Why don’t more companies perform forensic contract compliance audits?
Particularly when times are hard, there are significant recoveries and savings to be had if high proportion of an organisation’s costs are in supplier contracts. As an example, an organisation might have 70% of its costs tied up in contracts (not untypical in Oil & Gas upstream) and, as research shows, there is a likelihood of 9% value leakage (wastage): Based on those figures, a potential of 6.3% of the organisation’s costs that could be saved from contracts without affecting performance. There is, therefore, much to be gained by monitoring contract performance. Of course, different organisations will have different contractual structures but whatever your the situation, an approximation of the potential for contract cost savings is fairly easy to estimate. Given that these benefits can be realised without a loss of service, loss of staff or other internal resources, this would seem to be an obvious thing to do. Not so much low hanging fruit, as practically scraping the ground. However . . . . . .
As our experience shows, many organisations do not audit or review their contracts or supplier invoices at all. This is usually because they believe that there is no risk of value leakage. After all, they have a contracts department, a finance department and operational staff making sure things are ok, don’t they? And yet, when we perform forensic contract audits, we always find recoveries and gaps in contracts an internal control. so it would seem that things are not ok and money continues to seep away. Here are some of the root causes:
- Operational Staff may not have the time or commercial knowledge to check invoices thoroughly. We find that approximately 50% of all invoices do not attach the supporting documentation necessary for them to be checked. These invoices, sometimes to the value of hundreds of thousands of USD, have been approved after only a superficial look at the front sheet.
- Finance staff do not have time, knowledge, or technical understanding of the contract to be able to perform proper checks.
- Contract Administrators may be focussed on new contracts, rather than the post-award management of existing ones.
- Amendments and other changes are often made informally (often by email) and without any control; making it impossible to check invoices thoroughly due to departure from the documented Terms & Conditions.
- Contracts are often not adequate to cover the commercial risks and not subject to quality checks – the result being ambiguous T&Cs based on poor strategy, many gaps, and often with unacceptable supplier-led amendments slipped into the rates schedules.
- A lack of robust internal control processes which mitigate against a lack of commercial discipline within client companies.
All of these things we find on nearly all contract audits we perform; and they are not limited to one company, or to one industry. This is why there is so much to be recovered in the present and saved in the future from the forensic investigation of current contracts.
The effect of contract audits is to determine what is actually happening with current contracts. Given the degree of imperfection described above, this will nearly always produce recoveries which exceed the cost of the audit. But the real benefit is the light this throws on improvements to be made in the contract itself and the internal control processes within the client organisation. This will be between five and ten times the size of cash recoveries in our experience.
So I paraphrase the question:
Why are Contract Audits not used as a key component of most costs-cutting strategies ?
It seems a no-brainer! Help me understand this phenomena, please; just add a comment below: