Using SMS's to control the procurement process and boost governance

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Approve that Purchase Order! In organisations in which executives with approval authority are often out of the office, e-Procurement functionality is extended to enable the executive to approve a purchase request via SMS. Says Arthur Benting, IT manager at MWEB CommerceZone, a hosted e-Procurement solutions provider, "It won’t matter if the executive is out of the country or without access to email or the Internet: he or she is likely to have a cell phone and the ability to check for messages throughout the day."

“Since the Internet arrived on the scene as a supply management tool in the mid- 1990s, companies have tried to gain the benefits e-Procurement can deliver: process streamlining, improved contract compliance, increased spend under management and cost reductions. But there are issues emerging around the Internet as the only medium of communication in e-Procurement.

“One of these relates to time delays in obtaining procurement approvals from on-the-move executives who may not have immediate access to the Internet. Delays in approvals results in a wide range of problems, from lost opportunities to capitalise on ‘specials’ and other cost benefits, to increased temptation towards off-contract (maverick) spending,” he adds. “The key, therefore, is to eliminate these delays as far as possible.”

Remote approval
One way in which this is being achieved is to extend e-Procurement into the mobile arena through the integration of SMS technology into the e-Procurement approval process.

In organisations in which executives with approval authority are often out of the office, the system is being extended to enable the executive to approve a purchase request via SMS. It won’t matter if the executive is out of the country or without access to email or the Internet: he or she is likely to have a cell phone and the ability to check for messages throughout the day.

“When SMS is incorporated into the e-Procurement approval process, all that happens is that in addition to the usual online approval process, the executive is sent a SMS that outlines the contents of the requisition. The executive then simply responds with a preset authorisation code,” Benting explains.

This has significant implications for the organisations corporate governance compliance – and non-compliance.

Benting notes that corporate governance initiatives are having an impact on procurement, particularly in the area of process compliance and performance, as well as in the preferential procurement arena.

Results of a survey published by the global market research company, Aberdeen Group, in December 2004 revealed that between 2001 and 2004, e-Procurement tools resulted in a 64% reduction in maverick spending and a 7,3% reduction in prices for spend brought back onto contract.

The survey further found that each new dollar brought under management could yield 5% to 20% cost reductions.

More recently, (April 2006), however, research released by Aberdeen showed that while contract compliance was a priority among contract management executives, just two-thirds of procurement transactions were compliant. The resulting maverick spending led to significant savings leakage in lost discounts or rebates.

“Thanks to advances in technology and greater integration of the e-Procurement systems with other enterprise IT systems, enterprises are achieving more value from e-Procurement."

“Because this value derives largely from compliance, and compliance demands adherence to pre-established protocols, governance and pre-approved contracts, the utilisation of SMS technology makes compliance more readily attainable,” Benting concludes.

1 Comment

Below please find my response to the article above:

1)In reference to the first three paragraphs of the original article:
Reponse:

SMS functionality is not going to prevent off contract (maverick) spending. The way to curb maverick spend is through the use of a CLM (Contract Lifecycle Management) solution so that transactional procurement activities can be driven against contracts.

Just because a P.O is not approved or does not necessarily follow the correct organisational process does not necessarily make it a maverick purchase. It is all too common to see P.O’s that have followed the correct approval process and be approved only to be sent to a non contracted supplier for a product or service that is already on contract. Viewed another way maverick spend is spend that is not under organisational management and the tool for bringing spend under management is through the use of contracts.

Now in order to achieve a state of compliance you will need to ensure compliance across three domains:

- The regulatory environment: Regulatory compliance e.g. ISO, Sarbanes Oxley etc

- Internal organisational policies and procedures (these are internal controls): Procedural compliance e.g. Sales, Legal, Procurement, Accounts Payable and Receivable etc

- Contractual commitments: Contract compliance e.g. NDA’s, HR contracts, sales contracts, JV’s, procurement contracts etc

Now a CLM solution may not be the only way of achieving compliance across these three domains but it is the most efficient and effective.

2)In reference to paragraphs 4 and 5:
Response:

Any executive in this day and age that approves a purchase request via an SMS will truly deserve the consequences of such an action. The entire purpose of an approval process is not to cloak the organisation in further bureaucracy and administration but to ensure that the necessary controls are in place to ensure the adherence to organisational intent behind such actions.

