Blog Series: Lavante Guide to Optimizing Supplier Statement Auditing
This is the second in a four part blog series by Lavante’s Josh Morrison. In this series Josh lends his insights from over twenty years of experience as a Procure-to-Pay expert.
Blog#2 –Processes & Controls Surrounding Supplier Data
Accounts Payable Recovery Audit has been around for a long time, but in the last few years, many forward-thinking organizations have sought to drive greater results through new strategies and innovations. Some leading service providers have risen to the occasion and have met the challenge with exponentially better ways to support their clients. This galvanization has been catalyzed by several critical pains that many companies either are not aware of, or realize is a problem but are not sure what to do about it. This four-part series lays out these critical pains and identifies many of their associated root causes. The intent is to educate organizational leaders about these common pitfalls and provide recommendations and decision support for improved audit recovery strategies.
We as organizational leaders are always being asked to do more with less. We are challenged to cut costs or grow our business without adding costs, to improve and better control business processes, and to govern critical organizational information and business relationships. How can these lofty objectives be met through something seemingly benign like reviewing supplier statements? The answer may be simpler than you think; it’s all in the foundational data and processes that support the data. Today we will look at how this impacts your supplier information, specifically why you have bad data and why your Vendor Master File may be out of control.
Like with any other process, analysis, report, or strategy, the ability to make effective decisions and drive success is only as good as the underlying data and resulting assumptions used to do so. If the information is poor or outdated, there is no way to assure you are making the best decisions. This too is true in managing supplier communications, documents, and transactions, including your supplier statements. If you do not have quality supplier data, you cannot effectively manage or scale the solicitation, capture, research, and action steps required to collect monies owed to you, across your entire supplier base.
Conceptually this is all very simple; however in practice it proves to be far more challenging. In order to combat these challenges, first we need to better understand the environment in which these data and processes exist. From there, we must define specific reasons and root causes that create opportunities for these challenges to arise. Then, and only then, can we begin to create effective strategies to combat bad data and its various root causes.
The P2P cycle is extremely complex, especially in today’s fast-paced and technology-driven business environment. At the same time, the nature of enterprise itself has evolved to meet new and growing competitive forces and changing consumer demands. Many leading organizations now support multifaceted, and often disconnected, organizational structures that work with massive quantities of supplier data, across multiple divisions and users throughout the world. Of course this becomes a major challenge. If you cannot control what goes into the P2P cycle (i.e. the data and processes), then you cannot control what comes out of it (i.e. transaction processing, reporting, analytics, etc.). This includes being able to gain access to and derive value from your suppliers’ statements.
The P2P processes itself, by nature, is multifaceted as well. It is not just about creating a requisition and a PO, or processing an invoice and a payment. In truth, there are many departments and stakeholders involved in both the pre-payment and post-payment processes, all of whom rely heavily on accurate supplier information. From vendor prequalification, through onboarding, to processing transactions, and finally reporting on and analyzing the results, an organization’s supplier data is the common denominator that flows through every single one of these touch points. If we were to diagram the many ways in which supplier data flows in and out of the P2P cycle, and between critical points within the P2P cycle, the result would be a complex series of back-and-forth exchanges of supplier information, the various elements of which are needed to perform a variety of different functions. We would have a very busy picture indeed.
And let us not forget another key factor; M&A and divesture activities are higher today than ever before. This trend is expected to continue increase, across nearly every vertical. A critical problem therein however is that while M&A activities are treated as strategic initiatives, the tactical steps taken to execute merging two companies together are too often not given enough thought. Possibly the most neglected aspect of acquiring a new firm is effectively capturing, rationalizing, and ingesting newly acquired supplier data files. When we roll acquired vendor data into our corporate Vendor Master File (VMF) without the proper vetting, cleansing, or analysis, we leave ourselves exposed to all kinds of financial risk including, but not limited to, fraud, duplicate or erroneous payments, lost or inconsistent vendor data, lost discounts, and lacking controls to capture open monies on account.
So then, what if the underlying supplier information, that which is used for tactical and decision support and strategy development, is not correct to begin with? How can you be certain you are properly engaging your entire supplier base to assure the capture of all relevant data points, or identifying and realizing all monies owed to you? There is very real and hard exposure in this unknown.
The Importance of Good Data
Accurate supplier information is the backbone of all procurement and supply chain operations, from contracting, to credentialing, to ordering, to payables, through risk mitigation. As one leading advisory service noted, “Supplier data is the underlying foundation upon which a (P2P) organization operates…the failure to engage suppliers robs companies of potential ROI, and reduces the quality of reporting.”
Supplier data is often used across multiple purchasing organizations, business locations, and department functions. Again, supplier information is used for more than just creating PO’s and payments. It is not flat; rather it is multi-dimensional and used to meet the different needs of different stakeholders. For this reason, it is all the more important to enforce proper controls around your supplier data, both in the data itself and in the processes that surround it. These controls however can become extremely complicated when we layer in additional requirements based on supplier types, locations, commodities, and more.
Suppliers themselves often have many touch points within their organization, and buying organizations do not always store all of their supplier information in one place. It is common to see multiple disparate systems being used to house different types of supplier data, depending on the function being performed in the specific system. This is ok for the sake of maintaining more tactical functions, but it makes it much harder to drive centralized governance and controls across all supplier data. If you cannot control what goes in, you cannot control what comes out, and you are left exposed.
