Organizations spend countless hours negotiating vendor contracts. Think about how much time you spend to get favorable pricing, service and terms. When you factor in various management and legal reviews, the cost in terms of personnel really can add up. Of course, there’s an even greater cost if you don’t invest that time.
What happens after an agreement is signed varies from facility to facility — and often from department to department. The agreement may be stored away and not shared with accounts payable. Or, more likely, it is shared but just not understood. As a result, there are a set of challenges in reviewing invoices.
For starters, the department paying the bills may not know the contracted pricing. How many times have you had a pricing table attached to an agreement as a PDF? If you’re like most people, the answer is plenty.
In the real world, documents get scanned and copied, so that by the time they reach the individual who has to validate pricing, the information can be difficult to read. Frustrated staff members may do their best, but the documents might make it challenging for review.
Having a pricing list may be the easy part. What if the agreement is more complicated? Maybe there are early-payment discounts, category discounts and more. Now you’re relying on a nonclinical or nontechnical person to understand the nuances of every spend category to capture the appropriate reductions. Suddenly, items that may have seemed so clear during contract negotiation just create confusion during the practical application of validation.
Many times, contracts include a formula for invoicing. That formula may rely on external data such as an index that is difficult to obtain or is buried in the contract.
We’ve seen multi-year contracts refer to maximum annual price escalations, and when it comes time for the price increases in later years, the vendors conveniently forget, and the payables department doesn’t know to check. Maybe some knew it was there years ago, but it is lost in the normal hand-off that occurs regularly. The result is that organizations end up paying more than required.
Worse yet, the price-escalation restrictions may be buried in a contract amendment that isn’t shared with the rest of the organization. These types of oversights happen all the time and can be very costly to an organization.
For some spend categories, such as medical, office and janitorial supplies as well as pharmacy, there may be thousands of lines of billing to review each month. Unless you use an automated solution, there’s no way to effectively review an invoice.
Instead, organizations may rely on high-level metrics to determine whether their spending is reasonable. In doing so, there is all sorts of “leakage” as items fall through the cracks. Seriously, how is it possible to know if you’re really paying the correct amount for all of your goods and services?
So what are the alternatives? You may be worried that the time it would take to “do it right” could be so costly that any savings would be more than lost. It probably is not practical to manually check everything. Automating a solution could be costly as well, especially because contracts and invoicing change periodically and any automated solution needs to be updated regularly.
As a result, some organizations look to outside organizations to help.
Companies such as Expense Consulting conduct audits to find any errors in billing. Auditors who regularly study agreements and invoices for several organizations have the experience to identify common errors relatively quickly using tools that are maintained on a regular basis. Bringing in a third party can provide a level of assurance that you’ve upheld your fiduciary responsibility.
Why pay more than you agreed to?
Stephen Carrabba is principal of Expense Consulting, which he founded in 2009. After graduating from Babson College in Wellesley, MA, Carrabba established a specialty manufacturing company while investing in real estate. Gaining experience in controlling expenses to maximize profits, he developed protocols and procedures that he believed were translatable to other industries and organizations. Carrabba and his team have negotiated thousands of agreements. He lives in Connecticut.
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