While a recovery audit program can deliver meaningful financial contributions back to your company’s bottom line, evolving your approach to the recovery audit process can significantly improve the value realized from your program.
Recovery audit has historically been a reliable stopgap for retailers looking to ensure that any leakage is eventually identified and captured. In today’s complex retail environment, it is even more critical to ensure processes and systems are correct on the front end.
Leading retailers are evolving their recovery audit approach to shift from a post-payment recovery approach to a pre-payment error prevention approach in an effort to deliver significantly higher value back to their company’s bottom line.
Why your approach to recovery audit needs to change
Recovery audit has been a retail industry best practice for the past 50 years. Retailers of all sizes, sectors and geographies continue to conduct recovery audits because of the added value that the process brings that can include:
- Ensuring retailers are receiving the supplier funding they have negotiated with their suppliers
- Driving cash back to the retail bottom line by recovering overpayments and under-deductions
- Identifying points of leakage across the source-to-pay process to highlight opportunities for upstream process improvement
The ultimate objective of a recovery audit has always been to incorporate learnings from the audit, to correct the issues that cause recoveries, and to prevent them from occurring going forward. Despite this objective, errors persist.
Implementing and maintaining a comprehensive process improvement solution for error prevention has historically been difficult. Retailers implement process initiatives that are often not sustainable with companies primarily focusing on their core business. Resources and investments are typically prioritized for merchandising-related solutions to drive sales. Additionally, the volume, pace and complexity of deals are constantly increasing, making the required fixes a moving target.
Recovery audit firms often support process improvement objectives by providing root cause information on recoveries and corresponding process improvement recommendations. However, these recommendations may be dated, given the process of auditing in arrears. Additionally, even when still relevant, the recommendations oftentimes not implemented due to resource constraints are given a low priority within their IT organizations.
Taking the traditional approach to improve upstream processes and reduced overpayments has not proven to be either effective or sustainable. Adopting a sustainable approach toward error prevention will improve financial and operational performance for retailers and their suppliers.
Making the transition from post-payment recovery to pre-payment error prevention
To give credit where it’s due, the more traditional recovery audit approach does add value — both in financial recoveries, and more importantly in error prevention, the understanding of the root causes that result in overpayments.
Although it is impossible to eliminate all errors, with the right tools and processes, up to 60% of traditional recovery audit findings can be identified and corrected before the promotional event occurs. Leading retailers are investing in systems, strategies and partnerships to help flag and address systemic errors before they have an impact on their businesses’ bottom lines.
Without timely recovery audits, it can be difficult to identify common root causes of promotional funding issues. Some of the top root causes for errors that can be prevented in the retail industry include:
- Omitted items (missed family items, new products, old/new models and/or product lines);
- Missing deals (promotion in the sales planner, but there is no billing contract/deal);
- Date misalignment (divisional date extensions/adjustments, incorrect funding);
- Funding gaps (identified gap in required funding to support promotion);
- Rebate/co-op setup errors; and
- Missing offset allowances (freight and/or defective allowances).
Once retailers have greater understanding of what can be prevented from a root cause perspective, they can begin rethinking how they deploy their recovery audit capabilities upstream in support of error prevention. In this instance, the shift is from a recovery audit to a preventive audit.
A preventive audit works as a complement to your existing processes to monitor the alignment of your contracts and planned performance, identify areas of misalignment, correct the process prior to the event running through a highly configurable and integrated workflow, and report on process status, performance and value realized.
Transform to unlock increasing value from the recovery audit process
A sustainable approach toward error prevention will improve financial and operational performance for retailers and their suppliers. There are five primary sources of value that make this a compelling solution for the retail industry:
- Cost of Goods Sold: Error prevention will result in negotiated funding being reflected in cost of goods sold (COGS) vs. post audit income.
- Margin Accuracy: Reflecting post audit income into COGS will make downstream margin reporting more accurate.
- Supplier Abrasion: Reducing the claims deducted as a result of the traditional recovery audit process will improve supplier relationships and reduce their costs associated with deduction resolution.
- Administrative Costs: Reduction in audit claims will result in less review and correspondence relating to claims approval.
- Time Value of Money: Getting it right the first time will ensure retailers are receiving supplier funding sooner vs. later.
The key to unlocking these sources of value lies in the ability to understand the root cause of the overpayments, the types of errors that can be prevented and a comprehensive approach toward error prevention.
For retailers, having a recovery audit program is an important part of the merchandising and billing process, and these programs add measurable value. However, if a company is looking to increase the value realized from the process, implementing a preventive audit approach is the best way to unlock that value.
Mark Kilgore is VP of global client development at PRGX.