Why procurement compliance is critical
Learn about the importance of measuring and improving procurement compliance and discover best practices for maximizing compliance with purchasing policies.
Putting purchasing procedures in place is one thing. Ensuring your team follows them to the letter is something entirely different.
Many companies struggle with procurement compliance due to complacency, negligence, or a desire to move quickly when purchasing new goods or services.
But when policies aren’t followed (or don’t exist), businesses open themselves up to many risks, including severe data leaks.
Learn the importance of measuring and improving procurement compliance and discover best practices for maximizing compliance with purchasing policies.
Procurement compliance: What is it exactly?
Procurement compliance is when the people responsible for purchasing — whether a dedicated team or department leaders — follow established purchasing rules, procedures, and policies.
As a practice, procurement compliance extends to the following:
- Creation and distribution of purchasing policies
- Monitoring and managing adherence to procurement procedures
- Assessment of procurement risks and designing risk mitigation strategies
- Running of regular procurement audits and reporting to senior leadership teams
- Identifying opportunities to use procurement software tools to improve compliance via automation, reporting, and approval workflows
Why is compliance important in procurement?
Compliance in procurement is not about enforcing adherence to a set of arbitrary rules and processes.
Instead, complying with effective procurement policies is integral because it helps mitigate the many risks of procuring new goods and services.
When it comes to SaaS purchasing, companies are particularly vulnerable to several software security risks, such as the possibility of a significant data breach or non-compliance with regulations like the GDPR.
A focus on procurement compliance ensures purchasing teams follow the policies you design to mitigate these risks. It also acts as a cost-savings measure.
For instance, as part of your software purchasing process, you may enforce a mandatory tech stack check. Before purchasing a new SaaS tool, the procurement team member must confirm that your organization isn’t already paying for a platform that would solve the need.
This prevents the possibility of overlapping licenses, where your company pays for multiple software tools that offer similar functionality.
How to measure compliance with procurement policies
Use these five measures to track and report on procurement compliance.
Spend under management
Spend under management is the percentage of total company expenditure that falls under the management of the procurement team.
A higher spend under management metric means your procurement department controls more company spending and more expenses comply with internal purchasing policies.
Contract compliance refers to how often your vendors adhere to your contracts' terms and how completely the contracts are fulfilled.
As a metric, it is the percentage of your current contracts with which suppliers are entirely compliant.
The terms outlined in your contracts are designed to mitigate risks and protect your business against potential losses — like supply chain shortages that could disrupt regular operations. Improving vendor compliance with these terms improves your overall procurement compliance rating.
Process compliance looks at how often purchases made by your business follow the procedures you set in place for procurement — for instance, the supplier vetting process.
While this is an essential metric for all businesses to track, it's especially critical for organizations with a decentralized procurement model where department or branch leaders have independent decision-making authority.
In decentralized procurement, employees are more likely to skirt rules or skip steps in the procurement process they deem cumbersome (but are in place as business protection).
Supplier count is the number of service providers on your approved vendors' list. Finding an optimal number here is key.
Too many suppliers mean you may take on more risk than necessary. A high supplier count may prevent you from forming strategic supplier relationships with associated cost savings. Minimizing the number of relationships in place is a good move from these perspectives.
On the other hand, having too few suppliers on your approved list can leave you stuck if the vendor has a shortage or shuts down. Having at least one backup option is a good idea, particularly in cases of vendors who are vital to your day-to-day operations.
Invoice-to-PO matching is a measure of the percentage of invoices that have a matching purchase order number in your procurement system.
This means the official purchase order process, including any related approval workflows, was followed.
The goal is for your invoice-to-PO matching metric to be as high as possible.
Best practices for procurement compliance
Understand risks and develop mitigation strategies
Risk management is a critical part of maintaining procurement compliance.
Strive to find the optimal balance between minimizing risk and maximizing procurement efficiency.
To achieve this, use a risk matrix to establish the severity and likelihood of each risk.
If you deem a given risk low-impact and low-severity, you can prioritize operational efficiency over risk mitigation.
On the other hand, you should solve risks with a high likelihood or whose consequences are severe with more aggressive risk mitigation policies.
For instance, the possibility of a customer data breach could have a high severity, especially if it puts you at risk of non-compliance with legislation like GDPR. In this case, a more heavy-handed risk mitigation process may be appropriate, such as a thorough analysis and approval of new vendors by the CIO.
Schedule regular procurement audits
Procurement audits review all procurement documents and decisions within a given period.
Procurement leaders review current practices and policies during audits, assess vendor relationships and risks, and hunt down any out-of-process spending.
Run quarterly procurement audits to identify areas where compliance is low and implement steps to improve.
Learn more about procurement audits in our guide: An ultimate guide to conducting a procurement audit.
Create an approved supplier list
An approved supplier list is a document that details the vendors you already do business with or have sufficiently vetted and approved as safe service providers.
This list makes it easy for procurement team members to quickly identify vendors they can purchase from without engaging in a new strategic sourcing or vetting process.
As a result, preferred supplier lists speed up the purchasing process while maintaining compliance with procurement policies.
Find the right balance between centralized and decentralized procurement
Centralized procurement means utilizing a single internal team for all procurement duties. Decentralized procurement is an approach where department or branch leaders have this authority.
Centralized procurement is generally more secure from a compliance and risk mitigation perspective. It reduces the likelihood of overlapping software license purchasing and helps businesses take advantage of economies of scale.
On the other hand, decentralized purchasing gives more authority to team leaders — those with the expertise and experience required to know precisely what they need from a given purchase. It also makes the procurement process more efficient with fewer bureaucratic processes involved.
Many organizations opt for a hybrid approach where certain purchases (perhaps those above a given dollar threshold) are the domain of a centralized buying team. At the same time, department leaders retain authority for lower-risk procurement.
Learn more about centralized and decentralized procurement approaches in our guide: Decentralized purchasing: Benefits & differences from centralized purchasing.
Use vendor management software with automation functionality
Most procurement teams use some form of supplier management software to manage business partnerships, but these tools can also manage compliance requirements.
For instance, you can use automation to build approval workflows that send procurement documents like purchase requests to the appropriate stakeholders for approval.
This drives compliance, speeds up the purchasing process, and allows anyone involved to see where pending purchases stand instantly — all in a single central platform.
Learn more about using approval workflows to improve procurement compliance in our guide: Approval Workflows: Everything You Need To Know To Get Started.
Vendr: Your partner for SaaS procurement compliance
One of the biggest purchasing compliance concerns is sourcing and purchasing new software platforms.
Risks to current IT infrastructure, possible data breaches, and the potential for the purchase of overlapping licenses are all significant concerns.
To ensure compliance with SaaS procurement, teams need a dedicated software procurement and supplier performance management tool.
Using Vendr, procurement teams:
- Streamline processes with customizable automation
- Gain real-time visibility of the impact of spend management policies on the bottom line
- Create easy-to-follow workflows that ensure process compliance
- Collaborate on purchase approvals in a central hub
Find out how much you could save on SaaS today with our free savings analysis.