Sarbanes-Oxley Compliance Can Lead to Great Improvements in Company Alliance and Partnership Results

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Business Relationship Manager - Product Lifecycle Management, Chevron Corporation

The Sarbanes-Oxley Act of 2002 has caused big changes in big business with a hefty price tag.  Not only must publicly traded companies document and comply with the financial reporting and internal audit control requirements of the Act, they must also continuously attest, measure and document changes of the related processes to ensure continued compliance.

The challenge of complying with Sarbanes-Oxley requirements inside of a company is notably a time-consuming, costly and arduous task.  The good news is that the internal control systems that companies are building will certainly identify areas in the company where effectiveness can be improved, additional revenues can be generated and costs can be decreased.  Further good news is that many of these internal control systems are built so that their processes can be repeated which, in turn, will reduce the amount of time it takes to collect, analyze and report subsequent data sets.

Complying with Sarbanes-Oxley when it comes to a company’s alliances and partnerships with other companies where many processes and policies are shared, contracts must be followed and revenues can be recognized in numerous ways is much more difficult.  To complicate matters even further, compliance regulations require that these items must be re-measured on a continued basis to ensure their accuracy and the items internal control processes remain effective.  These items include the measurement of both quantitative and qualitative data from enough data points to ensure the data’s accuracy.

The diagram to the right can represent almost any alliance or partnership.  Corporation One and Corporation Two can be labeled Pharma and Biotech, Vendor and Reseller, Development Lead and Co-Developer as well as other labels.  The shared processes, policies, programs, quality data and results between two (or more) entities are represented by the center oval.  If there is more than one partnership, the oval would be divided into sections so that each section would represent one of a company’s partnerships still allowing the whole oval to represent all partnerships.

If that isn’t complicated enough, each section represents the individual shared processes, policies, programs, quality data and results between a company and the individual partner.

Where the safeguarding of assets had previously been a primary objective of internal accounting control, Sarbanes-Oxley requires that a company’s internal control structure meaning its control environment, accounting system and control procedures must be documented and measured.  This also includes an assessment of risk and, information and communication.  Safeguarding of company assets has become a subcomponent.  The scope of internal control includes policies, plans, procedures, processes, systems, activities, functions, projects, initiatives, and endeavors of all types at all levels of a company.  At an entity or company level, internal controls that affect the enterprise’s ability to perform must be documented, measured and certified.  At an activity level, the scope applies and considers the details of functions that generate revenue for the company, create or acquire company assets, incur company liabilities, result in company expenses or involve the receipt or disbursement of cash.

For alliances and partnerships this means measuring processes, policies, personnel effectiveness, contract adherence and other items that can impact revenues and other financial information and, monitoring for potential risks.  Assessing alliance and partnership risks have always been the most difficult items to measure because there are few control issues that can be enforced with partnerships.

Companies that can determine an accurate way to asses risk and measure the effectiveness of personnel, policies and processes are finding that the collection of alliance and partnership data is at the same time; also creating business intelligence and predictive analytics that can be used to improve numerous partnership effectiveness aspects and also results.  In order to determine what information needs to be collected it is be best to start with an analysis of the internal controls used for partner agreements and management.

It is best to start with the partner agreement.  The partner agreement is more than just terms and conditions.  It considers or should consider the important aspects of the partnership or alliance.  Items that should be included are items like roles and responsibilities, rules of engagement, communication processes, dispute or workout processes, and program spending and approval processes.  For Sarbanes Oxley, adherence to the terms and items should be measured, but more importantly, the effectiveness of the supporting processes should also be measured.  And, they should be measured from both the lead partner or vendor perspective and, also the other partner perspective.  Without both measurements, the data is incomplete and will most often be inaccurate.

With partner management, there are numerous process, policy, program and personnel effectiveness measurements that can impact the company’s profitability and performance goals and the safeguarding of resources against potential losses.  Dispute resolution, training, marketing program and alliance manager effectiveness and satisfaction all can impact performance and profitability.  They also can be tied back to partner agreement processes and then to particular agreement items.

Before Sarbanes Oxley, these types of measurements would have been called feedback.  Some companies measure some of these items infrequently and many do not at all.  As companies concentrate on effectiveness measurements for regulatory and legal reasons, they will also start to build a new base of knowledge regarding alliances and partnerships.  As all of the required measurements are gathered together, they can now be analyzed together.  Cause and effect variables and variances will be able to be created by comparing for example; policy impacts on program effectiveness, marketing ROI or program effectiveness on personnel effectiveness and, dispute resolution satisfaction on revenue performance.

When these types of comparisons can be made, the result will be the generation of accurate intelligence and analytics data.  Don’t spend a lot of time looking for the data in the company warehouse as information relating to effectiveness, quality and satisfaction pertaining to alliances and partnerships for the most part, has not been consistently collected.  Many companies will have to start from scratch.  The advantage is that the data will be clean, that seldom looked at processes and policies will be documented and then can be improved, and that there will be a new level of accountability within the function called alliances and partnerships.  Best of all, it has to be done anyway because of Sarbanes Oxley compliance.

One would wonder if the Government did business a favor.  The alliance and partnership component of Sarbanes Oxley will have an ROI.  Those companies that are successful and early in identifying the right internal controls and improve on their effectiveness will have the opportunity to gain a significant competitive advantage.

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