Monthly Archives: March 2015

Societal Damnation 41: Fraud and Corruption

Fraud and Corruption is everywhere and running havoc on your organization and your supply chain. A recent Kroll Global Fraud Report in late 2013 found that 70% of companies were affected by fraud in the prior 12 months, which represented an increase of 15% over the previous twelve months. In other words, at the time, 7 in 10 companies were hit by fraud in the previous year. But it gets worse. The Economist at the same time also found that fraud was on the rise and predicted that it would continue to rise. If the rate of increase remained steady, then 4 of 5 businesses got hit with fraud last year and 9 out of 10 business will get hit with fraud this year. Yowzers!

Moreover, Procurement Fraud can be particularly costly and damaging, in both the public and private sectors. For example, a recent article over on Supply Management on how “Councils [were] told to do more to tackle Procurement Found” found that there were 107,000 cases of Procurement fraud detected by local authorities in 2012-2013 that combined accounted for £s; 178 million! And this is just a drop in the bucket when compared to the total amount lost by the UK public sector to fraudulent purchasing on an annual basis, an amount that was estimated at £s;2,300 million in 2012! Zoinks!

It’s harder to find good numbers for the US, but a 2011 report by Computer Evidence Specialists found that Fraud cost the US $1.32 Trillion in 2010, of which 733 Billion was Corporate (with 68% committed by corporations and 32% committed by employees). This number might sound surprising but when you consider that between 2000 and 2007 a small South Carolina parts supplier collected about 20.5 Million from the Pentagon between 2000 and 2006 in fraudulent shipping charges, including $998,798 for sending two 19-cent washers to an Army base in Texas, it puts things in a different light. (Source M4Carbine.net archives.) Hamana, hamana!

If your organization is not on full alert 24/7, it is going to get hit with fraud from somewhere in the organization or the supply chain. It’s just a matter of time before an attempt is made. This fraud can take many forms, which can include, but are not limited to:

  • invoices from non-existent suppliers
    usually submitted by an employee for services (not received) or goods of questionable origin to try and defraud the company of money (or by a random third party trying to hope a small invoice slips through unnoticed)
  • invoices from suppliers for off-contract goods and services
    usually for smaller dollar amounts for services “to be received” or for goods that are priced above standard list price for “emergency provision and delivery” where a supplier is trying to eek out more revenue or an employee is colluding to get a kickback
  • bait-and-switch
    where the supplier promises you the newest high-end laptop with the top-of-the-line processor and memory chips, but you actually get last year’s model which has depreciated 30% less (because, not being an IT shop, the supplier thinks you won’t know the difference) or charges you for Grade 5 Bolts when in fact they are only Grade 2 Bolts (and which you intend to use in commercial busses used to transport passengers, giving you a legal liability as well as a case of fraud)
  • inflated T&E claims
    where meetings across town are 50 miles instead of 10, all meals are $1 below the per diem limits, significant “entertainment” charges (especially on the first and last day where the employee or manager was actually entertaining friends and relatives), etc. (or, and this happened, the same receipt is accidentally submitted on consecutive expense reports)
  • inflated performance claims
    where a buyer “negotiates” a year-end rebate in exchange for guaranteed volume at unnecessarily higher prices next year so that he can exceed his savings target and get a bigger bonus
  • “lost” / “damaged” stock
    that is “walked” off the truck by an employee during a pre-lot entry inspection or, if the merchandise is un-returnable / too costly to return, declared damaged and purchased at pennies at the dollars by an employee who will resell the undamaged products on his own

In other words, fraud can happen anywhere, and at any time, and if a Procurement organization is not vigilant, it will happen to them. Fortunately, steps can be taken to reduce the chances of most of these frauds. Having a policy that invoices will only be accepted from approved suppliers, that all invoices from approved suppliers for non-contracted goods and services and/or for goods and services at non-contracted rates will prevent most external fraud from slipping through the system. (Collusion can still bypass the best of controls, but, unless the system is hacked, you know exactly who perpetrated the fraud in this instance.) Having T&E limits without budget manager approval, automatic zip-code based mileage checks, and fixed per-diems (while more costly) can weed out a lot of T&E fraud. Careful inspections and a two-step process can minimize the chances of a bait-and-switch and good stock being written off. And waiting a quarter to verify the numbers then and now before issuing a bonus will discourage many employees from trying to inflate their savings (or sales) claims.

