How harnessing data analytics can reduce procurement fraud
We are pleased to publish this post from Andrew King, Co-Founder and CTO of business intelligence firm Qynn.
While procurement’s main objective has and always will be to protect business and support growth through scouring the market for the best rates and products, compiling accurate, historic corporate data to conduct vital due diligence is time consuming, resource-heavy and cost-inefficient. As such, it is often all too easy to miss red flags and fail to properly conduct Know Your Supplier (KYS). In fact, a report released by Crowe LLP, in partnership with Experian and the University of Portsmouth, revealed the annual cost of procurement fraud is estimated to be £121.4 billion each year.
Overcoming these risks requires constant monitoring of the entire procurement database, from monitoring changes in shareholder structure to countries of operation. However, keeping a constant watch over this complex moving puzzle is no easy task. Procurement leaders need to be able to create a complete picture of what is going on in order to make informed decisions. Here we will delve into how harnessing data analytics can provide professionals with just that.
Research from PwC estimates that nearly 30 percent of organisations have been victim of procurement fraud in the last year. Other industry reports show that 5 percent of total spend on average could be lost as a result of fraud – whether internal or external. What’s challenging for procurement leaders, is that this fraud could happen anywhere in the process, from bid to delivery of product or services.
A large number of SMEs, as well as big corporates, work with multiple suppliers and contractors to provide services, inventory and essential equipment, often on an international basis. As such, it is really difficult to gain a complete view of the supply chain or assess the risk of doing business with all suppliers. For instance, unless there is clear and constant communication internally, a supplier could easily sell the same equipment at a higher price to one department than it did to another. This amounts to fraud and if not stopped could cause businesses to lose thousands of pounds.
As supply chains continue to grow in size and complexity, and increasingly include vendors based in higher-risk countries, the need to carry out deep-dive checks into existing and potential partners grows ever more essential. This is where data analytics can come really into the fore. The ability to analyse in real-time any changes in shareholder structure, country of operations or incorporation can help raise red flags in a timely fashion and so reduce the opportunity for fraud.
For instance, harnessing data analytics will enable professionals to paint a clearer picture of where a potential supplier sits within a group structure. This can be particularly helpful when understanding whether your contract should be held further up the group structure or with the supplier itself. It can also provide clarity on who the suppliers’ directors are, and where else they have been or currently are directors. Understanding how those companies trade, whether they are in similar or competing industries, or even in liquidation, will help mitigate against any issues further down the line. Further, analysing both structured and unstructured data from within the company as well as externally could also help to reduce in-house fraudulent collusion, whether as part of bid rigging, bribery, phantom vendors or split purchases.
Having all the right data is just one half of the battle though. The importance of having the right people who can draw out these insights and then act on them to combat procurement fraud should not be underestimated. Experts in procurement are needed to consider whether there are any systematic problems that have been highlighted by the data that require addressing. Does the organisational structure lend itself to fraudulent cases? Are there any changes that could be made to counteract these issues? Analytics by itself cannot answer these questions nor implement the solutions – but it can point experts in the right direction to implement positive change.
Data analytics has been shown to be significantly more accurate than other fraud prevention methods such as user rights segregation, rotating staff and yearly or ad hoc auditing. Thanks to the automated ability to identify anomalies within the entire procurement supply chain, faster identification of fraud is possible for all companies.
Disclaimer: The views expressed are those of the author and not necessarily those of Spend Matters