Is procurement behind the new wave of innovation in banking?
With Procurement fulfilling an increasingly strategic role within financial organizations, we ask three leading experts for their views on the current trends in banking.
The last decade has seen Procurement evolve from a transactional function to a more strategic one – bolstered by the understanding that it is typically responsible for about 30% of a financial services company’s cost base.
The beginning of this period saw Procurement functions embrace a category management based organizational model. Barclays International built a sourcing center in Singapore six years ago: “We were in a very category-centric model,” says Hans Oriol, Global Head of Sourcing for Barclays International.
This reflects banks’ need to have people who are “incredibly knowledgeable of component elements because the management of categories is strategically important”, according to John Goyanes, former Head of Procurement and CTO - EMEA at Deutsche Bank. “There needs to be somebody that understands not only the external aspects of [markets and categories] but the aspects that are internal to the organization,” he adds.
This should not come at the expense of internal stakeholders though.
Barclays relocated its Singapore-based sourcing center to Manchester to bring it closer to home. “We lost touch with our business,” Oriol says. Ultimately, the bank’s previous implementation of a client management team in which senior leaders with an understanding of the operating model acted as an interface between category sourcing managers and business units is what really helped to embed Procurement into the business.
“If you’re going to use strategic sourcing and category management across the world and have an inkling of what’s happening on the ground, you need people who can interpret the business’ needs,” Oriol says.
There is a curve where significant impact is seen over the first three to five years of professional categorization. Category management should be about a holistic view of an area of spend, not just a segmented view of your organization. If you have the right people, who are financially focused, they will have a view for value
The pendulum is swinging back towards a business-centric model for financial services where banks use pooled resources to undertake functional activity with better stakeholder engagement and buy-in, particularly on complex projects that can be delivered faster.
US-based Umpqua Bank, located in Oregon, Washington, California, Nevada and Idaho, has segmented its Procurement function into upstream (category management, strategic sourcing) and downstream (procurement) functional groups, the latter of which takes responsibility for three-way matching, and works with financial groups on purchase-to-pay information. A third-party oversight group on which the SVP of Sourcing and Procurement, and the VP of Sourcing and Risk Analysts sit, acts as a vendor management hub.
“We’ve tried to create internal collaboration and segment it so that each functional group has strong roles, responsibilities and deliverables,” says Tony Bailey, Umpqua Bank’s Senior Vice President, Real Estate, Facilities and Corporate Strategic Procurement Officer.
“Alignment is with business lines not commodities – our level of spend and the variety of projects that we cover in a given year means we don’t have the economies of scale to commoditise.”
Denying either a category management or business focus within the organizational model is a “pretty big mistake – there is no avoiding these two dimensions that you definitely need”, Goyanes says. “A model that allows you to do both – where you have got deep category expertise that is aligned to the named individual associated with the business line – seems to work reasonably well in most instances. A lot of the fundamentals can be defined by what strategic outcomes you are looking for.”
A risk management exercise
Among these fundamentals should be a capability within the organization for effective vendor management.
“Where you choose to sit that capability matters less than actually agreeing that the capability has to exist,” explains Goyanes. “Whoever has control of vendor management should be sitting together with suppliers to talk about strategic and tactical issues, and that should cover everything – commercial appropriateness, service-level attainment and candid discussions about the roadmap for that supplier in that organization.”
If you’re going to use strategic sourcing and category management across the world and have an inkling of what’s happening on the ground, you need people who can interpret the business’ needs
Although vendor management is an integral part of procurement’s role in banks now, it has typically become a risk management exercise as a result of the punitive revenue and regulatory-based damages in consumer banking, Oriol says. “In corporate and investment banking we probably haven’t seen this regimented approach but the landscape is changing because regulators now want to see that investment banks have more control,” he adds.
This control has been reflected in a shift from offshoring to outsourcing to insourcing, ultimately to nurture extended, longer-term and deeper relationships with suppliers. “The attributes of outsourcing are largely about the maturity of a function, the available capabilities that exist in the outside world and the criticality and strategic importance of how those capabilities measure up,” Goyanes says.
Prior to this shift, outsourcing some or all processes had been the norm in financial services, with opportunities in areas such as risk and compliance, know your customer (KYC) processes and basic processing.
“The days of throwing bodies at a problem have gone,” Oriol says. “There are certain things you really should consider outsourcing. But outsourcing anything critical to the success of the organization – such as bills or debts – may not be the right way to go. You would have to have a lot of confidence in your provider and their abilities.”
‘Progress by osmosis’
There are concerns in financial services over the capability of business process outsourcers, particularly in relation to turnover and management. Umpqua Bank is “pretty heavy on the insourcing”, Bailey says. “Where we have done some BPO items, it’s been related to our e-procurement.”
Barclays moved its offshore sourcing center from Singapore to Manchester in the UK and to India. “We’ve elected to build sourcing and procurement capabilities internally,” Oriol says. “There are a number of factors – cost and talent, for example – but we want to grow and retain a lot of the talent in sourcing and procurement.”
Bringing external expertise into an insourcing model can boost the skills and expertise of current Procurement team members, but equally, Goyanes says, “progress by osmosis may not hold”. Oriol agrees: “You need to look at your team rationally and be realistic about what it can do. The most important part is that you incorporate what it brings into the learning of your sourcing and Procurement organization.”
