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Evolutionary cost management in financial services

Ian Ingram
May 14, 2013 4:03:00 AM

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Cost management techniques have been quietly evolving in the back offices of financial services businesses. It’s time for the new model to emerge.

Bankers bonuses. It’s perhaps the defining topic for our age – mostly, it has to be said, because it humanises a much broader financial crisis (one in which most consumers in the Western world are complicit) and creates an easy narrative for people to follow.

But among those in the know, bonuses are a distraction from the real game: a reshaping of the Financial Services (FS) sector across every dimension. This isn’t just some spasm kicked off by the twitches in the mortgage market in 2007. It’s a much longer evolution, elements of which have been thrust into the limelight by recent events.

Procurement is a great example. The smart commentators are pointing out that the whole way banks are run needs to change – not just their approach to remuneration. Take the FT’s Lex column: “Compensation may not have to take all the load. Using Barclays as an example, as well as a £10bn pay bill, it spends £7bn on selling, general and administration expenses. Surely there is plenty for the consultants to cut there.”

But there’s a problem. Procurement has been evolving, too. And organisations that think only about what to cut are taking too primitive an approach.

Basic purchasing functions can do a good transactional job for their business unit, but they’re really just in existence to buy stuff - there's no thinking about whether they are buying the right stuff, from the right provider – and little to no interest around what's happening on the demand side.

The second generation – which we call category management – moves an organisation into true procurement. At this phase, you’ve still got the tactical elements around order processing, but there’s thinking about stakeholder and business requirements from a category perspective – grouping spend items into buckets such Facilities Management, Marketing, Professional Services, IT and so on.

Third gen? Procurement starts to have a richer conversation with its stakeholders – it’s become business partnering. Procurement also works alongside other influential voices – such as the Head of Risk and Compliance, or Strategy; certainly the CFO. Supply chain is appreciated broadly as a risk issue – in terms of resilience and reputation.

But while many FS companies in this stage are sourcing mission-critical goods and services brilliantly and benchmarking well thanks to in-house expertise, there are often gaps in the non-mission critical areas. Many struggle to close these gaps, rather than just plugging them in the short term. Procurement operations know what's going on. But how do they transform or take some of the mission-critical sourcing excellence and move it into supplier relationship management around the tail? How do they backfill some of this sourcing excellence?

Which brings us to the fourth generation: moving beyond savings to deliver commercial rigour, insights and analytics that drive real value for the business. And very few FS businesses have reached this point.

I see many teams struggling to create a function that delivers supplier relationship management [SRM], stakeholder management, risk management, control, governance, business alignment and everything else that world-class procurement can be doing. Proxima help these organisations with our unique model – built around leverage, market knowledge and specialisation. We are able to resolve a lot of these issues because we are always in the market and we know what's going on.

(And – whisper it – at a time when there’s such pressure on remuneration, bringing onto the in-house payroll a raft of specialist, strategic procurement people capable of delivering these benefits is a tough ask.)

Adopting a fourth-gen approach to procurement won’t magically bestow banks and other Financial Services organisations with a progressive, 21st century business model. But for those looking at becoming exactly that kind of institution in the face of upheavals and “the new normal”, ignoring the wider strategic and cultural benefits this highly evolved procurement can bring is a missed opportunity.
Ian Ingram

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