Perfect storm brews in procurement

Gregg Barrett IN AN ABERDEEN Group study of 125 supply management executives, it was identified that visibility into spending and driving compliance with supply contracts were among the leading challenges facing procurement organisations. If we add the turmoil in global financial markets and renewed calls for governance, accountability and regulation, the perfect storm is brewing. With this in mind, lets lay the groundwork of what constitutes compliance within the procurement and contracting functions in an organisation. In the context of procurement and contract management, we can break down the compliance environment into three domains: -Regulatory compliance the regulatory environment like Sarbanes Oxley, Health and Safety legislation, Public Finance Management Act. - Procedural compliance Internal organisational policies and procedures like signatory mandates, delegation of authority. -Contractual compliance Commitments defined on the contract like Service Level Agreements, Key Performance Indexes. If we take a look at the organisational approval process as an example, an organisations approval process will fit into the procedural compliance domain listed above. Procedural compliance constitutes the organisations internal controls. The organisation that developed the commonly accepted structure of internal controls, the Committee of Sponsoring Organisations (Coso), was founded in 1985 and began looking at internal controls in response to concerns about the integrity of financial reporting. As their objectives, they have the efficiency and effectiveness of operations, reliability and accuracy of financial reporting and compliance with laws and regulations. While effective internal controls prevent or detect fraudulent behaviour, at a practical level their value is also to prevent errors. In accordance with the Coso framework, an effective internal controls programme include monitoring, information and communication, control activities, risk assessment and the control environment. Controls are generally categorised as preventive or detective. In procurement, preventive controls involve control activities such as training and segregation of duties between procurement and accounts payable. Detective controls may involve post-transaction reconciliation of financial information and management reviews thereby detecting any errors or fraudulent behaviour.

Detective controls are important control activities in the procurement organisation and apply to things like procurement requisitions. When it comes to procurement requisitions as an example, because of transaction volumes, it is unwise in most instances to seek higher-level approval of every small purchase. Transaction screening that is processing the transaction request against the procurement organisations contracts is, in most cases, the best process of ensuring compliance. And with technology like Contract Lifecycle Management systems, one can fully automate this process. As mentioned earlier, internal controls provide reasonable assurance regarding the achievement of organisational objectives. It is critical that when defining internal controls, organisations make certain that they are clearly aligned with organisational objectives and make sure that their processes are geared towards achieving these objectives. To illustrate, I know of an example where a supplier to a major government department said: We know this key performance indicator (KPI) is meaningless and so do the end-users of the contract, but the contract manager insists that we continue to measure it because thats what it says in the contract. If the review process had been properly aligned to the organisational objective and included the input of the eventual contract manager, the KPI would never have been included in the signed document. Further to this is the fact that internal controls illuminate a central issue: how best to balance the relationship between controls and operational effectiveness. Internal control processes entail a common issue, that of time and resources. It must therefore be remembered that when formulating procurement processes, the intent is not to cloak the organisation in further bureaucracy and administration (which increases operating costs) but to ensure that the necessary controls are in place to ensure the adherence to organisational intent behind transactions. In a world that is calling for collaborative relationships underpinned with innovative and sometimes complex contracts to be forged with trading partners at lightning speed, it will be those organisations that can achieve this balance who will succeed while the rest remain embroiled in bureaucracy that stifles their ability to compete and innovate.