You need to look at your team rationally and be realistic about what it can do. The most important part is that you incorporate what it brings into the learning of your sourcing and Procurement organization
Under-investment in technology
Embedding technology also has an effect on the components of a Procurement organisation. “What are the purposes of the implementation?” says Goyanes. “Are you trying to maintain a culture that you have or are you trying to change it? If you know the answer to that and you know what changes you’d like to make, technology can be a really great addition.”
Under-investment in technology is characteristic of the financial services sector, despite the necessity for visibility of data between often fragmented business lines. Even when banks buy increasingly affordable technology from large enterprise resourcing planning (ERP) providers, there tends to be low take-up, frequently blamed on the technology’s inflexibility and poor purchase-to-pay and back-end processes.
“Often sourcing professionals think that the technology will be the cure to everything and it’s not the case whatsoever,” Oriol says. “I have implemented three ERP systems in my career and none of them have gone smoothly. Most organizations don’t take the time to take a step back, align their processes, procedures, control and finance with technology.”
Sourcing changing, not ‘dead’
This misalignment predictably comes with Procurement organizations that haven’t reached the level of maturity necessary to make the most of technological intervention; often reflected in the approach taken to sourcing and category management.
In recent decades, banks have bundled their suppliers on a global basis, which can work, particularly in categories that lend themselves to a uniform approach, such as IT and network management. “I’m a big fan of global frameworks which allow things to be compared,” Goyanes says.
But suppliers’ inability to honor global deals has often resulted in increasing costs and poor service levels and quality. “Even from a regional perspective we have localised vendor relationships,” says Bailey. “We’ve tried within those smaller, segmented regions to consolidate but we are not just going to have a one-size-fits-all.”
One issue is the ability of financial services Procurement organizations to source effectively. “I don’t think sourcing is dead, but I do think it’s changing,” says Oriol. “It all depends on the maturity of your organization and where you are as a company. If you go through life not looking at the bottomline or expense management, you’ve got a while to go before you get to the maturity level.”
Extending beyond a one-off event
Reaching this maturity level means reaching an understanding that sourcing is a one-off event or transaction, whereas category management extends beyond that event. So it’s logical to make sourcing – and vendor management – part of an overall category management strategy, particularly now that banks are going after ever-complex categories, including legal, professional services and market data.
“There is a curve where significant impact is seen over the first three to five years of professional categorisation,” Bailey says. “Category management should be about a holistic view of an area of spend, not just a segmented view of your organization. If you have the right people, who are financially focused, they will have a view for value.”
Category managers at Umpqua Bank review all spend at six-month intervals in order to track any variances from what has already been negotiated. “I’m glad to say that a year removed from negotiations we are on plan and we have visibility of cost increases,” Bailey adds.
Early stakeholder engagement
These approaches mean mature Procurement organizations in financial services are not waiting for a discussion with their CFOs at year-end about savings made, but instead engaging with Finance and other functions earlier to agree expectations of Procurement, Goyanes says.
“The best solutions don’t happen at year-end, they happen well in advance,” he adds. “They thread through every month and quarter until year-end. So we need to understand where the money is early on. Until we get to a level of maturity around this, we’re going to see a fair bit of disappointment in the CFO and CPO seats.”
The early stakeholder engagement necessary for this relies upon talent and skills within the Procurement function. But the combination of a shortage in the financial services procurement hubs of Hong Kong, London and New York, with a lack of engagement in talent by organizations, demonstrates where improvements are needed.
“The big hubs are becoming exhausted, so we need to start looking outside of these geographies,” Oriol says.
The best solutions don’t happen at year-end, they happen well in advance, They thread through every month and quarter until year-end. So we need to understand where the money is early on. Until we get to a level of maturity around this, we’re going to see a fair bit of disappointment in the CFO and CPO seats
“Places like Charlotte in North Carolina and Tampa in Florida are starting to evolve and pump out some pretty good talent. The high cost of real estate for sourcing and procurement means we’re starting to see financial institutions build hubs in cheaper markets. Longer term, technology as a means for collaboration opens up a new talent pool through telecommuting.”
Umpqua Bank is a case in point – hiring talent in Portland, Oregon and Spokane, Washington, where the range of universities provides a talent pipeline. “We have a lot of decent recruiting areas,” Bailey says.
But Procurement organizations get into their location strategy a lot quicker than they do their people strategy, Goyanes says. “I don’t think the leadership in a lot of organizations embraces the talent they have, connects them into the organization in the right way, creates the strategic context in which they are doing a deal and helps them to understand how this deal threads through to earnings per share. You certainly don’t need hundreds of people, but you need the right few.”
Barclays International has focused on getting the right people by investing in learning and development for entry-level employees, and recruiting not on the basis of financial services experience, but diversity of experience. “You have got to have a mechanism to grow talent and progress people through their Sourcing and Procurement career,” Oriol says. “The unique part of what we do is that we can build experiences in a number of different verticals – financial, risk and control – and we have the opportunity to recruit for supplier management, taking people outside of the profession.”
Evolution of financial services procurement
Financial services procurement has come a long way, successfully establishing itself as a value-added business function. As a next step, it should also look to other sectors – such as manufacturing – and strive to be at that level of effectiveness, says Goyanes. “The industrialization of the financial services sector is an ongoing issue,” he adds. “We are just not going to get the economic outcomes that we want unless we start adopting ideas and models from other industries.”
This is especially true in light of the more sophisticated challenges and discussions that the sector faces now compared with two decades ago. The evolution of financial services procurement from a transactional function to a mature business-aligned organizational model with a mature approach to category management demonstrates how far things have come.