Friday 31 October 2014

Real World Sourcing Series: Making Spend Governance Work

By Alisa Matterson

On Wednesday 22nd October 2014, a diverse mix of the Procurement professionals assembled in the wonderful location of The Don restaurant for the fifth round of the Real World Sourcing Series. This session covered the hot topic of, Making Spend Governance Work.

This series is promoted and supported by BravoSolution, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Limited).

Guy began the session by discussing what does the frequently used term “Governance” actually mean? Ideas were bounced around the room, and then the dictionary definition of was revealed, “The action of governing a state or organisation.”

So, relating that to the session topic about Spend, within most organisations Spend Governance consists of a number of components:

Firstly, a Process; employees need to be aware of the processes in place. For example, there may be a separation of duties required, i.e. the person ordering goods/services is not the same person as the one paying/approving for the goods/services. The communication of these processes is imperative.

Secondly, within Spend Governance, regulations are fundamental; rules need to be in place to ensure compliance. For instance, rules determining delegated authority - who is able to approve spend? If the delegated individual is not available does the delegated authority go north or south in the approval chain?

Thirdly, Control Points within Spend Governance are essential; processes needs to be monitored to ensure conformity and rules are being followed.

Lastly, Consequences. If rules and processes are broken and not complied with there needs to be a consequence. This may be budget constraints/reductions, removal of delegated authority, or non-payment of expenses for example.

Every organisation will have a different Governance approach suited to their organisation. Some organisations will have strong governance whereas others may have a loose governance structure. It is important to get the balance right for the organisation in question. Strong governance can reduce risk, increase control, but however can reduce innovation, and flexibility. Whereas less structured governance may encourage innovation but can lead to increase costs and leave the door open for other negative side effects such as the likelihood of fraud. So aligning the correct governance approach to your organisation is critical.

So how can an organisation improve their Spend Governance? To improve Spend Governance there has to be a recognised need to improve governance and an objective. The objectives should be shared with senior management and bought into. Once the support and correct components are in place, it becomes easier to improve Spend Governance.

Throughout the session, Guy set a number of interactive tasks. The task which seemed most pertinent within the Public Sector at the moment was; “Select three major challenges that you face in seeking more effective spend governance within your organisations.” The general consensus at my table was; within the public sector there is no incentive to come in under budget. Departments are not able to carry over remaining budget and if departments have surplus budget remaining at the end of any period, the budget for the next period is cut! So where is the incentive to come under budget, and make savings?

Also, the common dictat of “No-PO, No-Pay” was brought up. In reality how often is this enforced? If POs are being raised retrospectively and the organisation has already received the service/ goods, generally the Invoice will have to be paid. How many people can remember a senior manager asking for an invoice to be paid and POs being raised retrospectively? The rules are not being enforced and strong buy in of the rules from senior staff is vital to make this work in reality.

Finally, employees like to understand they are receiving “true value for money.” For instance, how many times has accommodation been booked by a central department and we know we could secure better value for money? Working in procurement we all want to obtain value for money!

How is Spend Governance in your organisation? Is it too onerous, is it too weak? What are the barriers to changing the Governance model? Do you see an ever-increasing Governance model being adopted or have the rules been relaxed in certain areas?

You can download the slides from the session directly from the BravoSolution website.

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