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05/05/2015

Effective Compliance in Purchasing as a Competitive Advantage in Small and Medium-Sized Businesses

Handelsblatt Journal: An interview with Güray Karaca, Managing Director, Kerkhoff Risk and Compliance GmbH

An interview with Güray Karaca, Managing Director, Kerkhoff Risk and Compliance GmbH
Purchasing and procurement are particularly affected by liability and antitrust risks. Where do the greatest dangers lurk and how can effective preventive action be taken?

GüK: According to a study in 2013 on white-collar crime, 50 % of the criminal actions within a company are committed in the area of purchasing or materials management. Since there is the proverbial "profit in purchasing", a company's own workforce will present the greatest risk potential in this respect. For example, when a buyer agrees on price fixing with suppliers or other market players to thus obtain a personal advantage.

Especially among SMBs, the internal control system (ICS) is frequently rather poor as yet or insufficiently developed. Smaller and medium-sized businesses are not yet generally or consistently aware of the necessity of a compliance management system (CMS) although these companies are at least as affected as major groups or corporations.
With a CMS or an ICS adapted to the respective business model, suitable precautionary measures can be taken to considerably reduce not only the liability risk concerning managing directors and management boards but also concerning any financial damage to the company. The damage to a company's image and reputation should also not be underestimated when court proceedings are commented upon in public.

What must be taken into account in terms of the interaction between buyer and supplier?

GüK: If the buyer talks, for example, with the supplier about a new supplier relationship, it is advisable to tie the supplier selection process to verifiable or conclusive and objective criteria. Also, one buyer alone should never be allowed to make a supplier selection or a contract decision on his or her own. In this respect, risks in the procurement process can be minimized by the 4-eyes principle, in combination with a company-wide valid signature directive as well as a living separation of functions. Furthermore, all essential partial procedures must be completely, adequately and verifiably documented in the procurement process – e.g. upon commissioning a supplier. Job rotation is another helpful means so as not to allow any dependencies to develop between buyer and supplier. Of course, initially, it results in extra work since the employee must always familiarize him- or herself with new areas of work; however, it will increase the employee's flexibility and motivation due to job enrichment.

You are talking about a competitive advantage through effective compliance – could you explain that in more detail?

GüK: Companies considering compliance a passing fad will be in for a rude awakening. Compliance will continue to become an ever greater focus of attention for customers – as is the case with CO2 emissions in the automotive industry or an ecological footprint for sustainable development. In buying decisions, these factors will play an important role on both a conscious and an unconscious level.

Who would really want to buy consciously and in full awareness a brand name shirt for EUR 150 which had been manufactured in Southeast Asia in complete noncompliance with any safety and health regulations and, to top it all, had been sewn together by children?

Those companies will be able to gain a competitive advantage which, in their supply chain, actively address and respond to their suppliers and take them on board with regard to compliance. The market will reward those who proactively and considerately handle natural and human resources. It is to be furthermore kept in mind that companies may be barred from public tenders if they had already once before been under negative scrutiny – e.g. due to antitrust or other compliance offenses. Other market participants and one's own company will lose market shares. I am convinced that those companies which define compliance as a corporate value and firmly embed it in their corporate culture will realize a crucial advantage versus their competitors. And those thinking that compliance is expensive should critically examine what the cost of their current non-compliance actually is.

How should purchasing and procurement work together with the compliance officer?

GüK: Respectfully and on a partnership basis! This is not a matter of working against each other but with each other. Both sides should be open, respect each other and try to jointly realize the best for the company in terms of risk management.
As soon as individual divisional objectives are integrated in the overriding corporate objective, a culture of trust can develop which will be necessary in order to collaborate successfully and in a target-oriented manner.

Where is the "return on compliance"?

GüK: First, in a significantly reduced liability risk for the company and its top management. Second, in avoiding the cost of fines, damage claims, sales losses or less favorable terms and conditions. Third, in avoiding any damaged reputation or image as a result of negative headlines or the loss of customers and partners.