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Charging for New Vendors to Influence Behavior

Introduction

To create an efficient and low-cost process for Accounts Payable, standardization and new technology tools can only get you so far.  The biggest factors tend to be the quality of the inputs to the process, including clean processes and procedures for goods and materials purchased by teams of professional purchasing agents, to efficient processes for requisition items where the decisions are made and approved by employees with no formal purchasing training.

When looking for root causes of errors or identifying unnecessary complexity, cleanliness and the integrity of the vendor file is often towards the top of the list.  And particularly for vendors who are identified on ad hoc basis by end users, appropriate rigor in the verification process and assessment of risk, is complicated when the process itself is completed by users with little training, and where the businesses units don’t have visibility to the issues or experience any direct cost charges for vendor creation activity that too often is unneeded and not in the long-term best interest of the company.

This research paper is a top-level summary of a recent poll that was conducted in Peeriosity’s Accounts Payable (P2P) research area.  For Peeriosity members, full visibility to all the details of the poll is available, including the ability to interact directly with participating peers.

iPollingTM Results Review

Recently, Peeriosity’s iPollingTM was used by the Payment Services Manager at member company to explore the idea of charging business units for the costs of new vendor setups and as a way to increase visibility to and influence behavior with the result of better controlling the vendor creation process. Responses were posted real-time, with visibility to company responses available to all Peeriosity members, allowing for direct communication with peers using Peeriosity’s integrated Peer MailTM capabilities.  Using this approach, the poll author was able to quickly gain insights to his issue, which he described as follows:

While historically our Shared Services operation created and maintained all new 3rd party vendors on behalf of the business, is there a need to cross charge a fee to individual businesses for new vendor codes to help influence behaviors? Would this assist with getting users to understand that some of the possible savings with a new vendor are likely to be offset by the cost of creating, maintaining and risk assessing these new vendors? Plus, the additional complexity for users to select the best vendor when the vendor file has grown in part because there aren’t controls in place to limit the addition of new vendors.

The first polling question asks if member companies cross charge a fee to the budget holder requesting a new vendor creation.  The overwhelming response at 85% is to not charge a fee to the budget holder.  For the balance of companies, 5% do charge with the costs visible to the budget holder, another 5% charge with the line item detail for the charge not visible to the budget holder, and with the final 5% considering the concept.  Here are the details:

For the 15% of companies who either charge for new vendor creation or are considering charging, 67% are charging for all vendors, and 33% are only charging for ad hoc vendors that aren’t professionally sourced. 

Here are some comments from responding companies:

  • Vendor creation is not specifically charged.
  • Vendor creation activities are primarily performed in Supply Management.  There isn’t a charge currently for vendor creation and to my knowledge this hasn’t been considered.
  • Creating a new vendor is included as part of our recharge model, but this is at group level, so the individual budget holder is unlikely to be aware. The charge captured reflects the transactional cost of creating a new vendor, and not the full business cost. We are considering adapting our charging model to help drive the right behaviors and outcomes. Charging for vendor creation is one approach we are considering to discourage employees from creating additional and unnecessary vendor accounts.

Closing Summary

For many problems and issues where companies don’t have direct experience with solutions they are considering, knowing the approach taken by peers, and having an idea of the results that can be expected, can be valuable so that you can make informed decisions as the basis for process design changes.  While differences will exist between companies, having first-hand knowledge of the experience of leading peer can be an excellent guide, in addition to being a valuable starting point. 

Increasing quality of the vendor file using techniques, including a rigorous approval process and cross-charging budget holders for new vendor creation, are examples of approaches member companies may take to address this challenge.  Direct knowledge and communication between peers can provide valuable insights for how to consider and evaluate alternatives.

Does your company cross-charge the budget holder for new vendor creation?  What approaches does your company take to both maintain and improve the integrity of the vendor file?

Who are your peers and how are you collaborating with them?

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“iPollingTM” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility to all respondents and their comments. Using Peeriosity’s integrated email system, Peer MailTM, members can easily communicate at any time with others who participated in iPolling.

Peeriosity members are invited to log into www.peeriosity.com to join the discussion and connect with Peers.   Membership is for practitioners only, with no consultants or vendors permitted.  To learn more about Peeriosity, click here.



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