Are you the CEO or CIO of a publicly traded company?

Then you want to read this blog and think seriously about it means to you.

Over the last few years there has been a move by certain companies to reduce the number of suppliers as a way to save money and simplify the purchase process. Along the way a great number of excluded companies have seen their opportunity to propose innovative solutions decline as they have been unable to respond to “members only” RFPs (request for proposals). We have heard no end of excuses in the marketplace as to why this is a good idea. However, the reality is that it removes competition and introduces opportunities for dishonest employees to show favouritism to suppliers who claim to be offering better prices based upon ‘partnership’ or volume-based price reduction.

How can anyone determine if they are getting the best product if they are eliminating any chance for competition? Even if you manage to short-list the top ten best vendors in the market today, by tomorrow there will be another company born that offers superior solutions.

A quick review of today’s media makes evident that during the current recession there are thousands of individuals who have taken their know-how and created new opportunities. Economists recognize that start-ups and small companies are the engine that drives economic recovery and economic growth, which benefits everyone including large corporations. In a phrase, their growth is your growth. So why not include them more directly in your success?

But even more pernicious effects are resulting from the restrictive preferred vendor list and the close vendor-client relationships that ensue. A level of out–right fraud has escalated in recent years to a point where it is no longer a matter of accepting a free lunch or two. Every day one reads about another scheme where some ‘highly innovative’ individual has found a way to work around the system and walk away with substantial ill-gotten gains. There are middle level managers in large corporations who earn very average wages driving new Mercedes, owning country homes, going on lavish holidays and drinking fine bottles of wine.

And how have they arrived at this unearned lifestyle? After skilful positioning and self promotion about how they are saving the enterprise vast sums of money by reducing the number of suppliers and negotiating significant discounts, their actions are no longer scrutinized leaving them free to personally benefit in any way they can arrange. Ironically, in many cases the same companies are insisting that new employees have extensive background checks and police file verification prior to being hired.

Examples of preferred vendor policy effects and “under-the-table” transactions abound; here are just a few:

1. An approved vendor representative conducts special meetings at a strip bar where cash stuffed envelopes are dispensed to his ‘best’ clients.

2. An middle-level executive of a large corporation has an $80,0000 golf club membership, has gone cruising in the Greek Isles with his family, played golf in Florida, and is regularly taken out for lavish meals to thank him for his “patronage”. A preferred vendor list decision was made once and his employer has never questioned vendor invoices since.

3. A middle manager, after ‘streamlining’ the number of suppliers to his department, miraculously went from living in a modest home to inhabiting a million dollar mansion with an in-ground pool, period antiques, and a new Mercedes, not to mention taking amazing golf trips during the winter.

4. A multi-million dollar contract is awarded. A few days later five executives receive shipment from a local art dealer of signed, large, gilt-framed, original art work. After a week on the walls, the art, being recognized as far too valuable and obvious, is removed to the homes of the executives.

5. A handful of people in a very large multi-national have eliminated most of the suppliers to its technology initiatives, initiatives which count in the hundreds of millions of dollars. Although some middle managers question the economic benefit of such an approach, they nevertheless adhere to the ‘initiatives’ under threat of losing their jobs during the recession. No employee is willing to step forward and challenge why, in such a large corporation, with such diverse needs, they are not allowed to have contact or do business with those not on the restrictive ‘approved’ list. Kickback rumours abound, morale is low, and the department is operating well below its capability. The hidden intimidation is unethical at the very least, the threats to whistle-blowers very real, and the productivity impact incalculable.

Within the supplier community, the facts are obvious. In fact, they are openly discussed and the perpetrators well known. In many cases even the “kickback” amounts are discussed freely. The only people who seem to be totally unaware of this behaviour are executives in corporations where this behaviour occurs.

As a responsible executive you should ask yourself:

1. Is anyone in my organization guilty of this behaviour?
2. When is the last time we did a ‘lifestyle’ audit on those individuals making substantial purchasing decisions?
3. Do I believe that the new million dollar home that my employee purchased is due to an inheritance … from a rich aunt?
4. Can I really afford to have this illegal behaviour occur on my watch?

Simple First Steps (RCE)

Rotate Personnel: Individuals who make major purchasing decisions should be rotated on a regular basis. If the same people occupy these roles for too long, it is just too tempting for them to accept the gifts on offer.

Conduct Internal Audits: Unannounced, fully authorized, and executive committee supported internal audits should be SOP.

Expand the Vendor List: Open up the bidding process to more competition. The innovative ideas and cost containment may surprise you and will please your stakeholders.

“Unintended consequences” and “collateral damage” are two phases that came to this blogger’s mind when researching this article. In an era of increased regulatory oversight, think about the consequences of a corporate policy that could place you in the cross-hairs.

Copyright 2009 roslyn-on-the-go