Financial services CFOs face several challenges in their 2022 budgets related to cost reduction targets– from cost pressures due to rising inflation, to funding new demands from COVID, to funding long overdue business transformations. Procurement optimization programs, when done right, can help alleviate the cost challenges and free up capital to fund business transformations.
With our extensive experience in delivering transformations in Financial services, we continue to find that CFOs struggle with ways to hit cost reduction targets without impacting the operations of the organization.
Year 2022 will add to those challenges with:
- Rising prices: as of this writing, inflation is rising in US and directly impacting spending and budgets for all goods and services being purchased for business operations.
- Pandemic-affected past spend trends: pandemic-specific business changes and spending make it more difficult to use last year’s budgets and go through puts-and-takes for adjustment.
- Rising urgency to fund business transformations: The Financial services industry is prone to disruption, according to AlixPartners’ disruption index. Organizations need transformation investment more urgently– an—urgency driven by the pandemic itself (investing in cloud technology, for example) or from regulators (security and resiliency improvements, for example).
What kinds of business transformations are key for Financial services?
As CFOs focus on increasing company financial health through sustainable cost reduction, investment management, and improved efficiency, business transformation funding requirements put pressure on budgets. Many transformations, beyond being a matter of good business practice, may show up as compliance issues in regulatory audits.
For example, technology is one of the biggest external-spend areas for a Financial services organization. These organizations in the US are often saddled with legacy technologies. This can be due to incomplete post-acquisition system integration, past budget cuts, or simply insufficient focus on technology updates. The implications are the same:
- Higher risk of production system failure, and inadequate disaster recovery systems available for failover.
- Higher technology costs, with servers and software running on special, extended vendor support. Frequently outdated warranties often contribute further to increased technology costs. Applications built on top of legacy systems also require expensive, hard-to-find specialty engineers and developers.
- Inability to leverage analytics technology to drive better business decisions due to disparate data-keeping systems and poor data quality.
- Inability to drive next-level productivity and innovation due to excessive time spent firefighting critical issues.
Improved business system resiliency, wasteful spending reduction, improved applications development, and reduced cyber risk all depend on a technology transformation. Transformation also improves customer service, customer acquisition, and customer retention.
Operations also require technology transformation to drive more work through automation, streamline processes, and adapt to changing business models.
These transformations require millions of scarce investment dollars.
How can procurement help business transformations?
In our experience, a procurement transformation program can save 8%-15% of addressable external spend.
A clear synergy exists between procurement-based external spend optimization and accelerating business transformation—something that Financial services organizations often do not often capitalize on. In fact, most Financial services organizations lag other sectors in procurement function robustness and external spend management. This is because Financial services procurement teams are often support functions rather than strategic partners.
An effective procurement function should play a much broader role than simply negotiating the best rates and finalizing contracts. Organizations with mature procurement functions find that the procurement team can drive the following:
- Improve project outcomes by ensuring that products and services from suppliers meet quality expectations.
- Set up the right ecosystem of external partners to bring in innovations and solutions with effective supplier management.
- Bring transparency to enterprise-wide demand for goods and services to be purchased in order to drive better decisions.
- Set up vendor segmentation and strategic vendor programs to sustainably secure best rates for the organization and reduce tail spend sprawl.
- Set up and enforce policies that streamline processes and provide a common place to drive compliance.
Effectively driving business transformations requires all those elements, and more. For example, in a technology modernization program, an organization looking to move to cloud will typically rely on external suppliers to inject the right expertise over multiple years. The procurement team can start by engaging multiple partners to deeply test the market, find the right market rates for the talent levels, test the innovations that suppliers have to offer, check supplier references for other large cloud transformations, ensure the contractual protection of the organization, demand the right quality resources, and keep the feedback loop open to help the supplier improve.
These activities succeed best within the procurement team and outside the technology function. Technology teams typically lack the training and bandwidth for procurement activities like conducting thorough supply market analysis, category strategizing, and negotiation. However, success depends upon a clearly defined operating model to promote collaboration between technology and procurement teams.
How can organizations setup a procurement transformation program?
As with any transformation project, organizations must first get an understanding of the value at stake and set up the program goals. This means extracting the most savings without compromising quality, and building procurement team capabilities along the way.
A procurement transformation is best executed when it is set up to review volumes, service levels, and specifications in addition to pricing and discounts. This requires the procurement team to review the demand decisions with business stakeholders and discuss alternatives, which allows the teams to collectively create a supplier strategy before engaging the supplier.
Another key program element is to set up a clear and transparent value measurement process. As value gets extracted, it can then quickly be translated into budgets. This requires distinguishing hard savings from value.
Finally, the leadership team should set the right tone and empower teams to have bold aspirations. For example, leadership should challenge the status quo, have open discussions about demand optimization, focus on fast decision making, and remove any barriers to progress.
How can organizations get started?
For many organizations, budgeting for 2022 has started. CFOs are seeing pressure on expenses. Organizations should consider embarking on a rapid opportunity assessment through an analysis of external spend, and should review product specifications, pricing, policies, and asset utilization. The leadership team should then craft the transformation program with a clear focus on extracting the maximum value which can be re-invested into business transformations.