However, no system is perfect and a lot of process transformation, and diligence, will be required to minimize the risk of fraud and corruption and limits its impact if it does happen. For Procurement, it’s another damned if you do (as the effort takes time and resources away from good category management that is often the largest source of value generation) and damned if you don’t (as the losses from a single fraud could wipe out most of the captured savings).

Organizational Damnation 56: Legal

While not quite as many organizational damnations in our list as there are technological (which are enough to drown us on their own), there are still quite a few and Logistics, covered back in our post on organizational damnation 48, was just the beginning. Legal can be just as big of a thorn in our side as Logistics, if not bigger.

Everyone hates lawyers, unless, of course, we’re talking about their lawyers working for them doing exactly what they want and succeeding. In your organization, the lawyers work for the Chief Consul who works for the CEO and orders his organization to do what he feels the CEO wants him to do, even if it is not what anyone else in the entire organization wants him to do. So if the CEO has mandated the Chief Consul to get a standard legal template in place for all direct materials contracts, that’s what the legal team is going to try and do (even if half of the clauses are irrelevant to half of the categories or are so onerous that no supplier worth it’s weight in salt would ever, ever sign). If the CEO orders the Chief Consul to make sure the organization doesn’t get mud in its eye due to child labour in the supply chain like the competition did, you can bet the Chief Consul is going to order an operational review of each and every supplier you do business with and their suppliers and so on. And while neither of these are bad things, the Chief Consul and the legal team could get dangerous tunnel vision and make Procurement’s life very, very miserable in the process.

But it’s not just tunnel vision and insistence on onerous clauses or unnecessary deep supply chain reviews (on suppliers you already vetted over the last two years, a vetting process which included surprise audits) that’s the problem, it’s their definition of what a good contract management system is. If you’re a leading Procurement organization, chances are you’ve noticed the similarity between a good Category Management Process and Contract Lifecyle Management (CLM) and are looking to obtain a good CLM or Strategic Sourcing (SS) / Supply to Contract (S2C), or Supplier Relationship Management (SRM) solution with strong contract management capabilities. However, the minute you mention you want a solution which either has “contract” in the title or “contract X” as a significant module, Legal is going to insist that “Contracts” are their domain and they need to be the solution owner of the “contract” solution.

Why is this bad? Because, at the end of the day, all that Legal cares about is contract creation (drafting, authoring, and signing), contract archival, and contract retrieval and their definition of a Contract Management solution is one with strong drafting and authoring capabilities, version control, audit trails, clause repositories, Microsoft Word integration, etc. In a 3-phase, 22-step contract lifecycle management process that starts at the need identification and the production of a business case and ends with a proper post mortem, contract creation is one step — but they will ignore everything else, including all important workflow management, change management, performance management, relationship management, and risk management — among other significant features from a Procurement / Supply Management point of view. The best solutions will be immediately eliminated from consideration if they are missing one unnecessary bell or whistle that Legal wants in the drafting phase and the Procurement organization will end up with the best contract authoring tool on the planet — that does absolutely, positively nothing else.

But this doesn’t come close to the hell you’ll get the first time you try to help them with cost control. The minute you bring spend up they’ll get all defensive that the organization needs the best outside consul it can get, that talent doesn’t come cheap, but the extra cost is well worth the reduced risk that comes from having a high-risk contract drafted by a true expert or the best litigator defending your organization in what could be a very costly court case if the organization loses. They’ll do this even though you agree with them 100%, have no intention of reducing legal spend just to increase legal liability, and only care about getting spend under control for everyday cookie-cutter services and legal firm expenses.

For example, many real-estate transactions, franchise transactions, insurance transactions, etc. are templated, sold by nimble, specialist firms at fixed rates, and do not differ in quality or risk whether you pay $1,000, $5,000, or $10,000. However, many large organizations with a lot of local offices or branches will often pay significantly different amounts for the exact same service that should be a fixed price across the state, or even the country. the doctor knows a number of spend experts who have analyzed legal spend for large organizations and the differentials on some of these cookie cutter category are often a factor of 3 to 5! There’s a huge savings here, which can be used to insure that the organization always has enough in the legal reserve to hire the best talent for the strategic transactions and legal challenges when talent truly matters. Plus, allowing every law firm to choose their own e-Discovery firm and technology, their own business centre / copy house, and even their own messenger service / delivery carrier can lead to significant variations in expenses as well. If the organization takes control of the expenses and insists that it’s lawyers and outside law firms use it’s contracts, non-talent expenses can often be halved as well. Like the Marketing Sacred Cow, the Legal Sacred Cow represents a huge savings opportunity which, when approached correctly, does not increase the organization’s risk one bit. In fact, the increased control, standardization, and visibility reduces risk while increasing the funds in reserve for Legal in case of a law-suit or similar emergency. But Legal never sees it that way at first, and sometimes doesn’t come around.

