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Contract audit: establishing value

January 12, 2015

It has been some years since ISG introduced an audit service for outsourcing contracts. I recall that they estimated clients could save up to 7% of contract value through corrections of supplier over-billing.

Recently, I conducted a webinar with SC&H Group, a company that offers more holistic contract audit services. Their estimate of savings is a little more conservative, but still very significant. It seems to me the sort of service that any value-minded supply management group should be adopting – and indeed, worth considering by any supplier wanting to establish competitive advantage.

Billing accuracy is important. At one, extreme level, there is a risk of outright fraud, which every organization must be anxious to avoid. At another level, there is error. And somewhere in between is complexity – the growing volume of services contracts that are based on complicated algorithms or precise volumes of activities delivered, often utilizing personnel with varying hourly rates.

The concept of audit is obviously not new and it is used quite extensively in some industries. But in many, especially where Procurement focus has historically been on direct purchasing, there is little attention paid to contract outcomes. As indirect procurement has grown as a proportion of spend, the chances of waste and overpayment have increased.

One option for tackling this problem is to deploy internal resources to check and validate supplier invoices. However, in addition to asking whether this is an area for internal core competency, there is the drawback that such reviews may prove adversarial and damage the wider customer – supplier relationship. Using a third party can bring a degree of independence and objectivity, reducing the chance of confrontation.

For suppliers, there is growing demand for greater integrity in business dealings and key to achieving this is increased transparency and openness. It seems to me that a source of competitive advantage in the next few years will be proactive efforts to embed transparency within contract relationships. The accuracy of billing and charging practices is an area of major concern for customers. What better way to demonstrate not only honesty, but also confidence in process quality, than to establish third party audit as a contract term?

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