 |
|
|
|
||
|
    | RECAP,
Inc. > News
|
|
     
              |
|
|||
|
|
|
|
Originally published in Ten Questions Directors Need to Ask About Vendor Relations Jonathan Casher Directors are attuned to shareholders, employees, and customers—but what about vendors? Here’s a guide to this valuable, but often "invisible" constituency. Mergers, acquisitions, divestitures and name changes. It’s hard to keep track of who is who. No wonder companies often can’t tell who their vendors are, more importantly, how much business they’re doing with them. Many companies have developed programs to enhance and leverage their customer relationships. The most proactive companies are now beginning to do the same with their vendor relationships. They realize that a vendor relations program is key to maintaining or improving their competitive edge. The key objective of a vendor relations program should be to maximize leverage with vendors by buying and paying smarter. As a director, you don’t need to know a lot about the day-to-day aspects of a vendor relations program, but you should understand some of the steps that must be taken and key issues to consider to make a program work effectively. By asking the following questions and analyzing the answers, you’ll be able to assess the effectiveness of an organization’s understanding of vendor relations, and identify areas where improvement may be needed. Question 1. Is your own company a vendor to the company on whose board you sit? Leading publications such as Business Week, and leading investors such as the Teachers Insurance and Annuity Association, downgrade boards whose members work for companies that are suppliers. Avoid conflicts of interest or arrangements that give the appearance of such conflicts. As a board member you must decline to serve on boards with which you have a buyer-seller relationship. Extend your analysis to other companies represented on the board. Question 2. Does the company know its vendors? This may seem obvious, but many companies don’t know their vendors and lack basic information about their vendors. Information in purchasing and accounts payable files may be inaccurate, redundant, out of date, or incomplete. If a company has merged, it may have combined vendor master files into a single file without filtering out duplicate vendors. If vendors have merged, changed their names or addresses (even lock box addresses), a vendor master file will have redundant and obsolete entries. Subsidiaries, affiliates, or parent companies of vendors should be linked. If related vendors are not linked, any analysis will understate the amount of business being done. This reduces the achievable leverage. A major company made several acquisitions over the last few years. Each acquired company had its own automated systems. Each acquired company’s vendor file was merged into a common vendor file. IBM was in the file over 1,500 times. Not to be outdone, AT&T and its various subsidiaries accounted for almost 2,000 vendor records. Although nearly 200,000 vendor records were in the common vendor file, the actual number of vendors that the company was dealing with was under 30,000. The company had developed an extensive vendor leverage program, but many of its largest vendors were not included. In many instances, a parent and its subsidiaries were not linked because they had different names. Three of the company’s ten largest vendors were not included in their vendor leverage program because the vendors did not get ranked among the company’s top 50. Question 3. Is appropriate information known and kept about vendors? It’s often surprising how little a company may know about its vendors. The capabilities and financial stability of a vendor can be critical to its ability to deliver goods and services of appropriate quality within agreed upon time frames. Basic information such as SIC codes, taxpayer identifiers, telephone numbers, type of organization, types of products or services, how long the vendor has been in business, credit scoring, and size should be a part of a vendor’s profile. Information regarding minority vendor and woman owned business status are also important because of policy and compliance issues. In some instances, it’s important to know if a vendor is capable of electronic data interchange, accepts procurement cards, or is compliant with standards issued under the International Standards Organization, for example ISO 9000. Sensitive vendors such as directors, former employees, advisory board members, subsidiaries, affiliates, and vendors who are also customers should be identified. If employee records are kept in vendor files for business expense reimbursement, be sure that they are identified as employees. Question 4. Is there an appropriate process for verifying new vendors? A company’s vendor file presents an opportunity for fraud. People who are allowed to add vendors to a vendor file should not be allowed to make payments. When vendors are added, taxpayer identifiers should be obtained and documented via W9 tax forms. Some vendors may be subject to withholding of 31 percent of the amounts due. If the company does not withhold and withholding is required, the company may end up having to pay that amount as well as penalties and interest. Question 5. Are vendors providing appropriate supporting documentation? In today’s world of electronic ordering, billing, and paying, many vendors provide minimal information. In some instances, there is enough information to trigger payment to the vendor, but not enough of an audit trail to substantiate the validity of the invoice. Check with internal and external