Investing in Corporate Governance to Ensure Compliance
Three best practices you can use right now.
Procurement often uses the terms governance and compliance to describe the “law and order” part of our responsibilities. Governance establishes the rules for enterprise purchasing and spend management, while compliance measures how well distributed buyers adhere to those rules. In a perfect world, proper governance would lead to consistent compliance. In the real world, there is often only a loose connection between the two.
Historically, most procurement organizations have predominantly focused on compliance. This may be due to one of the following reasons:
Non-compliance leaves a trail: Evidence of failure to act in accordance with agreed-upon standards or procedures is visible in spend management reporting.
Management by exception: By focusing on non-compliance, procurement can focus their attention on just the purchases that fall outside of established processes – hopefully the minority of spending activity.
We recognize non-compliance when we see it: It is hard to predict how all of the buyers involved with a supplier, category or contract will act before an implementation or supplier change takes place.
Focusing on the evidence of non-compliance with a management-by-exception approach saves time and conserves procurement resources. Unfortunately, it also means that we are effectively accepting that something is going to go wrong and just plan to fix it later, when we know what and where the exact problem is.
This is due in part to the fact that there is little active management of signed contracts. Significant effort is invested in selecting suppliers for award and negotiating the terms of each agreement. Once contracts are in place, they – and the changes or behaviors they were signed to enforce – have a way of being lost in a mountain of other documents, information and tasks.
For companies to benefit at a high level from well-managed spend, the effort invested to put a corporate governance program in place in the early days of a new contract must be equal to (if not more than) the investment made to enforce compliance once the contract is active. Governance should no longer be compliance’s silent partner. Instead, governance should be the primary focus of contract implementation efforts, with compliance only becoming a focus if and when circumstances deem it necessary.
Here are three ways companies can shift their investment of time and effort from compliance to governance:
What is changing and why?
The greatest opportunity to positively invest in governance is when a new contract is initiated. No one likes change, but whether a new supplier will be introduced or whether there will be changes to an agreement with an incumbent supplier, the decision to change was made for good reason – because it creates measurable benefits for the company. There should be a clear communication effort to share what is changing, when, and what advantages are gained in return for any disruption that might occur.
What parts of the new contract will require the greatest change management?
Although not all procurement teams have a point in the contract implementation process where they stop and think about which details or terms come with the greatest risk of pushback, it is usually not hard to identify where trouble is likely to creep up. (Hint: The risk usually comes from the parts of the purchasing process changing the most or the teams in the company that have resisted change in the past.) By having a strategy session where risk points are identified in advance, procurement gets the opportunity to be proactive and either head off problems early or prevent them from occurring altogether.
How will compliance be measured and enforced, and are those measures likely to be successful?
Measurement’s contribution to governance is something of a double swing. On the one hand, it allows the team to put a quantitative plan in place up front to ensure governance. On the other, it provides a critical opportunity to have an internal review and make sure that those stipulations will be effective and not just more “rules” that increase frustration and diminish compliance across the board. Compliance should be the natural result of a well implemented contract, and procurement must ensure that it is easy to do the right thing.
While ensuring compliance is an important function of any procurement team, it doesn’t usually win us many friends. By moving the effort earlier in the process, procurement gains an opportunity to discuss benefits and changes without calling out specific behaviors or individuals. This investment in governance is more positive, allows for relationship building, and creates an open channel for dialogue earlier rather than later – something that contributes to everyone’s success.
If you’re ready to ramp up your compliance efforts and accelerate everyone’s success in the process, schedule a no-obligation demonstration of our modular, integrated solutions on the Corcentric Platform.