Feike Brouwers (FB), former Chief Financial Officer for ING Direct discusses his role in bringing the distressed UK business back afloat during the financial crisis, Barclay's acquisition of ING Direct and how cost management is a top priority for all involved in financial services.
CG: Today I am joined by Feike Brouwers [FB], former Chief Financial Officer for ING Direct - a global financial institution of Dutch origin offering banking, investments, life insurance and retirement services. Thank you for joining me today Feike. Can you tell me a bit about your background and your current role?
FB: My background is really in accountancy, I started as an accountant with PricewaterhouseCooper and then I joined ING about 15 years ago and had various roles but mostly always in finance with the last five and a half years as CFO of ING Direct in the UK. It’s been a fascinating time because I arrived in the middle of the financial crisis in October 2007, Northern Rock had just collapsed in August 2007 and we had queues in the streets here. During my current tenure we bought two Icelandic banks and launched our mortgage business, which expanded our portfolio considerably, making it about £5.5bn starting from almost nothing.
Prior to moving to the UK [tasked with bringing the distressed UK business back afloat], I'd been the Finance Director of ING Direct in France for about a year and a half, so I had the privilege to work in Paris with another ING Direct unit in a similar role before I joined the UK, which is always challenging working in a completely new culture outside your own home country.
I've also worked for an internal M&A team with ING Group, advising the Group Executive Board on mergers and acquisitions and at that time, we were still doing a lot of acquisitions, now it’s more about divestments.
CG: Coming into a distressed business during the financial crisis and turning it around must have been very satisfying. There has been recent press coverage around Barclay’s acquisition of ING Direct. Could you take me through this acquisition a little bit more, touching on what this means for the finance sector here in the UK and globally?
FB: If you look back at the crisis in the markets over the last five years, a good point to start a timeline is August 2007 (when Northern Rock collapsed here in the UK), that’s when it really hit home to people in this country that something very sinister was going on in financial markets.
During that time, I think there were two things that were catalyzed for the whole financial services sector. First, a lot of new regulatory measures and frameworks such as Basel III, which was probably the most important of them, but other discussions are still ongoing such as ring fencing.
In late 2011 / early 2012, we thought the worst of the crisis was over, so people were thinking, okay, we’re getting towards a point where things are starting to return to normality. That’s when the sovereign debt crisis hit us with full force, kick starting a domino effect brought discussions around Greece’s exit from the EU and it really stirred up the markets again.
Market turmoil is still continuing and the volatility in the financial markets only needs one small thing to happen to start the snowball effect – leading to panic in the market or what we are seeing now which is this overly risk averse attitude from many of the global banking institutions. Major players seem to be holding tight, maintaining a very conservative and cautious outlook and that leads to all kinds of other consequences for the wider economy, for example, banks stopping or reducing their mortgage lending and lending to small businesses.
So, I think it’s these two factors, the regulatory uncertainty or the regulatory response to the crisis, combined with a continuous volatility in the financial markets and very fragile markets.
The result of all of this, coming back to your question, is the acquisition of ING Direct by Barclays – and yes, this is a sign of things to come.
I think what we’re seeing is that a lot of banks and financial services companies are moving back to their core business. Older banks are in some state of strategic reorientation or strategic review and are already looking at where they can invest their capital most efficiently. Certainly, with the new capital and liquidity guidelines and requirements on banks, they're going to be more strict, so you have to be even more efficient with your capital.
I think another thing you're seeing is that financial service companies are returning back to their home markets. Take HSBC for example, they've decided to sell their stake in insurance companies in China to refocus on core priorities and core markets. This has also left ING to decide that UK is not one of these core markets for them and has led to the decision to divest and I think this trend has not stopped yet, so it’s something that we will continue to see.
Finally on this topic, I think, it’s also very challenging to keep your staff engaged. The consequences of this whole situation that we’re operating in is that a lot of banks are starting to look at their cost base more closely and there's a lot of cost cutting, there's a lot of redundancies being announced all the time, it seems to never stop.
CG: So cost management and control is a top priority in the financial services space as of today?
FB: I think it’s tremendously important. I think all the financial services firms now have an increased focus on their cost base, because many aren’t seeing strong revenue or top-line growth forecasts for the next few years. This is mainly driven by the minimal increases in consumer lending along with low interest rates which means low margins.
So, in order to remain profitable and to ensure that capital is still being generated all financial services firms are now forced to be increasingly efficient and to really keep the costs under control, so I think it’s a global phenomenon.
CG: I guess to control costs, a business needs to have absolute visibility over all expenditure. How do you and the wider financial services sector maintain the needed visibility across the total cost base, core or non-core, effectively?
FB: I think this is where the finance function, in co operation with the procurement or sourcing function, can play a very important role to the business. We are already seeing that procurement is a growth industry, if you like. It’s very much on the radar screen of boards in large financial institutions. I look at the procurement function together with finance team, not only when approaching cost reductions and managing costs but also to make costs more visible and transparent.
