Authored by Tim Freeman, CPA | Senior Manager, Contract Compliance Audit Services
In an unfavorable economic environment, large organizations are under greater pressure to identify cost savings opportunities. Taking into account a recession, rising interest rates, and the increasing cost of borrowing — which are forcing suppliers to increase fees and prices — procurement teams will need to rise to the challenge. Cost-cutting efforts and price-reduction negotiations will no longer suffice. Fortunately, there are strategic methods to help procurement unlock savings without increasing risks.
Cost-Cutting Challenges and Risks
Most organizations deploy common cost-cutting measures to reduce expenses in the short term. While these can provide temporary relief, it is important to recognize that there are potential long-term and inherent risks associated with these decisions. Be sure to weigh the short-term benefits against the long-term risks before making any decisions.
- Department budget reductions often result in layoffs, reorganizations, staff turnover, and hiring freezes. These cost-cutting tactics that impact personnel may place organizations in a vulnerable situation that can hinder operations and growth. Reducing headcount can limit resources essential to assessing contract compliance and validating pricing. High turnover rates can lead to the loss of specialized institutional knowledge, making it harder to operate with a lean team and requiring a greater investment in training and onboarding. Whether alone or paired with a reorganization, these methods can force a business to abandon or scale back projects to conserve cash but may inhibit future revenue.
- Increasing outsourcing can reduce control, transparency, and accountability. Outsourced, third-party contractors may disregard established practices which can lead to a lack of oversight of their activities. This makes it difficult to ensure that contracts are properly managed, standards are upheld, and compliance is maintained.
- Delaying investments in strategic initiatives — such as modernizing technology, software, and systems—may offer a short-term solution for financial hardship if the resources needed to oversee implementation are not available. However, this will ultimately impede operational progress in the long run. As such, it is essential to carefully analyze the benefits and drawbacks before taking action.
- Ceasing capital improvements, like expanding or launching a new line of business, can inhibit interactions with new suppliers and customers that are fundamental to business growth. In certain cases, the only way to finance capital improvements is to uncover and recoup lost money from transactions or overcharges.
- Consolidating spend, in particular, increasing the volume of work with a single supplier can help to maximize buying power but will also limit supplier options, potentially resulting in increased expenditure over time.
How to Recover Savings Without Increasing Risk
Implementing a comprehensive contract audit program is a strategy proven to bolster long-term ROI and maximize efficiency. It will not only assist in unlocking savings, reducing the need for cost-cutting measures, and diminishing the harmful impact of inflation but also reinforce supplier relationships. To suit your organization’s requirements, the following techniques are highly effective when streamlining and strengthening audit processes.
- Identify and recover past price overcharges. Procurement professionals should review past acquisitions and contracts to determine whether an amount higher than the agreed price was charged for a particular product or service. This could occur for various reasons, such as miscommunication or an error made by the supplier. Taking action to then recoup the surplus sum is critical. This could involve negotiating with the supplier for a refund, credit, or another form of compensation. However, if the supplier is uncooperative or if the overcharge is substantial, legal action may be required to recover the funds. This tactic helps to protect the organization’s bottom line and reinforce supplier accountability for their pricing.
- Rectify recurring pricing errors and financial leakage. Proactively rectifying recurring pricing errors and financial leakage requires thoroughly assessing the procurement process, supplier contracts, and purchase orders. This enables procurement to identify the root cause of the problem and implement measures to prevent future occurrences. Such measures may include negotiating better contracts, establishing clear communication channels with suppliers, and implementing processes to monitor and track pricing.
- Implement control improvements that strengthen contract compliance. Take steps to ensure that suppliers are adhering to the agreed-upon terms and conditions of the contract. Key control improvements might include conducting regular audits and inspections, monitoring supplier invoices and payments, and/or implementing a robust supplier evaluation process.
- Utilize historical use and pricing data to aid future negotiations. To secure the best value for money, procurement professionals should assess the prices their organization has paid for past products or services and understand the current market prices for similar investments. This data can be used to develop a more effective negotiation strategy and identify trends and patterns in purchasing behavior to minimize risks and optimize outcomes.
A contract compliance audit program, especially one paired with effective savings recovery strategies, will help ensure your organization is getting the services it needs, in a timely manner, and at the agreed price and quality. This helps to minimize the risk of financial loss, protect the organization’s reputation, and foster strong relationships with suppliers.
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