While familiarity purportedly breeds contempt, it certainly doesn’t lead to procurement fraud

I read with great interest Colin Cram’s recent post regarding both the prevalence and significant impact that fraud within the procurement process has beyond the original transaction itself.

While the Cram article focuses on how fraud and corruption are badly damaging the economies of many African countries, there is no doubt that its overall effect from a global perspective are also significant. In essence, and to varying degrees, no country is immune in terms of vulnerability to fraud – Canada included.

Before I get into the specifics regarding the origins of the fraud problem, and how to effectively deal with it, we have to address a long standing myth.

The Myth of Familiarity

Many organizations – especially those within the public sector – equate the familiarity of building a close working relationship with supply partners with somehow undermining the integrity of the procurement process. In short, and in a misguided effort to ensure purported fairness, a transactional approach to business relationships is pursued.

The transactional orientation of our business relationships and the subsequent oversight models we use to manage them, actually creates a greater opportunity for fraud, as opposed to preventing it. The reason is simple . . . a transactional mindset leads to a myopic focus on the bid and acquisition process. This includes our methods for assessing and managing risk, as well as value for money accounting, which in my view are pre-procurement incubators for potential fraud schemes.

Once the deal is done, the oversight model then narrowly seeks to enforce compliance with the terms of the contract, while ignoring the underlying elements that would raise the red flags necessary to both identify and deal with fraud before, as opposed to after the fact.

Within this context, familiarity is not the culprit in terms of creating an environment for fraud. It is instead the starting point that leads to the level of transparency and ongoing collaboration that is necessary to combat it.

This is a critical point in that research clearly shows that 90 percent of reported fraud occurs after contract award. This includes:

• False or Inflated invoices through layers of subcontracting
• Kickbacks subcontractors to contractor employees
• Change order process
• Undisclosed payments

Therefore, when a relational as opposed to a transactional approach, is incorporated into the initial procurement process, the framework for complete visibility is established right from the start. This includes the creation of a governance model in which stakeholder interests are identified, understood and proactively managed as part of the acquisition, versus outside of it.

The Relationship First Approach

With the Relationship First approach, complex business arrangements are structured and managed as a highly collaborative, adaptive system that leverages change as a strategic advantage.

What this means is that the process of implementation or execution is jointly managed through the operationalization of a Relationship Charter that provides accurate insight and intelligence into the relationship from both a strategic and operational level. The Charter’s mechanisms for continuous examination of the underlying process for planning, deliverable generation, performance management and continuous improvement are what makes this possible.

When the inevitable changes occur such as shifting objectives based on previously unknown or unanticipated factors, there is now an opportunity to see it and address it, in a open environment of mutual understanding and shared interests. In essence, everyone operates under an open book framework.

An Open Book Framework

As the name suggests, the open book framework is a transparent model for ascertaining the derivation of price at any time during the course of an extended or long-term relationship. It is based upon a true insight into real-time costs, cost objects and incentives, all of which are managed on a joint “team” basis involving all stakeholders. (Note: With the Relationship First approach, the joint team to which I am referring is actually called the Joint Integrated Team, as it consists of individuals from each stakeholder.)

Summary

Taking a relationship first approach to complex business arrangements does more than just provide the tools to gain needed intelligence into the quality of business processes and pricing.

Unlike audits and fraud investigations – which are always after the fact – the approach about which I am talking actually prevents fraud before it occurs. This is achieved through increased client – vendor collaboration (and familiarity) within the procurement process itself.

 

 

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