The True Cost of Noncompliance

Have you ever wondered why your savings projections supersede the realized savings? Have you ever been challenged by your finance department to validate the projected cost savings one year into an agreement? Has your C-suite ever complained that procurement’s estimates and projections go unrealized? If you have faced any of these or similar situations, you are not alone. Savings projections often fall short of reality, but why? For many procurement organizations, their sourcing efforts aren’t felt due to noncompliance.

Noncompliance is the failure to act in accordance with a wish or command. In a procurement context, this typically means the refusal to change vendors or some other form of resistance to process improvements implemented by procurement or upper management. Organizations both large and small struggle to implement changes resulting from a sourcing activity, get buy-in from site-level stakeholders, and ensure compliance across the board. The scope of noncompliance can vary depending on your business structure and the maturity of your procurement practices.

A common form of noncompliance is site-specific. For example, you may have ten sites that participated in a procurement event, but based on the results, only eight sites were projected to see a financial benefit. The two sites with no projected benefit may decide it is in their best interest to remain with their incumbent supplier rather than transition. Their decision not to transition could risk the entire organization’s saving opportunity, as it will reduce the volume the selected vendor will receive. This is especially crucial in volume-based pricing models.

Another frequently-experienced type of noncompliance is what I call passive noncompliance. Passive noncompliance is the act of ‘officially’ transitioning and implementing new pricing, but not confirming implementation is complete and being adhered to and/or not putting controls in place to ensure compliance to the negotiated terms. In these situations, the opportunity cost is not a function of an explicit action to ignore a sourcing award, rather a lack of confirmation and follow up. This type of compliance can be difficult to discover until it is too late to recuperate the lost savings.

As a procurement consultant, I am occasionally tasked with measuring the cost of noncompliance at the site-level or at the organizational level. Quantifying the cost of noncompliance can be challenging, especially if you did not set out assuming you would have to quantify the cost of not transitioning when you began the sourcing initiative.

In general, there are a few things your organization can do to increase compliance

1. Communicate

Once a sourcing event has concluded and an optimal award scenario has been determined, procurement must clearly and concisely communicate the background of the initiative, the results, your award rationale, anticipated benefits, and the immediate next steps to all stakeholders. Without this information, site-level stakeholders often have a difficult time understanding why they have to make a transition or what is expected of them to ensure savings. Once the initial communication has been made, your organization also needs to allow for feedback and questions.

2. Follow Through

Move forward with procurement award scenarios and confirm new pricing has been implemented shortly after the implementation period has concluded. Build controls into your purchasing protocols that require managerial sign off and an explanation in order to use non-primary vendors.

3. Stay on top of billing.

While in many cases noncompliance can stem from difficult stakeholders disinterested in changing suppliers, some forms of compliance can occur on the supplier side in the form of billing errors. As a business unit responsible for ensuring savings and managing supplier relationships, routinely review invoices to ensure that your company is actually receiving the pricing and service levels established in your contract.

4. Monitor usage

Going hand-in-hand with reviewing invoices, procurement should keep an eye on purchasing trends. Staying informed on pricing changes and your company’s purchasing profile will help you determine the best sourcing and supplier relationship management strategies.

For procurement, the job isn’t done once the contract has been signed. For teams looking to provide more strategic guidance within the enterprise, delivering sustainable results is a must.  Don’t let savings slip out of your hands by not implementing proper change management and monitoring. Follow through with your sourcing initiative by following up with your stakeholders and leverage your success as a platform for future procurement initiatives.