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Business Insights: Commercial assurance – are your contracts a help or a hindrance?
Even in good economic times some contracts produce doubtful benefits.
However, when finances are stretched it's absolutely imperative to challenge all business expenditure. Supplier spending is significant in all organisations and is a good place to start. In fact, experience shows that some contracts do not deliver the value that they should, that some contracts can be poorly controlled and that some can actually represent cash simply leaking from an organisation.
Even initially well-managed contracts can also produce a decline in value over time. Problems gradually develop such as scope creep, delivery and quality failures, poor or perverse incentives, bad planning and demand management, ill-informed buying, deliberate contract manipulation, and miscommunication. Any of these can be causes of value erosion.
When did you last consider whether your major contracts are still delivering value? Many organisations never undertake independent reviews, often because there is no clear ownership of such activity.
Yet the potential benefits are significant. For one client we were able to identify savings of more than 10 per cent of their sub-contract spend. For another, which had under-invested in supplier management and experienced a doubling of contract cost since inception, we not only identified immediate cost savings but provided evidence
for subsequent in-sourcing and the tightening of commercial terms in other areas of supply.
Organisations might suffer excessive payments or a lack of contractual control for a number of reasons.
For example, many third-party relationships have complex charging schemes – in respect of the purchasing of services it can be difficult to assess what is actually being paid for and also if there is a lack of transparency in a contractual relationship this can cause problems. When contract reviews are not undertaken not only could excessive spend continue, but inefficient operations might become embedded and limited resources become consumed on non-valuable activity.
There may even be legal implications arising from non-compliance to contract terms and, of course, the risk of fraud cannot be ignored.
In summary, it is hard to justify not undertaking contract reviews. We have the experience to help. We understand the problems in contract management and how to identify and resolve them.
Based on extensive client work, we have developed an approach that considers key aspects such as: billing accuracy, contract deployment, risk management, operational efficiency and process simplification.
We can advise on future beneficial control improvements including the effective use of right to audit clauses and the use of sound risk assessment techniques.
Combining an organisation's insight with our own knowledge, we focus on contractual relationships worthy of review, tailoring our approach as necessary and commonly focusing on a range of activities such as: a detailed examination of purchase invoices, scrutiny of contract terms, an assessment of contract deployment and controls and reviews of supplier management.
Real benefits can be found anywhere in the supply process and typical outcomes can include identification of over-payments, revealing important areas of contract non-compliance, improved effectiveness of accounts payable, and improvements of the procurement process itself.
For more information, contact Steve White on 0113 289 4611, email steven.m.white @uk.pwc.com or visit www.pwc.co.uk/leeds
Steve White is a director in the risk assurance practice at PricewaterhouseCoopers LLP in Leeds.
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