Creating value through vendor management 16 April 2014
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Creating value through vendor management Agenda
► Vendor management risk
► Contract risk
► Audit planning
► Contract compliance auditing
► Value add for Company and Internal Audit
► EY Major Capital Projects and Contract Risk Advisory
► EY Vendor Audit and Contract Risk Community of Interest (COI)
Creating value through vendor management
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Creating value through vendor management Vendor management risk
Creating value through vendor management
Vendors $10-$12 Internal $1
Contracting strategy poses one of the largest risks to
many companies.
Risks
► Performance
► Fraud
► Legal
► Reputational
► Contracting
► Strategic
► Industry
► Geographical
► Operational
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Creating value through vendor management Contract risk
Contract Lifecycle
► Vendor selection and contract development
Contracting Strategy
Pros and cons on types of contracts/risks
► Contract administration
Ongoing contract assurance
► Contract closeout
Creating value through vendor management
Ineffective control and management of supplier contracts cost
businesses $153 billion per year*.
Effective contract compliance efforts can recover 1-6% of total spends.
* Aberdeen Group, The Contract Management Benchmark Report
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Creating value through vendor management Contract risk
Different types of contracts have varying risks
► Contract performance
► Allowances
► Scope change
► Substitution of materials or labour
► Price adjustments
► Rebates (e.g. WCB, etc.)
► Performance based incentive/penalty
Fixed Price / Unit
Rate
► Burden
► Profit
► Labour rates/job classifications
► Costs included in overhead
► Duplicate charges
► Third party charges
Cost Reimbursable
► Material mark ups
► Rates and subsistence charges
► Unauthorized items billed
► Materials charges
► Equipment charges
► Duplicate charges
► Labour rates not auditable
Time and Material
Failure to establish sufficient attention to vendor management may
result in increased contract risk and lead to significant financial losses.
Creating value through vendor management
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Creating value through vendor management Contract risk
Issues facing Alberta
companies
► Overheated market
► Increased competition for skilled
labour
► Increased scrutiny
► Regional or global contracts
► Tighter regulatory, environmental
and safety requirements
► Advancing workforce
Creating value through vendor management
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Creating value through vendor management Audit planning
► Risk based vendor
selection, prioritized to
specific risk criteria
► Detailed contract
documentation review and
assessment
► Collaborative discussions
with project teams,
Materials Management and
other business functions for
additional insight and risk
assessment
► Customized audit planning
process, specific to contract
types
Total Vendor Population
Number of vendors exceeding agreed spend threshold
No Action - low risk vendors
Evaluate – prioritize high or
medium risk vendors
Action – prioritized audit plan
Based on the results of this “risk ranking”, this company can determine where and how to focus its attention on vendor contracts and relationships
that present the highest risk potential.
Contra
cts
are
evalu
ate
d b
ased
on
the
risk a
sse
ssm
en
t crite
ria
Creating value through vendor management
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Creating value through vendor management Audit planning
How should projects be selected for audit?
► Size ($ value & physical size)
Type of contract
Cost Plus & T&M versus
lump sum
► High profile or high risk projects
► Services offered
► Experience with the vendor
► Past audits/performance
► Contract lifecycle
Creating value through vendor management
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Creating value through vendor management Contract compliance auditing
Compliance audit best practices
► Stakeholder engagement – buy-in/expectation management
► Planning - detailed audit planning, aligning with company risks
► Standardization - documented standards around audit
procedures and reporting, adds efficiency to audit timing and
coverage of risks
► Governance - increased audit frequency for highest risk
vendors, depending on spend and risk
► Data analytics - leverage data analytics to increase efficiencies
► Vendors versus contract – auditing full vendor activity rather
than focus on individual contracts
► Prevention - preventative measures, as compared to auditing
Creating value through vendor management
Audit 25% Prevention 75% vs.
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Creating value through vendor management Contract compliance auditing
Areas of greatest recovery potential
► Labor (payroll) and labor burden
► CPP, EI and WCB
► Rental equipment
► Materials, supplies and small tools
► Subcontract costs
► Travel and miscellaneous expenses
► Overhead charges / general conditions/
permits and fees
► Profit and markups
► Insurance and taxes
Average: identify 1-6% cost recovery opportunity
Creating value through vendor management
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Creating value through vendor management Value add for Company and Internal Audit
► Cost recovery
(typically 4 to 1 ROI)
► Enhanced assurance around
contracting strategy
► Improvement in internal controls
and processes
► Standardization and
enhancement of contracts
► Enhancement in relationships with key business partners
► Development of “atmosphere of oversight”
Creating value through vendor management
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Creating value through vendor management EY Major Capital Projects and Contract Risk advisory practice
Creating value through vendor management
► Comprised of 15
dedicated individuals
in Calgary
► Varied backgrounds
including
engineering,
construction,
contracts, finance,
tax, accounting,
finance and real
estate.
Team
► Personnel with “boots on the ground” construction/contract experience
► Assist in credentialing internal audit team
► Project Health Checks can identify contracts with issues
Major Capital
Projects advisory
► Team has been involved in assessments of over 300 contracts in the last 3 years.
► Currently working with several companies in development and implementation of Vendor/Supplier Audit programs
Contract risk
advisory
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Creating value through vendor management EY Vendor Audit and Contract Risk Community of Interest
What is the value of our COI?
► Learning and development via knowledge sharing across the
Community of Interest
► Peer group networking
► Timely education on emerging issues and leading practices
► Informal real-time peer benchmarking of company practices
related vendor and contract management, focusing on capital
project and operations spend
Creating value through vendor management
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Thank You
Presentation title