Should Supplier Networks Outsource Vendor Compliance Like Payroll?

supplier network

I’ve had a number of discussions with folks on all sides of the procurement and accounts payable technology market of late, covering different points of view on where supplier networks and transactional connectivity might be headed. One area that seems to come up often is looking at networks not just as a tool for operational efficiency, as they are today, but as an essential compliance utility.

The analogy here, of course, is payroll in the US. There is virtually no reason a sane organization of any size would want to manage payroll in-house, given all of the federal, state and local compliance challenges. Benefits administration, including healthcare, is a similar headache – even in the case of companies that self-insure – although the complexities of programs vary dramatically between states and regions.

If we use this measure to look at existing transaction and e-invoicing-centric supplier networks, they come up short, for the most part. No doubt there is certainly value in basic onboarding and enablement, especially if suppliers are already part of a network, but whether they are truly invaluable or not is highly debatable. Shift the focus to compliance, however, and the network value proposition can evolve to become as essential to outsource as payroll.

From a network perspective, there are numerous potential use cases for outsourcing compliance to third parties. These include:

  • The initial onboarding of suppliers, including various checks and validations beyond simply capturing details – almost a “KYC lite,” but for whom a company is doing business with, versus a bank having relationships with customers
  • Meeting specific regulatory compliance requirements, such as anti-bribery, anti-corruption or conflict minerals
  • The ongoing monitoring and measurement of suppliers – and potentially even random checks on the goods they are providing – including checks for corporate social responsibility (CSR), environment health and safety (EHS) and other practices on the vendor level, as well as multiple types of checks on the SKU level
  • Tax and value-added tax (VAT) collection, holding, reconciliation and rebates, in jurisdictions where VAT is a consideration
  • Support for country-specific requirements, such as Nota Fiscal in Brazil

What do you think? Will procurement treat future supplier networks as only mechanisms to drive transactional efficiency and related benefits? Or will they primarily serve as mandatory compliance safety nets for buying organizations? Or do you think they can be successfully combined to identify and enhance true best-value relationships?

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First Voice

  1. Norman Katz:

    While I think there is merit to outsourcing certain specific background checks to third-party providers who are experts in the service, the thought of also outsourcing vendor inspections related to performance (e.g. item quality checks) and the issuance of financial penalties for non-performance (a.k.a. chargebacks, expense offsets), demands careful consideration. Maybe this inspection separation will help to bring more fairness into the assessment of financial penalties, but it could also backfire and result in financial penalty assessment unjustified and leave the customer enterprise in a difficult situation when their vendors demand evidence of infractions, (granted, typically absent currently anyway), or want financial penalties unjustly assessed reversed. Mistakes are enough of a problem already in this area without engaging an (unqualified?) third-party, especially in industries where the belief is that chargebacks are allegedly used as a profit center by some of the customer organizations, and are considerably egregious in nature. Will the third-party be beholden to a certain percent or level of chargebacks or damages or rejections, even if they don’t really exist, because of customer enterprise demands? This cannot just be about lowering costs: vendors are as valuable as customers and should be treated as such. Successful vendor compliance programs lower costs in other ways.

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