If there’s one thing that procurement professionals should take away from 2014, it’s the importance of transparency and integration throughout the purchasing, supply chain and P2P function. The past 12 months has seen increasing scrutiny by the board, and indeed by the industry, on ensuring that finance is clear on the responsibilities of procurement in delivering wider corporate governance.
Some of this focus can be attributed to the reaction to revelations back in the summer that the UK’s largest retailer, Tesco, had overstated its first-half profits to the tune of £263m. This was the result of early recognition of commercial income and delayed accrual of costs. While the overstating of profits related to the financial arrangement that Tesco has with its suppliers, it clearly demonstrated that the company’s procurement function has a responsibility to the rest of the business in delivering transparency.
In addition to Tesco, there were a number of high profile public sector cases that also emphasised the disconnect that can exist between procurement targets and how they’re reported. This is unsurprising if you consider that both the procurement and commercial departments are incentivised and bonused on savings delivered to the business. This is as it should be. But all too often the systems and processes that deliver these savings aren’t able to accurately measure and report actual savings over time – leading them open to being mis-representation at the outset and through the life of a contract.
Savings gleaned through effective and efficient sourcing can be considerable, but so too can be the complexity of contractual arrangements with different suppliers. eSourcing platforms are one way of ensuring that the terms of a contract become hardwired into purchasing and wider business processes, and that what is agreed is enacted by the organisations in question. And while such technologies cannot prevent unethical practices or ‘off the record’ kickbacks, we’ve seen recently how by-passing good procurement practice can one day bite back with razor-sharp teeth.
Risk is also a challenge within the finance and procurement functions and both become more integrated. Currently savings are not considered amongst the ‘wider’ risk analysis that takes place within an organisation. Yet as 2014 saw, there can be a risk issue within supplier and contract management. The larger and more complex the agreement the more open it is to potential manipulation.
In 2015, we need to see a greater understanding of how, where and why savings (or indeed discounts, kickbacks and rebates) are made, giving procurement and finance teams better toolsets to automate the measurement, reporting and validation of savings. Systems that are able to manage, accurately apply, record and provide awareness of contractual terms will aid the procurement function in delivering against governance targets, which inevitably will follow.
As procurement continues to adopt automation and integration of technology into other corporate systems, transparency and visibility of the purchasing lifecycle is crucial to good governance. As we head into the new year, organisations need to focus on creating transparency against savings so it’s clear to all how they’re accrued. A way to measure savings that is auditable and approved will go a long way to ensuring that companies adhere to the same level of governance that’s already in use in other parts of the organisation.