P2P 101: The Financial Impact of Maverick Spend

P2P Compliance is a Critical Component of Risk Management

March 22, 2010 Pete Loughlin No comments

P2P compliance and vendor risk management are not always taken as seriously at it should be. They are is seen as a nice to haves and a distraction to the important work of managing spend. But buyers need to wise up to the critical importance of compliance risk management. It’s fine to claim credit for a $1m contribution by negotiating a 10% cost reduction on a $10m spend but that’s only going to be a commercial reality if you have 100% compliance and it’s only a commercial reality if your supplier is still in business in 6 months time.

Delivering actual, tangible savings to the balance sheet as opposed to claiming theoretical benefits is what separates the men from the boys in purchasing.

Here’s an illustrative, real example of a bank that spent in excess of $250 million per annum on contingency labor. With that spending power, they were able to get margins down to levels that the supplier was barely able to operate with. The CPO was a hero of course, delivering massive saving s to the bank. But there were three areas that were neglected. Compliance; Purchase to Pay Processes (P2P) and risk management.

First, the compliance problem. There was $250 million spent on contingency labour and the deal struck with the single preferred supplier worked because of scale. But although the supplier was the only preferred supplier, compliance wasn’t enforced so that nearly half of the spend leaked to other suppliers on bigger margins and for the single preferred supplier, they weren’t even breaking even. No cosy savings delivered and huge risks introduced through non compliance.

Secondly, Purchase to Pay. P2P is all about recognizing that professional purchasing doesn’t stop at the signature on a contract. It’s about making sure that everything is in place to ensure that the commercial befits are actually delivered and that means that the contract runs properly, including that the supplier gets paid. Managing $250 million of invoices is non trivial and when you have a contract that is balanced on a profitability knife edge, there is no room for late payment.

Thirdly, risk management. The supplier was put through the risk management gauntlet, checking profitability and financial strength and reputation but formal risk management was not completed and no contingency or risk management plan was put in place in the event that the supplier went bust.

So what happened, The contract lasted 6 months. The supplier was losing money and could not tolerate the risk of continuing. For the bank, they were faced with the task of switching $250K worth of contingent labor in a timescale of 3 months. Want that job anyone?

The lessons are obvious. Take P2P compliance seriously and recognize vendor risk management as a key spend management tool. Ensure that the correct purchase to pay processes are in place so that contractual commitments can be fulfilled.