How to increase compliance with purchasing and sourcing agreements

- How many percentages of your purchases comply with a negotiated purchasing agreement?
- How much extra profit could you make if you could increase this number by only 10%?

Compliance with purchasing and sourcing agreements
Do you also have money on the table? Have you negotiated great purchasing agreements, maybe implemented an operational procurement system but still have low compliance? This would mean that you never see the actual savings on your P/L statement. Many companies have the same problems and research shows that very often those companies have focused on the formal governance structure but less on the informal governance.

What is formal and informal governance? Formal governance is the control systems put in place such as processes, policies and procurement systems i.e. to give instructions, tools and processes. Informal governance happens when the individuals understands the processes and “what’s in it for me” – to guide people to find out by themselves what to do.

To increase compliance you need formal governance as well as informal governance. The formal governance is a robust structure of how to purchase and is one of the cornerstones to increased compliance. The formal governance normally consists of:

· A clear and communicated purchasing policy

· Sourcing teams and teamwork

· Purchasing processes

· Different performance indicators (KPIs)

· An operational procurement system

Informal governance is the other cornerstone to increased compliance. Driving informal governance takes longer time than formal governance. Different people do not come to insight at the same pace and different organizations could be influenced by different leaderships. To increase compliance you need to reach the single individual and guide them to insight and actions, e.g: What will it mean for my company and me if I don’t follow the process to use negotiated agreements? Could I benefit and could it make my job easier if I used the negotiated agreements? Could there be any risks, for the company and for me as a person, if I don’t use the agreements? To get people understand and really change, you need a clear change management and change communication strategy.

You need both formal and informal governance to increase compliance. It is not a matter of stronger och weaker governance, just different.

Common pitfalls

- Companies develop new policies and processes and communicate them by “one-way communication” through PowerPoint’s or lectures and then believes they are implemented

- Leaders in the company are not leading by example. I.e. they have not bought into using the purchasing agreements themselves and do not understand the benefit

- Employees do not understand the benefits of using the negotiated purchasing agreements

- Employees do not understand the risks by not using the purchasing agreements