auditors to see what their needs are, as well as the needs of the tax department and other regulatory authorities. In particular, procurement (business credit) cards have potential problems with sales and use tax and 1099 reporting. Question 6. Are sales and use tax being handled properly? States are becoming more aggressive about collecting use tax when insufficient sales tax was collected. With more automation available to them and more need for revenue enhancement, states are scanning automated records and aggressively pursuing non-payment and underpayment of sales tax. If vendors are not collecting sales tax, make sure that the company knows where use tax must be paid and that it is being reported and paid to the appropriate state. Question 7. Is the company getting "escheated"? Some percentage of checks are never cashed. They may have never been received by the intended recipient. In many instances the intended recipient complains and a replacement check is issued. As states get more aggressive at finding ways to enhance revenue, they have begun to ask companies to provide them with lists of all open checks. Through a process called "escheat," uncashed checks payable to individuals or organizations within a state must be turned over to that state. Reports must also be filed. Each state has its own rules and regulations with respect to what must be turned over, what must be reported, and when filings are required. Failure to comply may result in fines and interest. One company made a lot of small payments to vendors that did not get cashed. Vendors came back and checks were reissued. Due to the fees assessed by their bank for stopping checks, the company did not place stops. Unfortunately, the company did not keep records showing which checks were reissued. Several states came in and claimed the outstanding checks as abandoned property. By not placing stops, and by not having sufficient supporting documentation, the company lost tens of thousands of dollars from unnecessary escheat. If the company had maintained appropriate records, the cost would have been much less than the cost of paying twice. Question 8. Is a process in place to catch and recover erroneous payments? Every automated accounts payable software package includes tests to make sure that vendors are not paid twice. Unfortunately, the test for a duplicate payment is usually based on vendor code and invoice number. Many vendors may be on file more than once. Forty percent of all invoices do not have invoice numbers. Thus, duplicate payments may slip through the typical tests that are made, Other erroneous payments include payments to the wrong vendor, charges for goods or services at a rate higher than contracted, charges based on incorrect meter readings, and charges for facilities or services beyond termination date. An entire industry specializes in identifying and recovering erroneous payments. Some companies refer to themselves as payment recovery services, others call themselves post-payment auditors. Many of these companies have specific industry expertise. All work on a contingent fee basis, getting a percentage of the amount recovered. Question 9. Have costs and procedures been benchmarked against others? While certain types of information sharing are not allowed, there are many ways to find out if the rates being charged for goods and services are consistent with organizations of similar size. In addition to benchmarking costs for key supplies and services, many companies have begun to benchmark various aspects of their procurement process. Several publications aimed at purchasing and accounts payable organizations have industry statistics for use in benchmarking. Question 10. If purchasing is involved in hedging, are appropriate controls in place? Especially where raw materials are involved, some companies have given their purchasing departments responsibility for hedging against future cost increases. However, appropriate controls similar to those used in treasury operations for currency hedging have typically lagged. While stories such as Sumitomo’s multi-billion dollar copper futures hedging fiasco make headlines, several other companies have been burned by overzealous buyers who have hedged inappropriately. Conclusion Companies should consider a vendor communications program that includes a vendor handbook that spells out corporate policies and procedures. Not only does this enhance vendor relations, it protects the company’s risk of exposure to claims and even fraud.There are many more questions that directors can ask. If you’re comfortable with what you know about each of the above, you’re ready to begin asking questions of your own to ensure that the companies you serve have effective vendor relations programs in place. Jonathan D. Casher is the Co-founder and Chairman of RECAP, Inc., a financial management consulting firm specializing in vendor management. Mr. Casher is also the President of Casher Associates, Inc., which provides software and information technology consulting for the financial services industry. Mr. Casher has over 25 years of experience in managing the design and use of computer-based financial systems. Prior to forming Casher Associates in 1976 and RECAP in 1989, Mr. Casher served as Managing Associates at Index Systems (CSC/Index)—overseeing the firm’s bank operations practice. He has consulted with hundreds of the largest financial services organizations, with expertise in A/P process redesign and reengineering, EDI, electronic invoicing, and electronic approval. Reprinted with permission from the National Association of Corporate
Directors
|
