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Driving Savings Starts by Enforcing Compliance

Stakeholder compliance — be it compulsory or voluntary — bridges the rather large gap between the cost savings that get encoded into strategic supply contracts and spending processes and the cost savings that actually materialize on a company's profit line. As I noted in my previous blog, “For procurement leaders involved in areas such as profit and loss, supplier, and/or budget management, winning genuine adoption and support from purchasing stakeholders is far and away the greatest challenge.” (See: Boosting ROI in Procurement Technology Initiatives.)

Compliance, whether it's adherence to contract stipulations such as buying from preferred suppliers or adherence to procedures such as adopting and using the preferred, lowest-cost buying and payment processes, can result in significant cost savings from procurement activities. It can also drive streamlined, repeatable processes that free up procurement professionals to focus on more strategic activities.

According to the study I referenced in my previous blog, doubling contract compliance may result in a six-fold increase over time in percentage cost savings from an organization's spending management activities. Despite the value compliance can bring to the procurement process, the challenge is to understand what tactics work to enforce it. Three out of five (60 percent) of the best in class companies — those with compliance rates at 70 percent or above — felt that monitoring and reporting was the most effective tactic to foster a culture of compliance.

However, simply favoring this tactic is no guarantee that it will deliver the intended results. The ability to monitor and report on compliance is heavily tied to technology adoption, as it enables metrics such as off-contract spending, contract utilization, and contract performance related to terms to be tracked easily, consistently, and accurately right down to a specific department and/or individual spender.

In fact, the study found that for all of the companies that favored the “monitor and report” tactic for contract compliance, there was a dramatic 44-point difference in reported contract compliance rates between companies with high adoption and use of contract management technology and those with low adoption and use. Interestingly, this does not restrict itself to contract management. Nearly half (49 percent) of the companies with high contract compliance reported high adoption and use of spending analysis technology, as well.

Another important tactic that can be utilized to drive compliance is creating a business case and communicating the benefits in a tangible, verifiable manner. This can include mentioning that you have seen an X-percent increase in savings in a particular category where contract compliance rates increased by Y-percent. However, this requires the procurement professional to be able to market the benefits and value of any process change or technology introduction.

Creating a business case and combining it with high adoption of supporting procurement technology and monitoring can make a powerful formula for obtaining compliance to spending management contracts and preferred processes. However, they are not the end game when it comes to achieving a corporate culture that truly embraces and buys into enterprise spending management. Few procurement leaders will tell you they wish to spend the rest of their careers policing people's behavior. On the contrary, what they really want is to embed best spending management processes and practices into their enterprises and move on to more important, value-adding, and performance-enhancing work, such as supporting innovation and new product introduction.

The key to getting there is encouraging active stakeholder participation in strategic sourcing and spending management processes and stakeholder ownership of spending management decision-making.

9 comments on “Driving Savings Starts by Enforcing Compliance

  1. _hm
    November 9, 2011

    Compliance is good and it has its advantages. However, it also adds significant delay to projects. Another aspect is, many time compliance is done as formality and quality of compliance work is quite poor. Can we have more simpler compliance but of high quality?

  2. mfbertozzi
    November 10, 2011

    Personally, I am with James, but in my experience attituted I have found especially in interacting with managers from sales is not really in line with that process. Usually in that mindset compliance means something that introduces delay and delay means something that doesn't allow to be competitive. Given a corporation, I am convinced before starting actions as per those mentioned by James, it should be very important to enforce internal knowleddge by educational sessions.

  3. Jay_Bond
    November 10, 2011

    The biggest issue I see is companies practicing what they preach and following through. If following through with compliance regulations is needed and a best fit for the company regardless of delay, the company needs to stick to those plans to see the long term benefits. If compliance is going to deliver long term savings, that needs to be the main driving force.

  4. bolaji ojo
    November 17, 2011

    James, The issue of compliance monitoring is a big one for the electronics industry. It also seems to hold certain pitfalls; either it's not done well or there's no person directly charged with responsibility for this. Who in your opinion within a company should be tasked with being compliance champion and how much authority is needed to assure the objectives would be achieved?

  5. James Thomas
    November 17, 2011

    As far as I have seen compliance monitoring is often a challenge because of this exact issue. Who exactly will be responsible for it? Well an effective if not easy way of doing this is making it a performance parameter. For example for a sourcing manager dealing with supply contracts tie in the fact that an x percentage of off contract spending will affect his rating in a y % manner. What we have generally seen at organizations is that allocation of resources for specific compliance monitoring is often a major challenge, but once the technology (say a contract management solution) has been implemented having compliance measures as part of individual or divisional metrics leads to increased adoption of the technology. and in return increased compliance. Of course it becomes imperative then for team heads ( say a sourcing director or divisional head) to thus be seriously involved in the entire process of technology evaluation as they would direct these metrics and compliance guide lines- which implies authority in terms of complete responsibility for the division or process. It works but not at all as widely used as it should be as a tactic! We have seen instances where project champions do create these metrics but they are few and far in between. 

     

     

  6. James Thomas
    November 17, 2011

    @ _hm A very important and debated problem. Which is why I believe end user involvement and education in terms of a. What are the benefits when implementing new technology or processes as well as b. The compliance and performance metrics is absolutely mandatory and needs to be very effective. Also the benefits of the process need to be communicated in terms of very tangible benefits like If we reduce maverick spending by x % it leads us to savings by y% to actually appeal to people to change and in turn create a culture of compliance

  7. Barbara Jorgensen
    November 17, 2011

    James: I have a colleague who is in IT and it falls to him to enforce non-compliance with some of his company's (mostly IT-related) policies. Who, or what function, typically acts as the “enforcer” in companies that use contract management programs?

  8. bolaji ojo
    November 18, 2011

    James, From your explanation, then, it seems compliance monitoring and the success of the entire process will depend therefore on multiple players within an organization. It should be a shared responsibility from senior executives to team leaders.

  9. James Thomas
    November 18, 2011

    @Barbara. Typically when we look at compliance for procurement contracts and contract management utilization it is very often someone from senior management in the procurement/purchasing function (Director/VP sourcing or a CPO) who takes lead in measuring and mapping compliance of using the tool although IT does act as the enforcer at the ground level in ensuring contracts flow through the tool implemented. At several organizations though contract management is very closely tied with legal/admin teams and their KPIs which makes them the gatekeepers/enforcers of overall adherence to negotiated contracts and contracting terms

    @Bolaji

    Absolutely. In fact multiple stakeholder participation right from the time any of these projects are even mandated has to be made simpler and more prevalent. I will be taking this up in the next part of the discussion.

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