Procurement and Compliance Teaming Up to Manage Risk

With another recession threatening, companies are looking to continue tightening their belts and many are eyeing the supply chain for added savings. Some are finding that the compliance department can help procurement achieve those cost-cutting goals by lowering risk and reducing fraud.

Over the last decade many large companies have experienced a broad transformation in their procurement functions, says Andrew Bartolini, managing partner and chief research officer of supply-chain research and advisory firm Ardent Partners. Rather than see procurement solely as the transactional business function it used to be—buying goods at the lowest cost—more and more companies are realizing the inherent value in aligning procurement more closely with risk-management and compliance functions.

“There is definitely a trend where procurement organizations are behaving in a way that adds not just a cost perspective, but a risk-management perspective, as well,” says Naresh Hingorani, global practice leader of supply-chain advisory firm, Bristlecone. "Increasingly, procurement has to work closer with various departments—be it finance, compliance, or risk—to get an overall view of the enterprise," he says.

As part of that transformation, many multinational companies with geographically dispersed business units are choosing to centralize their procurement functions, operating with a “command and control mindset,” says Bartolini. Policies essentially are developed and executed from enterprise-level down through the different regions or different business units.

In fact, one of the driving forces behind centralization is to gain greater visibility into enterprise-wide spending, processes, and risks. Centralization makes it easier for the procurement function to work more closely with risk-management and compliance. “Procurement and compliance organizations can reduce both costs and fraud by deploying an integrated set of tools, processes, and governance structures that enable tight coordination between the sourcing and contracting processes on one side and procure-to-pay processes on the other,” says Hingorani.

For example, Comverse Technology is using more cross-pollination between the compliance and procurement departments. The results are a supply-chain that is more responsive to regulatory and compliance risks. “Our approach to reducing fraud costs is to make expectations crystal clear, supported by decisive and forceful disciplinary action,” says David Frishkorn, chief compliance officer of Comverse Technology. “This is true for our employees as well as third parties with whom we do business.” 

“We don't tolerate lying, cheating, or stealing,” Frishkorn adds. “If we believe you've engaged in one or more of those activities, we'll take corrective action, up to and including dismissal or severing the third-party relationship.”

Increasingly, companies are looking to migrate procurement up the chain to higher-value services. These priorities were reiterated by several senior executives in recent analyst calls. At Coca-Cola, for example, procurement is not just focused on managing cost and quality, “but also on sustainability and working with our suppliers to identify, develop, and implement new cost saving initiatives,” said Richard Davies, vice presiden tof operations at Coca-Cola on a Sept. 13 analyst call. “Our procurement strategy is built on cost optimization, risk reduction, and maximizing efficiencies.” That means more cross-functional interaction with compliance, reporting functions, and risk management.

Sara Lee also is looking to optimize its procurement function. “We have been looking into the way we buy, how we buy, our buyers—everything,” said Jan Bennink, executive chairman of Sara Lee on an Aug. 11 analyst call. “I think there is definitely room for improvement.”

“If you need tangible and sustainable results fairly rapidly, the most symbolic way to empower a supply chain and procurement function is to give it a seat at the senior executive table.”

—Eric Beylier,

Chief Procurement Officer,

Tetra Technologies

Companies are also working with the compliance function to eliminate high-risk suppliers and shorten the list of third parties to a more manageable number. In the long run, establishing long-term relationships with fewer suppliers helps with cost savings as it helps companies to acquire volume discounts and centralize contracts with key suppliers.

Where procurement could run into challenges, however, is in other areas of cost saving, given that only 29 percent of procurement leaders reported having full visibility into spend under management—the percentage of total enterprise spend a procurement function manages or influences—according to a recent study by Ardent Partners of nearly 250 chief procurement officers.

“CPOs that have visibility and control over a significant majority of enterprise spend have extraordinary opportunity to drive value,” says Bartolini. “When you have more spend-under-management, you have better insight into what you can source and what you should source.”

Monitoring for Procurement Fraud

Hingorani says that procurement and compliance can collaborate by aligning “a specific list of vendors that are vetted for risk, credibility, costs, and performance as a preferred list to do contracts with,” he says.

This is particularly important since fraud in the procurement cycle can occur before and during solicitation of potential contractors. It may include selecting bidders based on biased information or disclosing information to one bidder but not others, or it can include collusion between bidders.

Procurement organizations can reduce the chance of fraud and create a preferred supplier list by “taking your entire supplier portfolio and looking across your entire organization,” says Hingorani.

In this aspect, many companies are finding e-procurement, the purchasing and selling of supplies and services over the Internet, an effective way to maintain their supplier lists. E-procurement gives companies the ability to compare supplier prices, service levels, and product quality.

