The Science of Compliance

It is increasingly important that companies make sure their systems tally with signed contracts and prevailing legislation, says Gary Mull.

Despite the efforts of today's companies to deliver greater shareholder value, many companies are missing the opportunity to improve their top and bottom lines. At the heart of this issue is the failure of companies to ensure compliance between the financial transactions in their daily operational systems, particularly in relation to the formal agreements they have negotiated with suppliers and business partners.

Furthermore, many companies lack proper corporate governance and oversight, resulting in exposure to a variety of regulatory compliance issues that expose them to increasing audit and personnel costs as well as exposure to regulatory fines, missed financial expectations and the potential for restatement of financial reporting.

But a growing number of companies are taking a less passive approach by implementing powerful supply management software solutions that enable them to source and negotiate better deals to begin with, and then monitor and manage the execution of business processes and transactions. This ensures that all parties – suppliers, partners, customers and your company – are in compliance with the commitments as defined in the contracts, and improves an organisation’s ability to support various regulatory compliance requirements such as the Regulation of Hazardous Substances (RoHS), Basel II, Sarbanes Oxley, HIPAA, the Gramm-Leach-Bliley Act, and others.

Although many enterprises report having formal compliance programmes, according to Aberdeen Research, organisations lose approximately four per cent of total spend every year due to a lack of proper operational compliance. For a $1 billion company with annual spend totalling $500 million, the resulting leakage is equal to $20 million per year.

Given this amount of money, it is easy to see why many companies are now focused on achieving improved compliance. But what exactly is compliance and what should companies be doing?

Simply stated, compliance can be divided into two categories, operational compliance and regulatory compliance. For procurement organisations, operational compliance is about ensuring suppliers lives up to the obligations in their contracts. Unfortunately, most organisations have limited visibility of how well a supplier is performing relative to their contractual commitment for delivery of goods, services, volumes, pricing, rebates, discounts and other key performance criteria. For organisations that can achieve this capability, a significant reduction in excess spend along with improved business performance awaits them.

Regulatory compliance, on the other hand, typically involves establishing documented business process controls, having proper business oversight to ensure good corporate governance, and proper visibility into obligations and material changes that could have a financial impact on the organisation. With these elements in place, organisations not only establish a firm foundation for solid business practices, but also support audit, reporting and certification requirements imposed by regulatory agencies.

With companies of varying sizes across all industries faced with similar operational and regulatory compliance challenges, organisations are recognising the substantial savings and control that can be achieved with automation of supply management operations. In a market crowded with software vendors touting a variety of compliance capabilities, smart organisations are looking to supply management software solutions that have a proven ability to deliver this innovative capability to tightly link spend analysis, sourcing and contracts to their procurement execution and financial applications.

These innovative supply management solutions help organisations keep control of their business by ensuring that strategic activities involving the sourcing of critical goods and services are negotiated at best value, and that executed contracts are based on the company’s standard contract terms and conditions, and are properly executed.

In addition to linking an organisation’s strategic operations to tactical activities, quality supply management solutions will also support the definition and control of user access, the segregation of duties, and the definition and control of business processes, while coupled with exception processing, system logs and audit trails for proper oversight to support key regulatory initiatives.

Beyond these capabilities, risk reduction and regulatory compliance support are further enabled by powerful analytical tools for performance monitoring to automatically identify and report on such things as control violations, (for example, the number of instances where invoices were received before a purchase order was initiated); potential fraud (for example, rounding up invoice amounts); and efficiency (for example, multiple invoices from the same company can be consolidated, thereby reducing processing costs).

Given objectives required to support operational and regulatory compliance initiatives, organisations require a holistic approach to drive greater business value. By selecting a comprehensive solution that integrates spend analysis, sourcing, supplier performance and contract management to their procurement and financial systems, companies can achieve significant ongoing cost reductions, increase revenue, mitigate risk and manage compliance.

When evaluating software solutions to help your organisation attain greater operational and regulatory compliance, you should select a solution that delivers powerful functionality in the following areas.

Spend analysis

Identify savings opportunities quickly and monitor effectiveness of initiatives across every category of spend enterprise-wide, with accurate and granular spend visibility.

Leading spend analysis solutions will enable your organisation to quickly analyse spend data for better decision-support such as the ability to identify unleveraged spend, aggregate demand for more purchasing leverage, identify opportunities for supplier consolidation, and support compliance analysis to monitor operational and regulatory compliance.

Sourcing

Realise the best value, not just the best price, from your supply base by factoring cost, risk, and performance drivers into decision-making. Leading sourcing solutions provide the ability to quickly and easily model and evaluate multiple cost, risk, and performance drivers and business constraints for any category.

Supplier performance

Evaluate and track supplier performance through a central repository of key performance indicators and scorecards. Leading supplier performance solutions provide such things as automated supplier assessment tools that leverage standard performance models (such as Lean or Six Sigma), custom model development to assess new product development capabilities, and root cause analysis to identify misaligned business processes.

Contract management

Manage all aspects of contractual relationships across the contract lifecycle. Leading contract management solutions will support all contract types, both procurement and sales contracts, for all users, empowering both contracting professionals and the extended community of professionals who need contract information.

Select a supply management solution that will provide a closed-loop between spend, sourcing contracts and the procurement execution and financial systems. Top solutions will deliver pre-built data-driven integrations to ERP procurement and financial solutions to drive operational compliance so that master and configuration data are synchronised, and reports on contract-to-actual transaction variance and supplier performance.

Finally, select a supply management solution from a vendor with proven success who can demonstrate real-world success in helping companies achieve compliance, reduce risk, achieve cost reductions and improve revenue opportunities.

Gary Mull is senior director, solution marketing, at Emptoris