The basis for Governance, Compliance and Internal Controls:

An organisations approval process will fit into the “procedural compliance” domain listed above. Procedural compliance constitutes the organisations internal controls.

Now why are internal controls important?
(I have used an example from the Sarbanes Oxley realm for the purposes of my argument and to illustrate my point, but my argument is not SOX specific)

The following public company disclosure about SOX internal controls appeared in an MD&A (Management Discussion and Analysis) filed with the SEC in 2005:

“If we are not able to implement the requirements of Section 404 of the Sarbanes–Oxley Act of 2002 or attain an unqualified report from our independent auditors as to our internal controls as required as of the end of the current fiscal year, our reputation, our financial results and the market price of our stock could suffer.”

It is important to note that SOX in this instance does not dictate contract outcomes, only management authorization, a system of controls, and proper accounting.

Now for the purposes of my piece on internal controls (which is the basis of what original article hinges on), I have utilized the work of the following:

- Standard No. 2, issued by the Public Company Accounting Oversight Board (PCAOB), which was created by the Sarbanes–Oxley Act of 2002 (SOX). The new standard renews attention paid to transactions and contracts of all kinds.

- The organization that developed the commonly accepted structure of internal controls, the Committee of Sponsoring Organizations (COSO), which was founded in 1985 and began looking at internal controls in response to concerns about the integrity of financial reporting.

“Internal controls” are processes and practices that provide reasonable assurance regarding the achievement of organizational objectives. They have as their objectives the effectiveness and efficiency of operations, reliability and accuracy of financial reporting, and compliance with laws and regulations (the other compliance domains listed earlier). While effective internal controls prevent or detect fraudulent behavior, their greatest practical value may be in preventing errors.

Controls generally are categorized as either preventive or detective. Preventive controls involve control activities such as training and segregation of duties between procurement and accounts payable, for example. Detective controls may involve post-transaction reconciliation of financial information and management reviews, thereby detecting any errors or fraudulent behavior

Detective controls are important control activities in the procurement organisation and of course apply to procurement requisitions. Because of the transaction volumes, it is unwise in most instances to seek higher-level approval of every small purchase. Therefore, transaction screening (transaction compliacnce) that is processing the transaction request against the procurement organisations contracts is in most cases the best process of ensuring compliance.

In accordance with the COSO framework, the components of an effective internal controls program include monitoring, information and communication, control activities, risk assessment, and the control environment.

With this in mind, at best I would group the provision of an SMS to an approver, as fitting into the “communication component” of the framework thereby alerting the approver to acquire insight into the activity accordingly, in order to make an informed decision.

The bottom line is that internal controls illuminate a central issue: how best to balance the relationship between controls and operational effectiveness. Internal control processes entail a common issue, that of time. As emphasis on internal controls increases, one can expect more attention to be paid to internal approvals. The size and complexity of a transaction relates to “materiality” and “significance” in internal controls, an acknowledgment that risk is a continuum. I don’t see how SMS’s can in anyway be a solution to this.

3) In reference to paragraph 6:
Response

The contents of a requisition is not the sole basis for approval and an executive would require far more insight into the “underpinnings” of this requisition before approval should be given – in the context of this article a mere SMS would not provide the approver (executive or other) with sufficient information to make an informed decision.

4) In reference to paragraphs 7 and 8:
Reponse:

Although the above is a correct statement concerning the impact of governance in procurement, none of the above relates to how an SMS provides any sort of solution to this problem. It has correctly been highlighted above that the approval conditions for a requisition span compliance to process, performance and regulatory provisions – how can a SMS ensure adherence to this?

5) In reference to paragraph 9:
Response:

Highlighted correctly is that it is about bringing spend back under the management of the contract – hence the solution lies in eprocurement integrated with contract management.

The very same Aberdeen report states:

“In fact, an Aberdeen study of 125 supply management executives published earlier this month identified visibility into spending and driving compliance with supply contracts as the two leading challenges facing procurement organizations today.”

6) In response to paragraphs 10 and 11:
Response:

Primarily as a result of ineffective and efficient contract management processes and the organisations either lacking a CLM solution or the CLM solution is not integrated into the other transactional systems (i.e eprocurement solution).

CLM solution implementation and integration is the key.

7) In reference to paragraphs 12 and 13:

The utilization of an integrated eprocurement solution with a contract management solution will make compliance more readily attainable. I fail to see how the utilization of SMS has any impact on compliance and therefore any impact on governance.

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