E-procurement and e-sourcing further assists companies in tracking the quantity of goods and services, delivery times, and invoicing errors. What's the quality of service? Have they been meeting their service-level agreements requirements? Since the processes are generally better documented, they can cut down on fraud and provide more opportunity for review of the purchasing process.

MOST COMMON PROCUREMENT CAPABILITIES

Below are two charts from Ardent Partners' “Innovative Ideas for the Decade Ahead” with respondents' rankings of the most common procurement capabilities:

The challenge of aligning processes to systems is another longstanding procurement problem and a top hurdle to success for 30% of this survey's respondents. This is one of the underlying reasons that the average procurement department has difficulty using solutions to drive business value. Whether or not budgets allow for process automation tools, organizations must start by getting their processes right. When looking at procurement processes independent of technology, we see that standardized sourcing and solid collaboration capabilities are in place at more than half of all enterprises; both are important since these are two top CPO strategies this year.

The chart below shows the processes that are in place at more than half of all procurement

departments. But, what is ultimately more interesting are all of the process capabilities that are missing. For example, only 36% of enterprises have standardized contracting processes and only 32% have a standardized spend analysis process. With such a low number of enterprises operating with standardized spend analysis capabilities, it is no surprise that only 29% of procurement departments have full visibility into enterprise spend. Organizations that lack visibility into enterprise spend do themselves a huge disservice. Whether it is missing the best souring opportunities and/or having no sense of contract compliance levels—this lack of visibility will ensure that at least some of the low-hanging fruit will go unpicked.

Source: Ardent Partners: Innovative Ideas for the Decade Ahead.

A.P. Moller-Maersk Group, a $56.1 billion marine freight, oil, and gas exploration, production, and transportation company has moved to e-sourcing on a grand scale and says it delivers compliance benefits, as well as cost savings. E-Sourcing is a “faster, more transparent and fairer way of facilitating tenders and conducting negotiations,” the company states on its Website. “E-sourcing ensures smooth and clear communication, and is a more profitable business tool for both the suppliers as well as the A.P. Moller-Maersk Group.”

E-sourcing also helps improve collaboration because all departments in a company can access these Web-based applications. “Even within that, you can have a multi-approval process so to minimize the risk and increase the governance around any of these decisions,” says Hingorani.

Procurement and compliance organizations are also getting savvier with technology, with some starting to turn to social networking to pull quantitative and qualitative rankings and ratings of suppliers, exchanged anonymously between customers. “It's an area that is still in its infancy, but it's definitely gaining momentum,” says Hingorani.

Procurement fraud also often occurs when an employee colludes with an outside vendor by creating bogus or inflated invoices. “This is why it's important to have proper controls in place,” says Bartolini.

Some companies, for example, separate procurement and accounts payable. By not doing so, someone in the procurement department could set up and send invoices to a fictitious supplier, which can then be paid by someone in accounts payable.

“Putting controls in place and employing analytical software are great, and we do those, but making it crystal clear that you are serious about mitigating fraud is the best deterrent,” says Frishkorn. “Soon, the entire organization becomes vigilant for fraud and other abuse and brings potential issues to the surface to be addressed.”

By having procurement work with compliance to impose proper approval processes and governance structures, the organization can ensure that it is doing business with the right mix of suppliers, stresses Hingorani. Additionally, procurement and compliance are able to reduce costs and better monitor for Foreign Corrupt Practices Act-related risks, he adds.

“I think an underlying issue for the performance measurement of any function that must be addressed is understanding how that function captures its ‘value-add' to the enterprise versus the ease of tracking and accounting for it,” Ron Carcamo, CPO for Yahoo, stated in the Ardent Partners report. The determining factor for what to measure, he said, should be related to where the company's resources and time are being expended.

Support from senior management is also essential. “All these processes and tools, and the overall approach and strategy, are only as successful as the buy-in from the organization,” says Hingorami.

“This is something that is evolving within some organizations at a greater degree than others,” says Bartolini. “I don't suggest that CPOs need to report to a CEO to optimize total impact, but it certainly doesn't hurt.”

As one executive put it: “If you need tangible and sustainable results fairly rapidly, the most symbolic way to empower a supply chain and procurement function is to give it a seat at the senior executive table,” Eric Beylier, CPO and head of the procurement supply chain at Tetra Technologies, stated in the report.

Cost reduction, risk mitigation, and fraud protection requires “rigorous coordination and collaboration from various facets, and no single tool  or process would be an answer,” says Hingorani. Defining and developing a sound procurement process with robust controls, ranking and rating suppliers, and developing long-term relationships with key suppliers, however, go a long way to reducing procurement fraud, lowering risk, and increasing savings.