unlocking the full value of your contract compliance program...companies reach wider, dig deeper,...

Beyond Recovery:

Unlocking the Full Value of your

Contract Compliance Program

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Beyond Recovery: Unlocking the Full Value

of your Contract Compliance Program

Executive Summary

While the bottom-line impact of a successful recovery audit can amount to

millions, other significant hard and soft benefits can also be generated.

From risk mitigation and service-level agreement (SLA) management to the

reduction of maverick spend and the rationalization of suppliers, a Best-in-

Class contract compliance program can build upon the results of a recovery

audit to make a lasting impact on spend and supplier management. This

report highlights these and other opportunities and the value that can be

generated from them. The report also provides Chief Financial Officers

(CFOs) and other finance leaders with a checklist of items to include within

their compliance programs.

What is a Recovery Audit?

In the broad scope of B2B payments, a percentage of disbursements made

to vendors contain errors that are not compliant to the underlying supplier

contract. The reasons for these mistakes (or overpayments) span from the

benign to the complex to the fraudulent and can quickly add up to

significant losses. While many of the issues, at their core, are basic

mistakes – typos and human error, the erroneous calculation of taxes, and

duplicate payments – others are linked to the broader mismanagement of

supplier contracts and a lack of controls needed to manage contract

compliance and fraud.

Poor contract compliance has a real bottom line impact and can result in

greater off-contract or “maverick” spend, increase the opportunity for

savings leakage and erode the work done by sourcing and category

management teams to identify and contract with the highest valued-

suppliers. In fact, Ardent Partners research has shown that noncompliant

spend adds an extra cost of between 12% and 18% for the average

enterprise.

A recovery audit focuses on identifying and correcting mistaken

overpayments through the systematic review of vendor payments and the

supporting documentation (i.e., contracts, purchase orders, goods receipts,

invoices, etc.) that defines supplier transactions and relationships. These

audits are the front-line remedy that CFOs and their accounts payable (AP)

organizations employ to recoup losses from overpayments and other

Ardent Partners

October 2019

Analyst:

Andrew Bartolini

Matthew York

Contents:

1 Executive Summary

1 What is a Recovery Audit?

2 Contract Management: The

Lever for Contract Compliance

2 The Benefits of Enhanced

Contract Compliance

3 Visibility into Existing

Contracts with Preferred

Suppliers

4 Enhanced Financial Risk

Management

4 Optimized Supplier

Relationship Management

5 Recommendations

5 Conclusion

6 Appendix – Contract

Compliance Checklist

Beyond Recovery: Unlocking the Full Value of Your Contract Compliance Program Ardent Partners


disbursement errors and lay the foundation for a successful contract

compliance program.

By answering standard supplier and contract management questions like –

Did the buyer receive what they were invoiced? Did the buyer pay the right

amount? Were any and all special terms like volume discounts and rebates

applied? And, were all credits received? A recovery audit can recoup cash

while also performing a diagnostic review assessment of a business’

contract compliance program that can yield sustainable long-term benefits.

Contract Management: The Lever for Contract Compliance

A standard recovery audit results in the successful recoupment of

overpayments, fraudulent payments, and costs caused by a plethora of

common mistakes which, at scale, can equate to hundreds of thousands

and even millions of dollars. But just as significantly, it can identify

numerous opportunities for process improvement across the full source-to-

pay (S2P) spectrum and set a framework for the development of best

practices across the entire supplier contract lifecycle, including contract

creation, management, and compliance.

A robust contract compliance program will limit and prevent many of these

issues from arising in the first place. With best practices mapped to

solutions that standardize contract language, centralize templates and

existing contracts, and make contract search, discovery, and review a

painless process, significant near- and long-term advantages can emerge.

A Best-in-Class contract compliance program can:

Increase visibility into existing contracts,

Drive greater contract-compliant (or “on-contract”) spend,

Increase suppliers’ contract compliance and adherence to SLAs,

Reduce off-contract or “maverick” spend,

Reduce savings leakage, and

Realize greater previously-identified savings.

The Benefits of Enhanced Contract Compliance

Contract Language and Terms Management

By crafting a contract’s language – namely its pricing, clauses, SLAs, and

terms and conditions (T&Cs) – right the first time and communicating the

key terms to business stakeholders, business leaders ensure that the value

identified in the sourcing and supplier negotiation processes can be more

fully-realized. This also reduces the number of potential vendor payment

errors that can be caused by confusing language in the underlying contract,

as well as the templates and standard clauses that were used to create it.



