They have killed for less

Recently we have been asked by a multinational to audit for contract compliancy issues one of their biggest contracts in order to reduce their financial exposure. And when I mean big we are talking big numbers. When I started working in the field of procurement, I was impressed by the total amount of money involved. As a starting consultant my father told me to count from 1 to 100 and try to have a thorough understanding of each number, which I did. As a result I can always see the relativeness of big numbers.

The only challenge you have,  is find for each denominator a divisor. In this case, I thought it was a good idea to compare it the auditable spend to the GNP (Gross Nation Production) as the company, we were about to audit, is state owned. The math was simple: auditable spend divided by GNP. The effect of the outcome was more complex: as the math showed over 10% of the GNP. In some audits we have findings up to 10% which result into actual financial recoveries.

Professionals working in the industry know that these kind of contracts usually relate to raw materials, which was the case here. Unfortunately most raw materials are sourced in area’s which could be described as “less political stable”. Flying in an audit team, which performs its work at the supplier site, is not something you do without taking the right security measures. Imagine what happens if the message reaches the “president”: “Some auditors have discovered….we may need to pay back …”. They have killed for less.

In the jungleIn Europe we do not leave in three blinded cars which all take a different way to our hotel. Obviously I will not point out all the security measures we take but they are considerable. Apart from the security measures, the way we perform our audit work is equal to the way we audit in the western world. We will never share commercial confidential information from suppliers with our clients and we will never look at a contract with a one dimensional view. On the other hand we will dive as deep into the details as is required and we will never stop due to the “circumstances”. Facts are friendly and it is our job to find and show these facts.

We perform these audits around the globe.  We do these audits on site of the supplier. We have a strong believe that by performing these audits on site we gain insight in the work performed and have better understanding of the contract and where the financial exposure could be. As a result we realize cost reduction through monetary recoveries & future savings but also tighten contract language & improve understanding of contractual obligations.

No Brainer

As of the beginning of this year we have started carrying out contract compliance recovery audits in the Netherlands together with Connolly. We check whether a supplier is invoicing according to what is agreed upon in the contract with our client, or not. Connolly is a US based company, hence there American clients are more experienced in these kind of things, as claiming is part of their DNA. We, Dutch, seem to believe that our suppliers do behave better.

After six months we jointly come to the conclusion that Dutch contractors are no better than their peers in the US. For Dutch people this may be a surprise but keep in mind that suppliers view a contract as a way to secure business with a valued customer to generate revenue and profit streams. Procurement views a contract as a mean to structure a framework for business relationships with suppliers, to lock in value and control costs. The contract is the basis of the relationship. Contracts often get executed, or “operationalised,” differently from their terms and conditions.

This occurs for a number of reasons:

  • Terms are interpreted differently by the parties creating financial exposures.
  • Urgent needs for goods and services and evolving relationships create situations where adherence to the financial terms and conditions “slip.”
  • Financial transactions are not executed according to the terms of the contract.
  • Bulk discounts, rebates, “true up” clauses, and credit notes are overlooked or forgotten.
  • Original contract terms may be compromised by new rates, or billing methods that are counter to the contract language.

Contract Compliance Recovery Auditing helps to ensure that the value expected when a contract is negotiated is actually delivered by verifying that execution is in compliance with the financial terms and conditions of the contract.

Hence, Contract Compliance Recovery Audits result into findings. Here comes the difficult part because our clients need to take position with respect to a finding. Do they agree, partly agree or disagree with our findings. In practice, clients agree in 95% of the findings. This percentage is not applicable to suppliers. Usually they agree on issues as double invoices, work invoiced that has not been carried out and so on and so forth. These findings are referred to as no brainers.

But what if parties disagree on the contract mechanism. These type of findings appear to have a serious financial impact. The reliance on the supplier and the good relation may withhold our clients to collect the whole euro amount and a settlement is a more logical solution. These are business decisions and can only be taken by the business. But to give you a little bit of advice to avoid a headache, these findings are usually split and half of the euro amount is collected.

Outsourcing to secure continuity

Last weekend the medical inspection (IGZ) paid the Atrium MC (a large top clinical medical centre in the south of the Netherlands) an unannounced visit. This has resulted in closing of Operating Theaters because the risks of contamination are too high. Malfunctioning air-conditioning is one of the reasons to shut the OT’s. The Atrium MC is forced to build an interim facility with 8 OT’s. This reminded me of the problem more smaller hospitals have with keeping up their facilities up to standard. By using the example of one of our clients, the Ommelander Group (a small regional hospital at the North of the Netherlands) which we helped to outsource its medical maintenance department, I like to show how outsourcing can help to reduce risks and eventually costs.

