The VW scandal and expense management
The ramifications of the recent Volkswagen emissions-falsification scandal have only just started to be felt.
The German carmaker has admitted that it installed software on 11 million of its diesel cars worldwide, which allowed them to pass America’s stringent emissions tests. But once the cars were out of the laboratory the software deactivated their emission controls, and they began to spew out fumes at up to 40 times the permitted level.
“The damage to VW itself is immense”, writes The Economist. “But the events of this week will affect other carmakers, other countries and the future of diesel itself.”
Even that may turn out to be an understatement.
The event is alarming because of the breach of trust involved. Volkswagen is one of the world’s most trusted brands, for many people a name associated with honesty and reliability. If the public specifications for large products from such a big-name company could have been sub-truthful for so long, then what can you rely on?
Is anything believable any more, a paranoid person might wonder? What about the claims of drug companies? Of food manufacturers? Of building product suppliers? What other companies are erecting Potemkin villages of information to fool me into thinking things are just fine?
Intention versus consequence
For enterprises, intention is less important than consequence. Whether a large supplier to the enterprise is deliberately trying to falsify data, or simply providing inaccurate or incomplete data unintentionally, the impact on an enterprise can be just as devastating. Products not fit-for-purpose, collateral damage to employees and users, overcharging – these are just some of the effects of ‘sub-truthful’ data from suppliers.
This is not to say that such suppliers should not be trusted. Many – probably most – are trustworthy companies with only honourable intentions. But they are not infallible.
Доверяй, но проверяй
“Trust, but verify” (Доверяй, но проверяй), the unofficial motto of nuclear weapons inspectors the world over, has much to recommend it in this area. This old Russian proverb neatly captures the importance of verifying critical facts, regardless of whether or not you ‘trust’ the entity involved.
The underlying truth is this: If the fact is sufficiently material, then trust is not the issue – verifying accuracy is the issue.
And so to expenses. For enterprises, large expenditure items are sufficiently material to affect the overall results (and sometimes even the health) of the enterprise. But fulfilling their fiduciary duty in checking such items is not so easy for modern managers.
Usage-based expenditure in particular (telecoms, energy, etc.) is prone to inaccuracy of recording. Usage requires measurement, and often the only artefact of the usage is the bill itself, making the system both liable to errors and notoriously difficult to thoroughly check.
Expense management providers have many war stories in this area. Smartbill, one such provider, recently verified the $16m annual telecoms spend of a large construction company, and immediately identified over $4.5m of unnecessary expenditure. That’s over 25% wastage, made up mainly of service errors, oversupply and billing anomalies.
VW has dramatically shown why trusting your large suppliers is not sufficient. Trust them by all means, but verify too. The cost of not doing so can be enormous.