When Compliance Conceals Reality
How 98% compliance concealed a much deeper sales management problem
- The system
A large beverage manufacturer sold nationally through a network of independent distributors. The sales force occupied an unusual position because the salespeople were contractually employed by the distributors, while their cost was paid by the manufacturer and much of their daily work was directed, measured and rewarded through the manufacturer’s sales organisation.
Each salesperson had an assigned route covering a number of retail outlets and used a handheld device or telephone with GPS during the working day. Location tracking recorded where they had been, orders and information about the outlet were entered into the sales system, and photographs were taken to show the company’s products and the quality of merchandising at the outlet. The photographs carried time and location information automatically uploaded to the sales system, so they appeared to provide a useful independent record of what the salesperson had found during the visit and when and where the salesperson had been.
The company had two further layers of assurance. A visibility team reviewed the photographs and measured merchandising performance, while a separate sales audit team visited outlets in the field and checked the information recorded by the sales force against what the retailer said had actually happened. Both audit teams reported outside the sales organisation to the Head of Risk and Internal Audit.
The arrangement appeared comprehensive. Management could see where salespeople had travelled, which outlets they had visited, what orders had been recorded and what the shelves looked like. Photograph compliance was consistently high, generally above 95 per cent and sometimes close to 98 per cent, while the separate field audit provided another source of reassurance that the information in the system reflected what was happening in the market.
At that stage there was no reason to assume that the sales organisation was systematically changing its behaviour to influence the information. Internal audit was reviewing the operation in the normal way, looking for exceptions, inconsistencies and areas where management could improve the reliability of the system.
The first concerns arose because some of the numbers simply did not fit together.
2. The contradictions
Sales audit was finding orders that could not be confirmed when auditors visited the retailer, yet the financial consequences were behaving differently from what the incentive arrangements suggested should happen. Over one period the proportion of false orders increased substantially, while distribution cost per case also rose by around 42 per cent and sales volume at the beginning and end of the period remained broadly similar.
False orders reduced the incentive payable, so a large increase in them should have placed downward pressure on distribution cost. The opposite movement prompted internal audit to start examining the relationship between sales results, incentive calculations and changes that had been made to the incentive rules.
At around the same time, scheduled field audits were occasionally cancelled following actions by the sales organisation. The auditors already had time allocated to those routes, so rather than return to the office they used the available time to visit the same outlets independently and ask the retailers about their normal buying behaviour.
The result was striking. Across 86 outlets on 12 routes, 63 per cent would have produced a false-order result under the normal audit method and only 26 said that they normally bought from the salesperson. An audit cancellation had initially looked like an operational problem; the independent visits raised the possibility that avoiding an audit could also affect the reported performance of a route.
Photographs then produced a different kind of inconsistency. In one case the visibility team identified the same photograph being used for two separate outlets. Sales management explained that the shops were close together and that the salesperson had probably made a simple mistake when submitting the pictures.
The two outlets were close, so the explanation was plausible. The Head of Risk and Internal Audit visited them to understand what had happened. Both retailers explained that they bought through wholesalers rather than from the salesperson, and one said that there had been little recent contact with the salesperson at all.
That changed the significance of the duplicate photograph. The question had moved beyond whether somebody had attached the wrong picture to an outlet record. The sales system was showing a relationship between salesperson and retailer that the retailer described very differently.
The photographic evidence was highly compliant, yet the commercial activity represented by it was becoming increasingly difficult to reconcile with what was happening in the market.
3.The investigation
As these inconsistencies appeared, the assurance teams changed the way they worked. The visibility team started looking more closely at the photographs themselves and identified examples where previous photographs had been reused or where a new photograph appeared to have been taken from an earlier photograph. The technical requirement to submit an image was being satisfied while the value of the image as evidence was being weakened.
Internal audit then tested the issue from another direction. Auditors visited selected outlets before the salesperson was due to arrive and photographed the displays themselves. The photograph taken before the visit could then be compared with the picture subsequently submitted through the sales system.
