How PRGX helps category management and merchandising leaders.
Conducting a deep dive to understand the underlying reasons for why something went wrong is an essential part of many jobs. From plumbers to accountants, getting at the root cause of a problem is a necessary step towards solving it.
The same holds true for recovery audits. For decades they have served as a reliable method to recoup the loss that occurs due to invoice errors. But as good as they are at getting money back, it would be better if erroneous payments were avoided outright.
By applying proven methodology, data analysis, and the expertise only decades of experience can deliver – it is possible for companies to uncover the hidden factors that enable profit leakage. Understanding where and why leakage occurs is fundamental.
Eliminate Leakage and Stay Efficient
Finance teams have always had to strike a balance between stopping spend leakage and staying efficient. In a big company where thousands of invoices are paid each month, reviewing every single one manually is practically impossible.
That is why recovery audits are a standard practice. Where they have evolved is the speed at which audit information can be turned into useable data and insights.
Auditors are now leveraging what they learn during the audit process to reveal the root cause of what allows overpayments to slip through the cracks. When those are addressed, sustainable long-term controls can be implemented that stop loss before it happens.
Getting to the Root Cause of the Problem
Root cause analysis is the process of identifying process weaknesses that open the door to erroneous payments. The rationale is easy to understand. It is much more effective to systematically prevent and solve invoice errors at their source, rather than continually looking backwards to recoup past losses.
Root cause analysis blends best practice methodologies, data analysis tools, and auditor expertise to identify the sources of an event or trend. It looks beyond superficial causes (e.g., ‘human error’) to show where processes or systems failed — or potentially created the issue to begin with. Then the information gathered is used to design or modify financial controls in a way that proactively removes the risk of errors from recurring.
Instead of just treating the symptoms of leakage, root cause analysis might focus on a particularly claims-prone vendor or purchasing category, as well as suggest additional checks before any payment within those parameters is confirmed.
What a Root Cause Analysis Looks Like
Root cause analysis begins with a top-level overview of all the claims successfully recovered. Claims might be divided into category, department, and type to identify where the biggest recurring loss is happening.
In a retail setting, that could include factors such as underfunded retroactive payments on volume and rate, volume incentives and un-credited returns.
Once those basics are established, the overview can include year-over-year breakdowns that highlight leakage trends. What auditors are looking for are spikes and anomalies. If they appear in one area more frequently, that is a red flag for further analysis.
The next layer of a root cause analysis is the category level. It is here where a particular category, trading area or claim type where a higher volume of claims is occurring becomes a candidate for a closer look. Auditors also look at key suppliers in the category and how much of the recovery profile they account for. Volume analysis is essential here so that one large claim does not skew the result.
Finally, auditors conduct a claim-level analysis by delving into the specifics of individual claims to uncover precisely what occurred.
Solving Small Problems for Big Savings
Once a systemic or process issue is found to be causing multiple claims, root cause analysis can branch out to uncover further leakage points, either within the spending category or elsewhere in the business.
Root cause analysis is also a cyclical process. Once the claim level analysis is complete, it’s vital to update reporting to ensure errors don’t recur and look at the top level again to identify new areas in need of attention. In that sense, root cause analysis is turning recovery audit into a process of continuous improvement and plugging as many leaks as possible rather than chasing the drops.
Want to learn more?
Download PRGX’s Root Cause Analysis: The Vital Ingredient In Today’s Recovery Audit e-book or our webinar on The Overlooked Benefit of Recovery Audit.