Six or seven years ago, a Chief Procurement Officer’s (CPO) role was not that visible or some organizations didn’t even have one. Now more and more, you see that those positions are being created and they get higher visibility and they get an extensive mandate in these organizations.
CG: I guess the role of CPO within the financial services industry would be a very different role that in manufacturing. What are some of the key services you would hope a CPO brings that would add value to what finance (and the wider business) are trying to achieve?
FB: I think a key service any CPO should provide is enabling transparency into costs - where we spend our money. It’s very easy to just make a list of your top ten spend areas but anyone can do that. True value is returned not only from identifying key spend areas but also what the business is getting for that spend. In addition, value is added around offering an understanding of what is driving a particular spend pattern – where is the demand coming from and how can it be managed effectively.
We have had this discussion internally here, it’s actually quite a fascinating discussion, to what extent should the procurement function be involved or leading the discussion around demand management? There's a very simple way of thinking about this, the business needs supplier X or a certain resource and then it’s up to the procurement function to basically go out and find the cheapest supplier. But there is a more sophisticated facet to this which asks should procurement not also be involved in a discussion about how the demand is managed?
For example, printers, you can ask the procurement function to look for a cheaper printer and paper supplier, but you could also ask the procurement function to investigate why we are printing so much or why are we using so much paper? What can we do to reduce the amount of printing or the amount of paper that we use? So rather than just constantly looking for a better deal, procurement becomes a function that gets involved with the business, trying to see where create efficiencies in demand can be exploited, rather than just driving down the unit cost or quantity of units consumed.
CG: How much of that is actually a reality today?
FB: There's still a bit of an education that is needed for the wider business before this becomes a full reality i.e. procurement being involved in demand generation. There seems to be a stigma within many businesses, that if you need the cheapest supplier of a widget then that is when procurement should be involved, many fail to acknowledge that procurement can help manage the demand from the start.
Educating the business around demand management becomes part of the collaborative exercise that the procurement function should be leading. Once the business starts to see value being returned from this process it becomes second nature to involve procurement at the start always.
I think that’s one of the biggest challenges for procurement, to step away from this role where they're being perceived by the business as purely the people who do negotiations and go for the cheapest price for a given product and the cheapest service, rather than becoming true business partners and trying to make the business as efficient and effective as possible.
CG: I guess that’s a tough job for a CPO in the financial services industry to do, being that a big portion of spend is around labor and capital investments?
FB: ING Direct is a little different to other retail banks as we are a direct bank and as such our cost base looks very different from a bank which has branches and a more diverse offering range (including insurance, credit cards, ATMs, etc.).
Generally, a financial services cost base is mainly attributed to staff costs and probably IT and IT related costs. This is true for ING Direct, out of our total operational cost, I'd say about 75% is really staff costs and then maybe another 10 to 15% is IT. Next to that, we have quite a significant amount of marketing costs and that’s again because we’re a direct bank, we spend a disproportional amount on marketing, compared to a traditional bank.
In the case of ING, local procurement teams co operate quite closely with the global procurement function led by the global CPO based in Amsterdam. This function was created only three or four years ago and has a very strong mandate given by the Group CFO. This global procurement function offers a lot of value particularly from the management of global contracts i.e. leveraging and influencing key relationships, in say marketing agencies, across regions. So the CPO role is not about making year on year savings, but driving value out of the existing supply chain in innovative ways.
Having said that, there are still cases, where the local procurement function interfaces directly with local suppliers in order to have a certain agility and flexibility in the local marketplace. If there's a problem, we don’t want to have to talk first to someone in Amsterdam that’s going to talk to a global Account Manager in Seattle of supplier X, we want to be able to talk to a representative of supplier X here in the UK.
So the challenge is how do you get the best deal through a global contract, but manage locally to enable agility and open communication and transparency by dealing with your local supplier.
CG: Last question for today, what is one example of catalytic or unconventional thinking you or your team have been involved in which has resulted in a transformational change for ING?
FB: I'm not sure whether strictly unconventional or new, but it was around the concept of zero based budgeting. Within the financial services sector, you generally have your budget from last year, your actual spend, then you forecast for the next 12 to 18 months and say okay, how much will I need to spend on basic increases (inflation etc.) and what additional will I need to achieve the targets and you come up with a cost budget for next year.
We take the traditional approach, which I believe is being picked up more and more these days, of starting completely from scratch and mapping out exactly what we really need this year to achieve our objectives. This process is more prevalent in small businesses who need to strategically allocate strict resources but actually holds a very interesting proposition for big businesses (and can be transformative) – looking to reduce waste, challenge legacies and really uncover why, how and where revenues are being spent.
CG: Thank you for your time Feike.