The results indicated that some displays had been created for the purpose of producing the photograph. In one exercise covering 24 outlets, two photographs were clearly false and most of the remainder showed strong indications that the display had been staged during the sales visit.
Management responded by restricting the practice of salespeople carrying product on their routes. Later surprise fieldwork found retailers describing another variation: some salespeople were arriving with products or empty cases which could be used to create the required photographic evidence.
This was the point at which the investigation increasingly became a process of adaptation. Each time the assurance work identified how the sales information could be influenced, the sales behaviour changed and the audit method had to follow it. Formal field audits were supplemented by independent route surveys; photographs were checked against earlier photographs; outlet conditions were recorded before the salesperson arrived; and information enered by the sales team was increasingly compared with information collected directly from retailers.
The incentive system added another dimension. There were very clear definitions for fake order, incorrect order and wrong order. Changes had been made to the financial consequences attached to these different categories of poor order, and the mix of reported errors then moved in a direction that affected the amount of incentive paid. Internal audit began looking at the classification of sales results as part of the behavioural system rather than treating each category as a neutral description of what had happened.
This mattered because a measure changes character once the person being measured understands how it affects his income. The classification may still contain useful information, but management needs to recognise that the employee has an economic interest in the result.
The work also showed that individual behaviour was only part of the explanation. In one major city, around a quarter of the outlets audited said that they bought through agents rather than from the distributor, compared with less than one per cent in the other regions. Merchandising performance and outlet satisfaction were also weaker, while some distributors were operating substantially more routes.
This suggested that some of the apparent sales irregularities reflected a route-to-market model that was becoming disconnected from the way retailers actually bought the product. An order that could not be confirmed by the retailer could arise because the salesperson had manipulated the information, but it could also arise because the product had reached the retailer through a wholesaler or agent while the sales system continued to represent the market as a direct relationship between distributor and outlet.
The same reported symptom could therefore have very different causes, and management needed to distinguish between them before deciding what to change. The stakes were high, salesmens salaries and incentives, distributor rebates and quarterly volume bonuses all added into the $m every year
4. What changed
By the end of the work, the value of the sales technology was actually clearer than it had been at the beginning. The location data, photographs, electronic orders and merchandising information had generated a large body of evidence and had made many of the investigations possible. The important change was in the way that evidence was interpreted.
Location tracking gave good evidence that a salesperson had reached a particular place. The retailer provided the better evidence of whether a genuine sales relationship existed. A photograph showed what was visible at one moment in time, while subsequent fieldwork helped establish whether the display represented normal trading conditions. The sales system showed the order attributed to the outlet, while comparison with the retailer’s buying behaviour showed whether that order represented the commercial activity management believed it did.
The strongest management information therefore came from bringing independent sources together and examining the contradictions between them.
The experience also changed the way internal audit approached the sales operation. Routine compliance testing remained useful, but the greater value came from understanding how the business worked, how people responded to incentives and how behaviour changed as controls became familiar. A control could remain technically compliant while its ability to provide assurance gradually weakened, which meant that the assurance process also had to continue learning.
There was an important organisational lesson as well. The manufacturer funded the sales force and depended upon its performance, the distributors were the contractual employers, and the manufacturer’s sales management directed and measured much of the activity. Clear responsibility for supervision, discipline, incentives and the reliability of sales information became essential because blurred accountability made it easier for poor performance to sit between the manufacturer and distributor without either fully owning the problem.
The broader lesson reaches well beyond field sales. Modern businesses generate increasingly detailed evidence through dashboards, automated reporting, location data, photographs, key performance measures and now artificial intelligence. These tools can give management a much richer view of the business, provided managers understand what each piece of information actually demonstrates and where independent evidence is needed to confirm the underlying reality.
For this sales operation, some of the most valuable information eventually came from a very simple source. The auditors went to the retailer, compared what they found with what the systems were reporting and followed the differences until they understood why they existed.
The technology created the evidence. Management capability came from knowing what that evidence meant.
A business can achieve 98 per cent compliance and still be poorly controlled if the process is measuring the wrong thing.