Legal will drive you nuts. It really is the case that you can’t live with them, can’t kill them. Because, at the end of the day, no matter how miserable they make your existence, there will always be that big contract where you need them to make sure your behind is covered. And, just like the lawyer, you will have to take two sides.

Simply Your Procurement Life and Eliminate the 5 E-procurement Mistakes You Don’t Realize You’re Making

Today’s guest post is from Iyana Lester, a Project Analyst at Source One Management Services who specializes in contract management and negotiation, project evaluation and monitoring, and market assessments.

Along with the boom of internet-based business came the challenges of maintaining an effective supply chain in the digital space. E-procurement offers a seamless solution to streamline processes and improve compliance all while reducing cost. While e-procurement has been around for several years, there still remains several factors that impede businesses from utilizing it fully and attaining maximum savings largely based on their expectations.

A recent Procurement Insights article points out that merely assuring yourself you’re doing everything in your power to maintain supplier relationships isn’t enough. “Even if you are well-versed in procurement and can speak every language in existence, nurturing complex supplier relationships in a global spectrum requires frequent communication that often slips without a system to manage the contact.” So what does this mean for organizations considering the shift?

Inform yourself of what’s out there before committing to one e-Procurement solution. More importantly, become educated on the user short-fallings that lead people to assume that their solutions aren’t optimal. This will allow the largest-scale view of your options without any user-impairment bias. By ensuring your expectations are reasonable, you’re conveniently building yourself a ladder out of a situation coined by Sourcing Innovation as Procurement Damnation. Whether you prefer it as a remix to AC/DC’s Rock ‘n’ Roll Damnation or a procurement state of agitation, you can’t anticipate unrealistic savings and results from an e-Sourcing platform. These solutions are helpful in approaching the challenges of global sourcing, but they are only 100% effective with a strategy that supports them.

Below is a list of several of the most common shortcomings faced in e-procurement. As you develop your e-Sourcing options, keep these organizational glitches in mind:

1. Poorly Implemented Systems

This issue stems from a lack of initial planning. The systems must be integrated with existing corporate systems so that they will be interacting all the way to the end user’s interface experience. They should also be implemented quickly to accomadate any rapidly-developed new technological advancement. Failure to consider any of these focuses can result in systems that aid in one area of the procurement process but cause harmful disruption in others.

2. Partial Implementation

When implementing any large scale change, the change must be adopted and interconnected organization-wide to achieve optimal outcomes. To successfully implement e-procurement, your organization needs to carry out a detailed evaluation of its procurement processes and consider the needs for each division. Roles will continue to depend on effective collaboration between many different organizational players. This will assist in preparing proper agendas and budgets.

3. Uninformed to the Latest Technological Advancements

Monitoring advancements in e-procurement technology will serve as a guide for key risk concerns that should be in your organization’s radar. Observing technological advancements will lessen the chance of your systems becoming outdated.

4. Failure to Develop Performance Metrics

Many organizations have the mentality that once a system is in place, all advantages and will be manually achieved. Considering a comprehensive set of metrics provides a better framework for benchmarking and allows for the procurement process to be more effectively managed. Some metrics areas to consider may include effectiveness, efficiency, quality, and cycle time.

5. Unsuccessfully Identifying the Issues at Hand

A system cannot effectively solve a problem unless the true problem is identified. Organizations often identify sources and causes of the problem and look for fixes that will only temporarily improve the issue. To capture the full potential of your e-Sourcing, never close your eyes to developments and minimize your exposure to Procurement Damnation by following the above steps. The most effective procurement management systems are constantly adapting their capabilities while remaining user-friendly and consistent. Procurement departments should be mindful and eager to pursue new functionalities wherever possible without compromising supplier data quality.

Thanks, Iyana.

Two Hundred and Twenty Five Years Ago Today

The first United States census was authorized. The census is important to the United States not just because it gives us a much more accurate count of how many residents and citizens there are (as opposed to interim projections) but because the resulting counts are used to set the number of members from each state in the House of Representatives and, by extension, in the Electoral College.

It also influences how more than $400 Billion per year in federal and state funding is allocated with respect to neighbourhood improvement projects, public health programs, education programs, and transportation. So, while it might be annoying to have to answer those questions every ten years and reaffirm your Pastafarianism or Jediism, it is necessary.