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November 8, 2016

Investing in Corporate Governance to Ensure Compliance

Governance and compliance are terms that are often used interchangeably to describe the “law and order” part of procurement’s responsibilities. That being said, they are not quite the same thing. Governance captures the rules in place regarding purchasing and spend management, while compliance is the adherence to (and/or enforcement of) those rules. In a perfect world, governance is what you do and compliance is what you get in return.

Historically, most organizations have predominantly focused on compliance. This may be due to one of the following reasons:

  • Non-compliance leaves behind evidence of failure to act in accordance with agreed-upon standards or procedures, and becomes apparent in spend management reporting.
  • By focusing on non-compliance, the company can take an exception-driven approach, responding to occurrences that contravene governance and requires less constant attention than ensuring compliance.
  • We don’t anticipate how those involved will interact with a contract in practice before rolling it out.

By allowing ourselves to focus on the evidence of non-compliance with a management-by-exception approach, we are effectively allowing things to go wrong and then fixing them later. This is due in part to the fact that there is little active management of signed contracts. Significant effort is invested in selecting the suppliers for award and negotiating the terms of the 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 and information.

So how can companies shift their investment of time and effort from compliance to governance?

Communicate

What is changing and why?
The greatest opportunity to positively build out governance is when a new contract is initiated. No one likes change, but whether a new supplier will be introduced or there will be changes to the 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 of what is changing, when, and what advantages are gained in return for any disruption that might occur.

Anticipate

What parts of the new contract will require the greatest change management?
Although not all companies 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 those points. Which parts of the purchasing process will change the most? Alternately, which people affected by the change are likely to struggle the most? By having a strategy session where risk points are identified in advance, the team gets the opportunity to be proactive and head off problems early or prevent them from occurring.

Regulate

How will compliance be measured and enforced, and are those measures likely to be successful?
This contribution to governance is something of a double swing. On the one hand, it allows the team to put a 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.

While ensuring compliance is an important function of any company, it doesn’t usually win many friends for the team in charge of it. By moving the effort to earlier in the process, there is an opportunity to discuss benefits and changes without the need to call out specific behaviors or choices. 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 success.

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 to enforce compliance once the contract is underway. 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.

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