How to Combat Corruption in Procurement

Newspaper "Vedomosti"

Many Russian companies introduce bureaucratic measures to fight corruption in procurement, but this only serves to complicate work and doesn’t have the desired effect.

Omnipotent security services treat these matters formally and become an extra barrier to the stakeholders in the procurement process. Procurement control is often entrusted to tender panels, yet they are not able to determine how competitive the bidding terms and conditions are. Financial controllers review not the commercial conditions of the tender but invoices and requests for payment, i.e. acting post factum. They are left to fight corruption by means of “manual control” practices, involving top management in audits for every dispute case. Put simply, it’s like using an administrative sledge-hammer to crack a nut.

The more companies battle corruption through prohibitions, the less purchasing authorities desire to hold it effectively.

The key issue for companies in Russia is a conflict of interests. This occurs when the purchase initiator is a budget manager and, at the same time, in charge of sourcing and contracting. For example, an IT Director establishes requirements for servers, arranges the tender for purchase of servers, chooses a supplier and signs the contract.

Corruption occurs not only in the course of sourcing, but also at later stages of the source-to-settle process: during the order, receipt of goods and payment. These steps should also be regulated and controlled. We have faced situations in which a job that was well-executed by the purchasing manager was canceled by the requestor, who then increased the price of the contract due to changes in the terms of delivery or payment, additional works, purchases of ancillary goods not included in the contract, and so on.

If an individual does intend to instigate corrupt practices toward the company, he won’t be easy to stop or even to uncover. However, a well-thought-out strategy will make the life of such an individual significantly more difficult. The following recommendations will help prevent corruption.

1. Implement rules aimed at shared liability (the “four eyes” principle). Procurement functions must be separated from business units – internal clients of goods and services, and fully transferred to an independent unit subordinate to the General Manager.

2. The procurement department should cover all purchases of the company. If you do not have enough staff or expertise in a certain category, such as IT, for instance, then get external experts involved.

3. At least once a year arrange an independent audit of the completed sourcing projects. For example, one company had held a tender for software development services, based on the minimum cost of man-hour, they had chosen a partner and signed a contract. A year later it became clear that the company had spent 6 million roubles launching an online store when the market price of such works was not more than 1 million roubles.

4. Develop an anti-corruption policy. It is necessary to describe key issues related to potential conflict of interests. And let the auditors report on any inconsistencies to an independent member of the Board of Directors, otherwise, in the event of large-scale corruption practices, management may be tempted to conceal information from the shareholders.

5. Implement a “whistleblowing” policy in respect of violations. Make the employees and partners aware therein that all such cases can be now reported to management anonymously. For this purpose, arrange a special form on the corporate website or specify an e-mail address or a contact phone number.

6. Promote openness and transparency in procurement: post tenders’ results on the company website, inform suppliers of the selection criteria, maintain feedback to contractors and employees. For example, having interviewed your own employees, you may become aware that the travel agency inflates tickets and hotel prices by 20-25%.

7. Automate the procurement process. This will not only save 10-15% of the costs, but it will also limit the opportunities for manipulations, since all tender documents and supplier contact details will be stored in a single database, and all actions will be recorded.

8. Implement a tendering procedure to regulate purchases of all types of goods and services. Introduce a delegation of authority guide to specify who should make a decision and on what amounts. For example, purchases within the region of 5-10 million roubles are to be approved by the Procurement Manager, of 10-25 million roubles by the Chief Financial Officer, and above 25 million roubles by the CEO. Introduce the rule that all decisions on purchases in the amount of above 500,000 roubles must be supported by quotations from at least 3 vendors, as well as by comparing quotations in terms of cost, timing and quality.

9. Pay attention to the bottlenecks in the company that may stimulate corruption. For example, wages of employees, who take key decisions on purchases, should not be lower than the market norm, otherwise such savings will turn into systematic overpayment to suppliers. It’s worth rewarding employees materially for savings in procurements to avoid them seeking out ways of making money on the side.

10. Make procurement department operations more interesting and efficient: eliminate redundant links in the contract approval process; develop templates that will help departments’ customers draw up purchasing requirements; set the limits so that they can make their own decisions within the framework.

11. Recruiting employees for the procurement department, choose people with a global mindset, who are enthusiastic about procurement and aimed at career growth in the field. Such people will be less likely to engage in corrupt practices.

Moreover, the main goal is to create a company culture in which the incentives for illicit enrichment in purchasing are reduced to a minimum, with fairer deals appearing more beneficial and safe.

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