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.