Achieving the Right Balance of Optimization and Compliance
A major driver in technology adoption is process improvement, a result of which is process acceleration. This acceleration means reduced downtime and due-diligence downtime, and fewer stops during the process. While unexpected downtime is an unnecessary process delay, planned downtime is built into the operations sequence, so it’s accounted for.
These planned processes can produce efficiencies and improvements that result in financial gains. However, organizations can overlook the compliance aspect of these improvements.
Why does this happen? What can be done to ensure that a balance is maintained when introducing technology and process improvements? Let’s look at it from a supply chain perspective by examining some of the major compliance requisites:
Electronic/digital approvals. Most ERPs have an embedded approvals process that is scalable — from basic digital signature to comprehensive security encryption. The need is driven by business requirements and regulatory controls governing the business.
It seems like it would be simple to automate this process, thereby (1) saving on paper, printing and mail routings and (2) eliminating the inefficiency of rerouting the entire paperwork for repeat reviews. However, the design process can have hidden pitfalls:
- An overly simplistic or complicated review of the transaction trail (which impacts compliance or inefficiency costs)
- Too many approvers incorporated into the chain of command (inefficiency costs)
- Misalignment between process and technology (compliance and inefficiency costs).
Spend control. This is by far the most crucial and important element of an organization, as spend management and control directly impact profitability. Therefore, it’s no surprise that most systems have a built-in control that links budgets and actual spend through a clearly auditable trail.
Or is it? Experience has shown that large numbers and complex cost breakdown structures (CBS) can make it a mammoth task to maintain linkages from primary to secondary and tertiary sub levels of accounting codes. Eventually, lines start blurring as the varying layers of costs and work breakdown structures (WBS) start crossing paths, resulting in a cost structure that begins to look like a tangled web of transactions. Why this happens:
- Absence of a formal CBS, WBS and operational breakdown structure (OBS) communication protocol
- Lack of planning at any or all stages in the process — project planning, estimation, budgeting, execution, sourcing and closeout
- Technology that is not in sync with the operational needs of the organization.
Contract compliance management. Most contract managers would agree that keeping track of deliverables, payments, variations and timely approvals can be daunting. Modern-day technologies have made it easier to manage most of these tasks. The trick, however, is in ensuring a balance in the controls applied versus the efficiency gained from automating these processes.
More often than not, a one-size-fits-all approach is adopted to manage different types of contracts. One exception: At the contract-authoring stage, organizations use their own contract template and set of terms and conditions. However, the rest of the process follows the same level of due diligence, whether for a low-cost, low-risk contract or one involving a large spend with a major subcontractor.
Fast forward a few months after the contract award, and contract professionals can be swamped with alerts and tasks not categorized per the type of contract. This leads to due-diligence fatigue for employees who must keep track of each alert and ensure nothing important is ignored. Even with the most diligent of workers, almost half of compliance findings are in this area — for example, contract deadlines missed, change orders not issued or prices not negotiated timely.
When implementing operational effectiveness versus compliance, organizations must adopt a balanced approach. A formal risk analysis involving stakeholders is a tried-and-true method. Ensure that all stakeholders with relevant experience — not just those in with technology and process experience — are part of this exercise.
Stakeholders should be able to come to a consensus regarding goal achievement. Risks should be clearly written and communicated to decision makers, enabling them to determine the investment levels and appropriate technologies. Business functions like audit and legal should also be part of this exercise to advise on process controls.
Achieving balance in operational optimization and compliance is a continuously evolving task due to rapidly evolving technologies and regulatory controls. While some industries are impacted more than others, every organization faces challenges. Companies that plan well, are pragmatic about their strengths and weaknesses, and engage all stakeholders at the start generally perform better than those that don’t take these steps.