Ardent Partners’ Report, CPO Rising 2011: Innovative Ideas for the Decade Ahead, showed that the average compliance rate in the market today is 62.9%. Not exactly great but it is a number that slightly exceeded the average percentage of spend under management which is 60.6%.
Both numbers have improved steadily over the years that I have conducted market research in this space, but both numbers have significant room for improvement. Even the Best-in-Class (top 15% of the market) who manage more than 80% of their total spend, have room to improve their compliance rates which averaged 77.5%.
As everyone knows, compliance is important because there is a very real cost of non-compliance. In fact, inefficient contracting processes lead to a loss of between 5% and 20% of total enterprise spend, according to several dozen procurement leaders interviewed over the past 18 months (those figures were generally based upon either internal company audits and/or spend analysis). When enterprise users fail to buy from preferred suppliers and against negotiated contracts, they often (but, not always) pay a higher price than what had been negotiated. Additionally, volume discounts may be lost and rebates may be lower or unrealized. These hard dollar losses reduce procurement savings numbers so, the entire procurement organization has a vested interest in increasing compliance rates.
Beyond the dollars, non-compliance also has softer costs as well. A non-compliant transaction signals a failure by the procurement department to anticipate or support a business need or a failure to communicate the existence of a supplier contract or catalog. Non-compliance often signals the failure or lost opportunity to support your preferred trading partners. For today’s purposes, I am not referring to small one-off buys (often done on a Purchasing card) as failures. I am talking about non-compliant transactions above some reasonable threshold.
Last time, I discussed the recent conversations I have had with several technology solution providers who either have currently or plan to develop solutions which capture the details of maverick purchases and provide visibility into that spend. The solutions support a parallel process for these purchases and keep them within the larger framework of the application. Again, not new technology or a new concept in the broader market; but, it is a new emphasis, at least, by this small sample of companies.
Last time, I questioned whether or not these solutions do more good than harm and have spent the past few days weighing that question.
Here’s what I came back with:
When it comes to compliance, I guess I am an old-school sourcing guy. If my team is investing its time and effort in negotiating, executing, and managing a contract, I want the entire enterprise leveraging that contract to the greatest degree possible. Why? Because, done properly, these contracts have captured the business’ requirements and engaged it in the final decision-making process to ensure the highest value supplier(s) have been selected.
Now, does that leave room for exceptions? Yes, of course. First, there are transactions that fall below the radar screen of procurement and wouldn’t have a contract in the first place. These transactions by definition are non-compliant. But, by definition, they are also small and tactical. Second, the speed of business is accelerating so, it is possible that business requirements have changed or the market has. I wouldn’t allow a blanket approval policy on these types of exceptions and would prefer to treat these on a case-by-case decision. Key considerations to understand: what changed? why? when was it known and communicated? Is this a one-off situation or something that will continue. Even if the answers are less than satisfactory, an exception could still be granted (often based on lead-time and the team’s ability to drop what it’s doing to tackle this new opportunity). Third, sometimes we are in no position to influence or stop non-compliant purchases. Fourth, sometimes oftentimes, we learn about the non-compliant event well after the fact.
At the end of the day, my gut preference is that compliance should be actively managed and that non-compliant transactions, when they occur (1) should be understood (2) should occur within general pre-defined parameters and (3) should be a more difficult process than compliant ones.
More next time.
Postscript: I know that compliance doesn’t rank at the top of the list of our readers’ favorite topics, but, stick with me for one more article and then I’ll jump back into the sourcing wave discussion
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