Unclear contract language and/or poorly communicated contract terms can

erode supplier relationships and the value that can be generated from them

which can result in B2B payment discrepancies. For example, tiered pricing

agreements may be confusing or ambiguous, leading to mismatched

expectations and payments between trading partners. This can result in

significant overpayments or discrepancies in delivery and a sizable loss.

By identifying and correcting contract language issues, AP and

procurement teams can quickly implement permanent fixes across their

existing contracts and eliminate future issues.

Visibility into Existing Contracts with Preferred Suppliers

Another hallmark of a Best-in-Class contract compliance program is having

easy, enterprise-wide access to supplier contracts, which provides basic

visibility and extended transparency into buyer-supplier agreements.

Centralized, searchable contract repositories open the proverbial curtains

on an enterprise’s existing contracts and supplier relationships. This

access enables stakeholders from across the enterprise to retrieve,

consult, and leverage supplier contracts to drive a number of favorable

behaviors and outcomes, both immediate and long-term, including:

Optimization of preferred suppliers via established contracts.

Procurement teams conduct formal sourcing events to find the

greatest value from the most competitive suppliers in the market.

By accessing and leveraging existing contracts with preferred

suppliers, buyers can take advantage of early-payment discounts,

volume-based discounts, and/or “most favored nation” pricing terms

and conditions that procurement secured from these suppliers

during negotiations.

Ensuring compliance with negotiated SLAs. When buyers have

access to supplier contracts, they are able to understand the finer

points of the agreements, such as pricing and T&Cs for goods and

services. Armed with this intelligence, enterprises can better ensure

that all parties comply with their obligations, do not solicit or pay for

goods or services already under contract, and preserve the value

and integrity of the original contract.

Reduction of maverick spend. Ardent Partners research has

shown that for every dollar of off-contract (“maverick”) spend, there

is an additional 12%-to-18% cost to the buying organization. These

can include: the overhead costs of adding the vendor’s payment

information into their payment system, the negation of value



negotiated, and a lack of formal controls or recourse over the

supplier that a signed and executed contract would afford.

Reduction of Savings Leakage/Preservation of Value: To

AP/Finance leaders, like the CFO, preserving projected savings is

vital to long-term strategic budgeting and forecasting. By identifying

and leveraging existing contracts with preferred suppliers, stake-

holders across the enterprise can avoid additional costs and

preserve savings that were identified during the sourcing process

and negotiated and codified during the contracting process.

Enhanced Financial Risk Management

A natural product of implementing and achieving a Best-in-Class contract

compliance program is the opportunity to enhance risk management across

the enterprise – namely, financial risk management.

Organizations that have greater contract compliance (in the form of more

on-contract spend, spend with preferred or electronically-enabled

suppliers, and tighter adherence to SLAs and T&Cs) are less exposed to

financial risk than those that do not. After all, they will likely:

Avoid additional costs associated with off-contract/maverick spend,

Avoid the extra overhead costs of paying vendors off-contract, and

Incur fewer additional costs from needless supplier up-selling.

Optimized Supplier Relationship Management

Driving Best-in-Class contract compliance can also help enterprises bolster

their supplier relationship management initiatives – because what benefits

one party in a B2B relationship often benefits the other. Consider the

following examples of how an enterprise’s enhanced contract compliance

boosts their supplier relationships:

Ardent Partners research shows that 12% of all supplier payments

are contested; improving contract compliance should reduce that

number, saving both parties the time and effort reconciling

payments and seeking recouped losses or overpayments.

Moreover, moving away from tactical transaction auditing and time

spent with invoice and payment processing can allow strategic

trading partners to focus on higher-value areas that support mutual

growth and profits. This can also allow them to develop an esprit de

corps that can give each an advantage over their competitors who

may approach supplier relationships in a more sterile manner.



Recommendations

Ardent Partners research has shown that Best-in-Class contract

compliance programs can drive greater on-contract spend, reduce risk, and

improve supplier performance while helping companies to preserve more

savings and value. By leveraging a combination of proven strategies,

robust processes, and business solutions and services, AP/Finance teams

can turn post-payment recovery audits into next-level value drivers. The

following are recommendations to develop and successfully leverage a

contract compliance program for maximum benefit:

Leverage the output of a recovery audit to identify additional

savings opportunities including the reduction in maverick

spend and the increased accuracy in B2B payment execution.

Deploy digital, automated technologies, like contact authoring

tools and repositories, to codify recovery audit results.

