Monday, January 29, 2007

Sarbox – the Lemonade Law

Unlike some folks in business, I’ve never felt particularly strongly against the Sarbanes-Oxley Act – at least in regards to trade promotion management.

As a citizen and taxpayer, I always get nervous when the government creates another layer of bureaucracy (the PCAOB). And I’ve been hearing a lot lately about how much financial business is moving to London and other places, away from New York and the US, to get away from Sarbox.

These are legitimate concerns, I think. But as for trade promo, what does Sarbox require? As I understand the requirements, they could be summarized in simplest form as:
  • Full audit trail from plan to settlement
    • Have a system that accurately tracks what promotion was planned, what actually happened, and what you paid for it
    • All changes and deviations must be documented
    • Program rules must be documented and appropriately enforced
  • Full auditable proof of cost and performance
    • There must be documentation of what you paid for
  • All funds must be fully and accurately reconciled
So what’s the problem here? None of this is anything that we shouldn’t have been doing all along. It has been a shock to our systems to actually have some rules after so many years of anything goes, but now that we’ve adjusted, the time has come to look at the ways to take what we’ve learned from Sarbox and, whether we like the law or not, make the most of it.

As the saying goes: If life hands you a lemon, make lemonade. I can think of three varieties of Sarbox lemonade that can probably be made by most companies, and there are no doubt others that are specific to your company, based on the findings of your internal audits and the process re-engineering done to achieve compliance.

Sarbox Lemonade Recipe #1: Deductions and Post-Audits

If you are doing what Sarbox requires in regard to trade promotion, you should have virtually no unidentifiable authorized deductions for trade promotion.

Hard to believe, but true. Let’s look at a (very simple) schematic of a properly-functioning trade promotion process under Sarbox:

If you are actually doing this – if you and your trade partners are agreeing to a plan up-front, and the execution of the promotion matches the plan, and it’s all documented – how could there ever be a trade promotion deduction you don’t recognize?

Okay, I know this is the real world, and stuff happens – there will be exceptions. But they should truly be exceptions, meaning that there should be few. The exceptions themselves can be made into a positive, because they can become your measuring stick – the number of exceptions tells you the degree to which you are noncompliant with Sarbox.

For the same reasons noted above, there should be virtually no post-audits.

Sarbox Lemonade Recipe #2: Outsourcing

What is your company set up to be? A manufacturer/marketer of (fill in the blank) or a paperwork processor? There’s no good reason anymore for keeping the administrative aspects of your trade promotion program in-house.

You’ve outsourced payroll, HR, and a good many other paperwork functions, but you kept trade promotion inside, in large part because it was too unruly and uncontrollable. You wanted it where you could keep an eye on it.

That’s not necessary today – not now that you have Sarbox-compliant processes in place. You still will have the upfront planning done internally, of course, but all the back-end paperwork processing – all the collection and checking of documentation, and the issuance of payments or matching of deductions – can be done outside, by companies set up to do that sort of stuff.

Sarbox Lemonade Recipe #3: Documentation/Analytics

Now that Sarbox has enabled you to get your trade spending under control, and to track what you are spending the money on, you now have the opportunity to measure its effectiveness. The documentation of performance gives you the information you need to fully understand exactly what sort of promotion your retailers are doing for you – matching this up with their sales reports will tell you what sort of promotion works, and will give you the opportunity, in the next planning cycle, to do more of what works and less of what doesn’t.

You may or may not like Sarbanes-Oxley. It may or may not be a good law. But, properly used, it can be turned to your competitive advantage.

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