The Costs & Causes of Bad Data
Let us now define what bad data costs a buying organization. There is no finite list of areas impacted by bad supplier data; its effects radiate throughout the entire organization. The Data Warehousing Institute estimates that $611 Billion is lost annually by U.S. businesses as a result of bad data. Included in this figure are credits owed but never realized. Much of this is felt in hard dollar losses, but it goes far beyond that too. Having poor quality supplier information inhibits an organization’s ability to effectively manage governance and risk, or identify and scale other strategic areas of opportunity.
Not capturing open credits on supplier statements is just the tip of iceberg when it comes to hard costs resulting from bad supplier data. You cannot properly solicit or review statements without complete and accurate information surrounding it. Suppliers will not be engaged and credits will be left unrealized. Moreover, additional insights can be gleaned about your suppliers when regularly looking at their statements over a period of time; insights that often have direct financial impacts. Reviewing statements and supplier data also helps to reveal instances of duplicated supplier information within the corporate system of record. In some cases, these are true duplicate records which can lead to duplicate payments. In other cases however, this is representative of doing business with a supplier in different ways and in different locations.
For example, one of your business units may use a national service provider for facilities services in their east coast office while another business unit uses them for dining services on the west coast. It is the same supplier, but each carries different aspects and hierarchies of supplier information specific to the relationship the record represents; contacts, addresses, terms, taxation, payment methods, etc. Each of these data aspects carries inherent requirements surrounding them. If any of these data elements are incorrect, outdated, or incomplete, there is financial risk.
But outside of the hard financial discussion are some broader concepts in how bad supplier data and surrounding processes hurt an organization. Companies suffer from a limited ability to centralize and enforce governance. Whether this results in maverick spend, contract leakage, or regulatory violations, if you cannot control what goes into the P2P cycle, you cannot control what comes out. There is also significant value lost in opportunity costs resulting from poor supplier data. Supplier programs become less scalable and supporting software systems erode in ROI.
Further, internal stakeholders who rely on supplier data often times work outside of the system and do not centrally retain agreements or learning derived from supplier interactions. Time will be wasted by others looking for supplier information that should be readily available for decision support. According to Gartner, companies can see as much as 20% negative impact on productivity resulting from bad data. Moreover, 40% of targeted capital budget benefits are never realized because of bad data. This gets to be very expensive.
There are many, many reasons why bad supplier data exists. Most major companies still use their ERP systems to collect and store supplier data. This is not only limiting with regard to the data components and handling of new supplier information, but also with the ability to manage these suppliers over time. And over time, supplier information changes. Most major ERP’s do not support configurable workflows and change management controls, at least not out-of-the-box. Other major causes include inconsistent handling or lacking oversight of new or changing supplier data, erroneous or untimely merge or purge of AP accounts, inability to capture and associate related parties and supplier hierarchies, and non-centralized governance of supplier data and processes. No matter what the reason for the bad data, once identified and understood, organizations can start to form strategies to combat the problem.
Best Practices & Recommendations:
Like all transformative strategies, first we must come up with realistic and tangible goals to combat bad data (remember your SMART goals, and don’t be afraid to include a few BHAGS!). With this as a foundation, we can drive improvements and accountability in a realistic path to achieve these goals. This is by and far not an exhaustive list, but here are some of the best practices that leading organizations employ.
First, commit to a data quality philosophy. Every time you look at an area for improvement, remember that the quality of the underlying data is of primary importance. You must commit to this, otherwise it will end up by the wayside with the other initiatives that never took off. Not only do you have to commit to a data quality philosophy as the owner of the data and processes, but you also need to radiate this paradigm shift to all internal stakeholders. You have to help them to understand, “What’s in it for me?” This is a critical first step.
Next, remember data is always changing. From the moment it is entered into the system, it begins to age. For this reason, you cannot treat data as a one-time event. Invest in onboarding strategies to create a controlled, auditable, and repeatable process. This alone however is not enough. Adding a new supplier is just the beginning of the relationship. Continual engagement and information updates must be part of the fluid conversation between the buying organization and its supply base. Seek out updates regularly, assuring proper controls and approvals in place behind them.
Do not rely on data aggregators. Your suppliers are the best resource for current and accurate data. The best mechanism to collaborate with suppliers is the use of a vendor portal. This is quickly gaining in market adoption, and is slated by experts to become de facto standard over the next two years. Not only might this enable the onboarding and information update processes, but also the capture of supplier documents like statements. It is very common in fact, through improved data and supplier engagement using a vendor portal, to generate enough incremental monies from supplier statement audits to justify the cost of a vendor portal project.
Don’t forget to measure what you do. Create baselines, benchmarks, metrics, and KPI’s surrounding your data to keep it clean and accurate. This will help show progress and identify additional gaps as you go. You cannot improve what do you do not measure. Finally, employ the Three Pillars Model to sanitize, stabilize, and optimize your supplier data and its surrounding processes. This is a growing and learning process and should be treated as such.
We may not traditionally think of supplier master information and supplier statement audits as having a symbiotic relationship, but it is clear; the two go hand-in-hand. Having good supplier master data and continuous collaboration allows for the greatest capture of supplier statements and open credits. In turn, outreaching to suppliers to solicit statements regularly is the mechanism to assure all information remains current and accurate. When we work together and share the same information, we all win.