Utilize a Contract Compliance Checklist (see Appendix).

Construct a multi-stage plan to review supplier contracts and

amend erroneous and/or ambiguous contract language.

Conduct a spend analysis to identify savings leakage and

other opportunities to maximize value.

Collaborate with procurement to close the S2P process

including payment reconciliation and recovery audits.

Collaborate with suppliers to develop strategies that prioritize

and reward contract compliance.

Conclusion

Contracts are the glue that binds transactions between buyers and

suppliers, ensuring that buyers maximize the value negotiated during the

sourcing process and that suppliers deliver on the value that they promised

to provide. Without the visibility and control that contract management

provides, businesses expose themselves to greater internal and external

risk in the form of savings leakage and non-compliance. For the modern

enterprise trying to cut costs and increase savings wherever and whenever

it can, contract compliance is a veritable linchpin to success.

Recovery audits can set a foundation for a value-driven enterprise to then

use their contract compliance programs to positively impact the bottom line.

But, beyond the financial gains from a successful recovery audit, leading

finance departments understand that significant, longer-term opportunities

to identify and realize value also exist.



Appendix The development of a contract compliance checklist ensures that best

practices are understood and followed while also providing the finance and

procurement teams with a mechanism to track contract performance,

address and correct non-compliant behavior, and ultimately, optimize

contract value.

Ardent Partners’ Contract Compliance Checklist focuses on the three main

phases of the contract lifecycle – Contract Execution, Contract

Enablement, and Contract Management – that begin after the primary

negotiation has been concluded. Value is gained by driving compliance

across each of these three areas.

This checklist is built upon foundation of standardization, communication,

and visibility. And while it is immediately usable, this checklist can be

customized to match the unique industry, region, and supply base of the

buying organization.

-



About the Authors

Andrew Bartolini is the Founder and Chief

Research Officer at Ardent Partners. With 20+ years

in the industry and 10 years leading the charge at

Ardent, Andrew is a globally-recognized expert in

sourcing, procurement, accounts payable, and supply

management. Andrew currently oversees and manages

all research programs at Ardent Partners including the

annual state of the market research studies, the Metrics

that Matter eBook series, the CPO Rising Summit, and Ardent’s monthly webinar

programs. Andrew focuses his research and efforts on helping procurement and

finance teams get the most from their technology investments and develop

strategies to achieve Best-in-Class performance. Andrew is also the publisher of

CPO Rising (www.cporising.com), the most popular site globally focused on

procurement and the Chief Procurement Officer. Andrew has been named a “Pro

to Know” by Supply and Demand Chain Executive multiple times and holds a B.A.

in Economics from The College of the Holy Cross and an M.B.A in Finance from

Indiana University. You can contact Andrew at [email protected] and

617.752.1620. Follow Andrew on Twitter @andrewbartolini and Ardent Partners

@ardentpartners.

Matthew York is a Senior Research Analyst at

Ardent Partners who for more than a decade has been

fascinated by emerging technologies like artificial

intelligence, connected devices, and distributed digital

ledgers and how they can enrich business operations. At

Ardent Partners, Matt researches, analyzes, and writes

about the intersection of people, processes, strategies,

and technologies in supply management and how they

are changing the business landscape of tomorrow. He has been lead author on

data-driven, thought leadership reports ranging from advanced analytics to

contract management to strategic sourcing to supply risk management. Matt has

twice been named a “Pro to Know” by Supply and Demand Chain Executive

magazine and is a sought-after speaker. Previously, Matt served as an analyst

with the U.S. Department of Justice and the U.S. Intelligence Community. He

earned a B.A. in Political Science/International Relations from Stonehill College

and an M.A. in Political Science / International Politics from the University of New

Hampshire. Matt can be reached via Twitter (@MattYork_Ardent), LinkedIn, and

at [email protected].

https://events.cporising.com/

http://www.cporising.com/

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https://twitter.com/andrewbartolini

https://twitter.com/ardentpartners



Ardent Partners: Research with Results

Ardent Partners is a research and advisory firm focused on defining, and

advancing the supply management strategies, processes, and technologies that

drive business value and accelerate organizational transformation within the

enterprise. Ardent Partners was founded in 2010 by Andrew Bartolini. Ardent

Partners actively covers the supply management marketplace and produces

research to help business decision makers understand (1) industry best practices

and how to improve performance & (2) the technology landscape and how to

identify the best-fit solution(s) for their specific budget and requirements.

Contact [email protected] if you have any questions about this report

or our research in general.

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