August 10, 2015
Consider the “Carrot vs. the Stick” Approach to Compliance
A spend analysis, when properly performed, can lead to insightful findings and sustained savings, and often can act as a catalyst to driving business decisions. A vast majority of organizations have the desire to employ a spend management system to improve efficiency, but most do not effectively adhere to the function’s standards, therefore limiting its capabilities and rendering inadequate results. Challenges often arise when precise expenditure data is not captured, such as having minimal control of complete spend, inputting incorrect data, or even improperly classifying categories, to name a few. This leads me to taking the “Carrot vs. the Stick” approach to compliance as a way to effectively produce results within Spend Analytics.
So where do you begin? The answer may lie more in the upper echelons of your organization rather than in the trenches where compliance takes place; it starts with the organization’s strategic objectives and what senior management really values. Is your procurement strategy aligned with key enterprise goals and objectives? Are senior-level and line-of-business executives aware of this alignment? If business leaders do not view procurement as a strategic function, then you will inevitably run into compliance and collaboration problems with downstream business organizations. Even a simple process improvement initiative will face resistance.
Advantage: There is no denying that Spend Analytics is a powerful capability that can help achieve 5-10% savings from indirect spend. The major reasons any company uses Spend Analytics are to:
• Reign in ad hoc spending
• Negotiate direct savings with suppliers
• Ensure compliance to payment terms and price parity
• Identify new opportunities for strategic sourcing
Challenges: Coming from a background in manufacturing where Spend Analytics played a key role in the company’s profit, I have a deep appreciation for its value. I also recognize that for most companies, the road to Spend Analytics is a rocky one, fraught with such challenges as:
• Getting accurate spend data: Spend data as defined here can be anything from item numbers and descriptions to unit prices. When recording and paying vendors, data entry error rates are much higher than most companies realize. Only the best-in-class procurement organizations have a process and the discipline to routinely check purchase price variances. My colleague, Ted King, has already elaborated on this issue in his blog and white paper.
• Spend classification: Many companies struggle with defining their GL classifications and the level of granularity required for their business needs and objectives. Inevitably, the “other” GL account ends up in the top three categories of spend. The primary causes for this issue are:
- The company does not define their categories adequately and often not aligned to industry standards such as UNSPSC codes.
- Detailed descriptions of the categories are not defined and maintained for end users to assign.
- As a result, the accounts payable staff that generally assigns the GL account when processing the invoice are many times guessing and selecting the wrong GL account.
- ‘Accounting’ approvers are not reviewing the coding of the GL accounts.
• Inadequate vendor information: There is no question that good vendor data is critical to a Spend Analytics outcomes. Yet, many companies do not have a proper Vendor Information Management function. Key data, such as parent-child relationships, categorizations, and contractual payment terms are not defined and maintained.
Approach: When you think about the root causes for the challenges listed above, the common theme is a lack of compliance. But I believe they are symptomatic of a larger issue that hinders the success of any procurement optimization issue. Most companies that are having compliance and adoption challenges for Spend Analytics (or any other procurement initiative) haven’t spent enough time on three areas that are critical to success:
• C-Suite Support: Do your peers in the C-suite understand the business value of Spend Analytics, not just for procurement but for achieving their strategic objectives? Any attempt at change management is destined to fail when C-Suite support is absent.
- For instance, one of my past clients had the ambition to enforce a purchase order requirement across the company to gain better visibility of spend. The business owners however, while acknowledging the benefits of a PO, flat out refused to follow the requirement because there was no firm-wide policy that required a PO.
• Stakeholder Education and Collaboration: Today’s P2P systems have the capability to capture extremely powerful spend data, thus enabling effective Spend Analytics. Ensure that your stakeholders are properly educated on these systems. Train your staff to properly capture the transactional data and assign the GL classifications. Make sure the ‘accounting’ approvers are reviewing the coding before posting to books.
• Celebration of Success: Rather than rolling out Spend Analytics across the enterprise all at once, start small with a few departments that “get” the benefits. Then celebrate their successes through enterprise-wide communications. Therefore, if your IT group is doing a good job of utilizing purchase orders and capturing the spend data, you can use those results to convince other business functions to adopt the new process.
In conclusion, in order to become an organization that makes informed decisions from effective Spend Analytics, you could argue for better compliance and enforcement authority. Or, you can adopt a more collaborative approach that is tied to direct business benefits for your stakeholders. It seems the carrot yields far more sustainable results than the stick.
If you would like to know more about how Shelby has helped organizations achieve maximized business value with their strategic procurement transformation objectives, please contact email@example.com.
The Shelby Group