Daily Archives: February 28, 2024

Fraud and Waste are Not the Same Thing — And You Cannot Overcome them Equally

A recent article in BusinessDailyAfrica on how firms can overcome fraud and wastage in technology procurement had some good advice, but it missed some key points, especially since you can’t treat fraud and wastage equally if you want to truly combat fraud and wastage in real time.

The article notes that when it comes to the adoption of new technologies, organizations allocate substantial budgets that provide fertile ground for funds to be siphoned through fraud, which is sort of true, but usually what happens is a plethora of change orders and upsells at multiples of what the organization should be paying, which is not fraud when the vendor delivers, but severe wastage.

A bigger concern is, as the article notes, manipulation of procurement processes encompasses practices such as bid rigging or collusion with service providers, kickbacks and bribery, false invoicing, misrepresenting specifications and capabilities of products and services, channelling payments through shell companies solely to facilitate bribery, conflict of interest, and disguising procurements to bypass processes, which has nothing to do with the tech budget, and which happens whether or not the company implements new tech or not, whether the decisions are ill-considered or not, whether the decisions are rushed or not, etc.

The reality is this: if a company has a lot of money and fraudsters believe it, or its processes, can be exploited for fraud, they’ll try. And while adequate planning, centralization of tech decisions, robust implementation of strategies, and controls can curb fraud and wastage, that’s not always enough.

The only way to minimize and prevent fraud is

  1. identify each type of fraud attempt that your organization is likely to get hit with
  2. for each type of fraud,
    1. identify processes that can be exploited, and change them to minimize exploitation
    2. implement specialized technology or algorithms to look for it and alert people to the potential — in real time (before money changes hands)
    3. educate your people on what valid payment requests look like, what typical fraud looks like, and when to ask questions and/or escalate it up the chain (possibly all the way to the CFO if necessary)
    4. anytime a fraud slips through, besides trying to immediately stop-payment, immediately do a post-mortem to figure out the root cause and update the process, technology, or detection methodology; fraudsters are always upping their game, so you need to always be upping yours

And when the doctor says you have to identify and target each type of fraud (scheme/scam) separately, he means it. There’s no one-size-fits-all for fraud, but there are technologies, techniques, and targeted theorem tabulations that can rather reliably progressively prevent frequent frauds.

Nor is it as simple as just throwing a bunch of analytics at the problem, as this recent article that purports to prevent procurement fraud with analytics that was published as a think tank article in SupplyChainBrain (which, as you can guess, really upset the doctor when think tank articles in Supply Chain Brain should be the best of the best and this was barely acceptable). Apparently the doctor will have to include Procurement fraud in his list of topics for his Source-to-Pay+ series because the state of information being provided to you is, for the most part, sorry and sad.

But waste is entirely different. As we alluded above, that typically takes the following forms:

  • frequent change orders during implementation, usually billed at excessively high day rates as they have to “divert resources” or “work overtime”
  • unnecessary customizations or real-time integrations that are an extensive amount of work (and cost) when out-of-the-box or daily flat-file synchs are more than sufficient
  • extensive “process evaluation” or “process transformation” processes that are well beyond what you need to eat up consulting hours
  • extensive “best practice” education when your practices are good enough for now and/or those best practices are already encoded in the system and just following the default process gives you the same education
  • additional seats or licenses you really don’t need (but you are convinced somehow that you do) (which don’t get used and just sit on the v-shelf)
  • etc.

Basically, you go in for a penny, and they take you on a joyride that costs a pound. They deliver the minimum at each step of the way so you can’t technically accuse them of fraud, but they end up making sleazy used car salesmen look good!