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A supplier agreement is meant to safeguard the value of each procurement deal. It helps set pricing, discounts, rebates, service levels, payments, etc., so you know what you'll pay in the end.
But it is only the first step to do the right deal. It becomes harder to ensure that the suppliers stick to their agreements when there are many suppliers, ERPs, and invoices that one has to deal with. While finance and procurement teams have access to contracts and invoices, connecting them isn't always easy.
Why Supplier Contract Compliance Is Not Easy To Manage
The supplier agreements hold vital commercial data, but that data is not always easily trackable after the signing of the agreement.
Some of the challenges encountered in enterprise procurement settings include:
- Thousands of live supplier agreements
- Several ERPs and procurement systems
- Complicated pricing
- Volume discounts and rebates
- Contract changes
- Payment terms
- Several business units/locations
- Large invoice volume
There is the possibility that the supplier will keep on billing against an old price. The negotiated discount might not apply to every applicable transaction. The calculation of the rebate might be erroneous. A condition in the contract may not find its way into the transaction.
Individually, each of the above problems may seem minor. But when we talk about thousands of transactions, they all amount to leakage of money.
What Do Contract Compliance Audits Actually Evaluate?
A contract compliance audit does not just entail an analysis of whether the supplier has been compliant with the contract. This involves a comprehensive examination of the contract against the actions that have taken place financially.
Depending on the contract, this can include:
- Contracted rates vs. billed rates
- Discounts and rebates
- Volume pricing
- Payment terms
- Service level agreements
- Promotional or commercial contracts
- Credits and deductions
- Discrepancies in purchase orders and invoices
- Specific pricing terms by the supplier
The importance lies in the synthesis of all these various sources of information.
For instance, an agreement might set a certain price for a product upon attaining a particular purchase quantity. When the transaction information indicates that the organization was still paying a higher price even after meeting the required quantity, the discrepancy could be considered value that could be recovered.
Key Capabilities to Look for in Contract Compliance Audit Services
Not all auditing methods offer the same degree of transparency. It is important that finance and procurement executives consider the capability of contract compliance audit services to detect inconsistencies in agreements, vendors, invoices, and payments.
The following capabilities take centre stage:
1. Ability to Establish the Connection Between Contract Terms and Financial Transactions
The connection between the provisions included in the contract and the transaction itself is one of the main problems that arise during contract compliance audits. Contracts may be stored apart from purchase orders, invoices, suppliers' data, and transactions. Independent analysis of all the listed data sources makes it hard to detect the connection between contract terms and financial transactions.
In order to perform a successful audit, it is necessary to combine and analyze the data in context. It will allow finance departments to detect those cases in which the agreed-upon commercial term was not reflected in transactions.
2. Capability of Analyzing Data from Multiple ERP Environments
Big companies usually do not use a single financial environment for their operation. Due to acquisitions, regional operations, business units, and different technology environments, a company may have several ERP systems. As a result, data on suppliers and transactions may be spread over various environments.
This creates a problem of visibility. The same discrepancy in price may not be seen as unusual in one environment. If transactions from several environments are analyzed, it becomes visible. Contract compliance auditing has to analyze data across complex enterprise environments.
3. Identifying Pricing and Commercial Discrepancies
Compliance within the area of pricing is critical. Price-related information may include negotiated pricing terms, tiered pricing, quantity discounts, rebates, promotional pricing, or other commercial terms. The difficulty lies in guaranteeing the consistency of these terms in the transaction process.
This type of audit system should assist in detecting any discrepancy between the anticipated and realized financial results. For instance, if a supplier agreement contains a negotiated discount but the relevant invoices still have the initial price, the organization is likely overpaying for its products. Detecting such instances allows recovery of lost value and also investigation of the reason for the problem.
4. Reduce manual auditing
Examining the contracts and matching them against millions of transactions manually might entail a great deal of effort. Auditors would have to find the related contracts, understand the contract terms, compare the transactions, look into exceptions, etc.
5. Analyzing the Root Cause
The work does not end after the discrepancy is identified. Remember that identifying the discrepancy is just a small part of the process. The financial department needs to understand the reason behind the occurrence of the discrepancy.
Was there no update of the contract within the ERP? Was the price condition wrongly configured? Is the supplier invoicing based on an old contract? Has any process change led to a disconnect between the procurement and accounting departments?
Role of the contract compliance audit in helping recover supplier
The financial value of a contract compliance audit can be in identifying the gap between the value of a contract and its realization. Think of a firm which, through negotiations, achieves improved prices from a strategic supplier. Procurement has successfully delivered better terms of business, but the newly revised terms have not been incorporated into invoices.
Negotiation was a success. The challenge now is that the firm is not realizing the full benefits of that negotiation. Through a contract compliance audit, organizations will be able to identify this gap and take remedial measures by validating the gap. This will not just lead to recovery of the overpayment. It will enable organizations to realize areas where value is being lost throughout the supply lifecycle process.
Periodic Reviews to Continuous Contract Visibility
Contract audits conducted on a regular basis are fairly common. Whereas regular reviews will expose discrepancies in the past, supplier activities do take place during the year as new contracts are created, prices are adjusted, suppliers are added, and procurement circumstances change.
This implies that there can be compliance gaps that are formed between contract audits. Firms are faced with a need for a more ongoing contract review process. Ongoing reviews can assist finance and procurement departments in detecting discrepancies early on, assessing supplier performance, and seeing if the terms negotiated have any practical financial benefits.
Conclusion
Supplier contracts are major financial investments. However, their negotiated value will be achieved only if the terms of the agreement are faithfully mirrored in the actual transactions. With growing supplier networks, organizations face challenges in identifying every non-conformity if they depend on manual reviews and audits alone.
The contract compliance audit service allows comparing the terms of the agreement with transactional data, detecting non-compliance, finding financial losses, and getting insight into the processes that cause such deviations. For finance and procurement teams, the goal should be to choose the right way that will ensure data visibility, scalability, audit expertise, and a recovery path.
Discover Dollar allows companies to analyze their supplier contracts and invoices and detect any instances of contract non-compliance or profit leakage from their procurement operations.