Procurement Comes of Age in Financial Services and Insurance
A recent article in the Wall Street Journal points to the increasing pressure being felt by financial services, as well as insurance companies.
The article goes on to point out that the biggest Wall Street banks have slashed tens of thousands of jobs and pruned all manner of expenses since the financial crisis. But expanding pay packages and the rising cost of complying with government regulations have neutralized those efforts. Put simply, banks can’t continue to slash employees, because they need these people to work in order to comply with all of the expanding set of onerous government regulations. With revenue pinched by a slowdown in trading and tepid loan demand, profits are coming under pressure this year. The WSJ story points that in the first quarter, revenue at the six largest banks declined 3.2% to $104.86 billion. Profits declined 9.5% to $18.67 billion.
The squeeze is leading banks to look for new ways to save. And that is where procurement is suddenly playing a role – because nowhere is there more of a need to find savings than in the area of indirect spending in banks. This includes elements like temporary services, software, data providers, real estate, and many, many other categories of spending that banks and insurance companies spend money on to provide services. The article cites the example of Morgan Stanley, which a few years ago announced plans to more-closely monitor costs such as BlackBerry usage through an auction platform. The sourcing process typically results in an additional 5% cost reduction on goods and services including business cards and printer cartridges, according to a spokesman.
For categories that cross multiple business units in banks and insurance companies, the effort to build a consensus among different groups is more challenging, but the opportunity is often greater. This begins by understanding the individual within the business responsible for developing the strategy, and understanding how each point of view on requirements differs across the lines of business. Finding opportunities for consolidation of supplier spend will vary, and in some cases, will be very difficult to do through a conference call with 10 people! Still, low-hanging fruit can be discovered through these conversations that provide a very easy solution, leading to a starting point for taking on the tougher categories of spend.
In some cases, external hires may be required with prior experience and capabilities in the category of focus. For example, a large insurance company recognized that they needed category specialists to understand the current state and provide advice to lines of business on sourcing options:
“We had to hire an IT specialist to work with the IT group to assist in building their IT category strategy. Travel was a similar story: We didn’t have a focus around travel and recognized that to develop great travel deals we needed in-depth skills, and hired an individual who is now going out assessing process, tools, and skills on this team to ensure we can make the leap to build a comprehensive travel category strategy. The procurement solutions team works optimally when we have those with good procurement experience and good functional experience. So for our marketing category, we hired advertising agency people and taught them procurement. That has its challenges, but the benefit we got from that ability to build a TRUSTED ADVISOR function was invaluable. We are doing passive recruiting for more marketing people on our team because we feel we have solid procurement experience but need the marketing experience.”
Financial service companies are also moving to establish a “service relationship owner” to manage risks from an operational perspective. This approach recognizes that a center-led approach is not able to manage all the risk with outsourced relationships. These positions are designated to act as an intermediary between those who manage commercial contracts and risk. Companies have also sought to employ third parties to conduct some level of risk monitoring of credit scores, turnover of executives, and other dimensions that can provide updates to supplier profiles.
Developing an understanding of key supplier characteristics, buying channels, spend analysis, and capabilities is fundamental to building relationships and establishing criteria for segmentation of the supply base. It also serves as the basis for establishing communication with suppliers and establishing procurement’s position as the driver of relationships. An important change here is designating individual category owners who become the coordinator for spend decisions when it crosses multiple lines of business, or indeed within a single business.
