What Neil Sedaka teaches us about commercial separation
The following article was written by James Cunningham, Principal at Efficio, and first appeared on Supply Management.
Neil Sedaka should have been a procurement consultant.
Since the global financial crisis hit the top of the charts of “things we are most worried about” in 2008, the pressure on financial institutions to scale down their operations has been inescapable.
Subsidiaries have been jettisoned, nationalized banks ring fenced and legions of city workers have been gently persuaded they might want to find something else more wholesome to do.
But how to actually make it all happen? The secret to many a successful break-up (as Sedaka helpfully points out) is “starting anew” which in practice means a top to bottom procurement-led transformation.
This is because financial institutions are heavily dependent on their supply chain to support the delivery of day-to-day services to customers. Some of these activities are more visible such as cash handling and point of sale marketing while others are less visible, such as IT and technology to support the bank.
The secret to many a successful break-up is “starting anew” which in practice means a top to bottom procurement-led transformation.
Manage supply chain to manage risk
The bank can face a significant risk to its day-to-day operations if the supply chain is not proactively managed. This risk is significantly increased during a commercial separation as the supply chain will need to agree to new terms and conditions required by the bank. In some instances the disposing bank may even be required to buy back services from the recently sold business unit and these will need to be formally contracted. Put another way, in this divorce you may be waving goodbye to the partner who has the car keys and pays the bills, so how do you get to work and keep the lights on?
Need for cooperation
Like all divorces, the process of separation is complex and significant focus is required by a number of different teams working together. That means finance teams, IT, treasury, and procurement sitting across the table from each other during a particularly strained period. These teams are often under additional pressure from external stakeholders, to either manage the separation while continuing business as usual or facilitating a commercial sale at the same time as maximizing the bank's return. No mean feat.
Besides the contractual risk there is often a requirement to separate the infrastructure as well (e.g. IT and real estate), which can be a highly complex and time consuming activity, which poses substantial risks to the entire operation if mishandled.
The role of procurement
The role of procurement is to manage these risks from early on during the strategic discussions around separation: The potential acquirer needs the confidence the existing supply chain and related third party contracts ensure continuation of services to the sold entity, at least in the short to medium term while the businesses split.
Procurement’s role is to collect the “as-is” contractual information, engage with Legal and other business functions to determine a contractual design following separation which will ensure service continuity, and lead often complex negotiations with suppliers to enable the future contractual landscape and service provision.
This starts with identifying and documenting all the contracts that are impacted by the separation. This step is more difficult than it sounds, as purchasing’s contract database is frequently out of date or is missing information. Many contracts have expired and no extensions have been put in place, hard copies are often hidden in the buyer’s filing cabinet and in some instances the contract is not held by procurement at all but by the end user in the business.
With markets rocky and the broader outlook uncertain, having a clear plan to sort out contract separation issues efficiently and effectively is increasingly important. Only then can business continuity and stability be assured, at a time when both are so vital in the financial services industry.