Wednesday, July 27, 2016
VOLUME -27 NUMBER 3
Publication Date: 03/1/2012
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ARCHIVE >  March 2012 Issue >  Management > 

How to Develop a Path to Voluntary Procurement Compliance

Recently, I was discussing how important compulsory and/or voluntary stakeholder compliance is to achieving successful procurement technology adoption. After all, compliance bridges the rather large gap between the cost savings that get encoded into strategic supply contracts and spending processes and the cost savings that actually materialize on a company's profit line. Compliance — whether in the way of adherence to contracts such as buying from preferred contacted suppliers or adherence to process such as adopting and using the preferred, lowest-cost buying and payment processes — can result in significant cost savings from procurement activities.

Today, procurement leaders aim to achieve much more than just complete compliance, by adding value to the organization at a more strategic level. As a result, organizations now realize that procurement teams need to be an integral part of the activities that drive innovation, manage supply chain risk and optimize the supply chain process.

Active Participation
The key to success is to encourage active stakeholder participation in an organization's strategic sourcing and spend management processes, and to create stakeholder ownership in spend management decision making. Going all the way back to the early days of enterprise spend management in the 1980s and 90s, the popular wisdom has always been that when stakeholders actively participate in the process — from drafting the requirements, evaluating and selecting suppliers, designing the processes that make their work easier, and continuously measuring and managing both supplier and technology performance — they are more likely to voluntarily abide by the decisions that ensued. In essence, there is a direct correlation between the level of compliance and success of new technology and process implementations and the participation, collaboration and sheer number of participating stakeholders. Ensuring active participation also helps to identify organizational procurement "champions", or members of the team who are eager to drive these processes throughout the enterprise.

In fact, a recent study of 600 procurement and supply management professionals — representing an estimated $370 billion or more worth of collective spending power — found that companies who placed in the top performance tier for cost savings attributable to spend management (30 percent or greater) earned nearly an "8" on a 0-10 scale for cross-functional participation in spend management activities compared to a "4" for companies falling into the lowest cost savings performance tier. In the meantime, companies reporting the highest participation rates in cross-functional strategic sourcing processes also reported contract compliance rates that are 3.1 times greater than companies with the weakest cross-functional participation.

Avoiding Compulsory Compliance
The implication is that organizations who win active and enthusiastic stakeholder participation in decision-making have an opportunity to spend much less time and resources on compulsory management of stakeholder compliance. For example, exceptions-only monitoring and alert system might replace more burdensome, detailed and frequent tracking of individual behaviors without any loss to compliance.

So while achieving stakeholder sourcing participation may seem extremely obvious and necessary, it is actually anything but. According to the study, winning strong and consistent stakeholder participation remains a challenge for many enterprises with nearly half of study participants grading participation at 5 or lower on a 0-10 rating scale.

Effective Tactics
So the question becomes not how important stakeholder participation is, but rather what are the tactics that need to be employed to achieve successful involvement? The tactic voted most effective by companies that do well with promoting stakeholder participation in strategic sourcing is to "communicate both the benefits and the business case." However, when developing the business case, it is critical that it is built using verifiable, tangible facts such as how reducing maverick spending by "X percent" will increase calculated savings by "Y percent" etc.

There is a strong relationship between technology adoption and cross-functional participation for eSourcing as well. Companies achieving the highest rates of cross-functional participation and collaboration in sourcing activities are nearly three times more likely than those achieving intermediate participation rates. They are also 6.8 times more likely than those achieving the lowest rates to also have high adoption rates for eSourcing technology. This is because fully functional eSourcing technology is designed to support the most effective tactics to promote stakeholder participation in strategic sourcing processes — as determined by the study — instead of being misjudged as a device focused solely on driving down supplier pricing.

Opinions Count
Another way to encourage participation is to ensure people's opinions count heavily. Considered the third most popular tactic for promoting participation among high performers, stakeholders should be given a structured mechanism for registering their opinions, reviewing others', and understanding clearly how a sourcing team's collective set of opinions influences a sourcing event's outcome. A sourcing solution provides a platform for stakeholders to collaborate on drafting comprehensive request for proposals (RFPs) and request for quotes (RFQs) with input from all perspectives. In the same manner, evaluation of suppliers can, and should, happen by multiple stakeholders using a single platform.

Similarly a contract management platform that brings together legal and procurement departments in a collaborative way is also valuable. For example, using workflow to drive contract authoring ensures that not only the best contracts are created in terms of covering all necessary clauses and caveats, but also ensures that any deviation from contracted terms is monitored and compliance is adhered to. But simply deploying technology illustrates that driving technology adoption and use is a must. For example, companies who favor the number one tactic of "communicating benefits and business case" around strategic sourcing in concert with high adoption and the use of eSourcing, scored cross-functional participation that averaged three points higher than the companies where eSourcing was poorly adopted.

Stakeholder Participation
So unless a department head or procurement leader wants to spend the next several decades closely monitoring and frequently reporting on compliance, it is critical that they promote stakeholder participation at least as assiduously as they focus on compelling compliance. Building a strong business case with tangible verifiable benefits and implementing technology ensures that steps are taken for its adoption. It also provides a platform that makes it easy for stakeholders to participate in your process improvement decision making efforts. Over time, it also evolves the corporate culture to one where all parties routinely participate in improving procurement and sourcing processes and efforts are made to measure compliance. This allows leaders to focus on activities that are more strategic and value-added to the business.

Contact: Zycus, 103 Carnegie Center, Suite 117, Princeton, NJ 08540 609-799-5664 E-mail: james.thomas@zycus.com Web:
http://www.zycus.com

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