In its strategic review the Ommelander Group discovered that external landscape was changing rapidly. The environment became more competitive, continuous cost cutting by the central government, innovative technology which can overcome geographic distances and finally the more demanding customer. As a result the Ommelander Group decided amongst others to focus on its “core business”, to outsource or cooperate on back office activities and to reduce risks. Looking at medical maintenance department (being one of the back office activities) we discovered the following developments, risks and consequences:

1. Development: Scarcity of skilled people Risk: discontinuities
2. Development:Increased complex devices Risk: uncontrollable medical devices in the hospital
3. Development: Need for risk assessment Risk: failures and damages to patients and bad reputation
4. Development: Increased requests of IGZ Risk: closing of (parts of) the hospital by IGZ
5. Development: Increased competition Risk: lost sales

The Ommelander Group had foreseen, that due to these developments, they could not secure a highly (ICT)skilled staff 24/7. Hence the board decided to outsource the medical maintenance function although the costs for the hospital were (initially) higher and they might become more dependent of their contractor. These developments and risks are generic and applicable for most Dutch hospitals. Hence hospitals should always keep in mind that outcourcing could secure their continuity.

Finally I would like to underline that in the case of the Atrium MC other more complex developments were the reason to close the OT’s. Outsourcing of their medical maintenance would not have solved the problems Atrium MC is facing today.

Cost saving requires Leadership!

Dutch hospitals could save 200 million Euros by good procurement

The headline of my newspaper (de Volkskrant, 2nd February 2010) surprised me. After the take-over of a hospital (formerly known as the Ijsselmeerziekenhuizen) by a private owned company, it made profit over its first year. Anybody familiar with the healthcare in the Netherlands would not have believed you. I wonder what kind of bet you could make at the bookmakers three years ago. Is this a miracle or the result of a normal business approach by an entrepreneur?

A closer look into the article tells us that 300 employees have voluntarily left the hospital. Based upon the annual report 2008, this is a reduction of more than 25%. Moreover 55 managers and 10 doctors were fired. An interesting remark made by Loek Winter (CEO MC Lelystad, as the hospital is called today) is the savings realized by good procurement. Although savings on personnel are significant, the MC Lelystad must have shown similar results on procurement to make profit again. I consider this to be easily achievable. Probably strong leadership is shown by Loek Winter as it involves switching from a supplier to a new cheaper one. In hospitals these kind of changes are not made easily.

What are the opportunities for hospitals if leadership is shown? Based upon the last 25 spend-analyses of Dutch hospitals carried out by Coppa, a cost saving of 10% on average was considered to be achievable. Coppa always looks at the risks which may influence the probability of achieving savings. Strong leadership is one of these factors which influences the possible saving. I made new analyses of the savings, but I made the calculation taking into account that all hospitals were lead by strong leaders. In my dreamed landscape more aggressive strategies including standardization, outsourcing, e-auction, and single sourcing are common practice. Each hospital could realize a cost reduction ranging from 20% to 25% within one year.

I woke up and realized that most hospitals are not in the ‘luxurious’ position like the MC Lelystad to be in the middle of a crisis which makes it easier to make bold decisions. What a shame that hospitals do not realize all possible cost savings on procurement. Is there another way to realize these savings without making bold decisions? Another survey carried out by Coppa in 2009 reveals price differences between the Netherlands and Germany ranging from 30-60% on identical medical devices and supplies. As of the 1st of February 2010 Inkoopconsortium.nl is able to import these products from Germany. Inkoopconsortium.nl has calculated that all Dutch hospitals could save 200 million Euros by sourcing via Inkoopconsortium.nl. Inkoopconsortium.nl claims to deliver the same products from the same suppliers. No difficult changes or decisions have to be made. Savings can be realized within three months. Are you stuck in the middle of a dream or are you going to discover your potential savings?

Supply chain at risk

Managing Supply Chain Risks

Managing supply chain risks is key to keep shareholders satisfied. Not knowing what risks in your supply chain may harm your turnover. So managing supply risks should be the first priority for supply chain managers in 2010. A Supplier which cannot supply key components is not called an act of God. In my blog you can read the preliminary results of a survey on managing supply chain risks carried out in the high-tech and process industry.