Contract Audit – driving business efficiency

Holding your suppliers to account is surely not a bad idea. Whenever we hold anyone to account, it generally improves performance, not just our performance but more importantly their performance. Think of any successful sporting teams; not just a good manager and good players but a strong system and individuals who know their roles. Without accountability, how can we praise performance, or highlight specific improvements. Yet many companies don’t see the value in contract audit, not just the monetary value but the intangible benefits, and focus instead on the cost. At times like these, costs are being cut and contract audit is an easy cut to make. But is it the right one?

Contract audit is not just about identifying incorrect charges, failures to process volume discounts and unapproved variations. It is all about improving performance. We read about “supplier bashing”. We read about collaboration. Is one of these the right “approach”?

Let’s take a step back for a moment. There is pressure to reduce costs but that cannot be an end in itself, simply just one means of improving performance. More often than not, a contract audit pays for itself in savings generated. Yet without corrective action, the same audit can be completed the following year with the same result. This may generate a cost saving but where is the improvement in performance or efficiency? There is certainly no “win/win”.

Recommendations for improvements are a key deliverable in any audit. However, the nature of engagement with the supplier drives results. We all select suppliers for a reason and we don’t expect the relationship to be an adversarial one. Suppliers also want to improve performance, both their own and that of the customer. If not, then we should admit the selection mistake and move on. Sometimes it happens but in most cases, suppliers do want to improve performance and should welcome constructive criticism. Of course there are sometimes contractual disputes but right first time has to be more efficient than error and corrective action. That is a change which clients can and should influence.

So what is the right approach? Adopting an approach to suppliers based on a polarized view isn’t constructive and doesn’t improve performance. What about applying an open mind to engaging a contract auditor? Traditional dayrate models remain the most common form of engagement and these frequently work well, but they are not the only form of engagement. There are other models involving incentives where the objectives of client and contractor may be better aligned through sharing the risk and reward, or joint teams carrying out contract audit with representatives from contract audit professionals and the client’s supply chain team. But consider the objectives and ask what behaviours these models drive; a pure focus on cost savings perhaps? Or maybe improvements in process, in performance and efficiency are more important? Think about the drivers, think about how you are engaging with your suppliers and think about who you are engaging to drive improved performance from your supply chain.

For more information contact Ian McPherson, Director, ian.mcpherson@aab.uk