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Buying stuff; but better – procurement in financial services markets

In this edition, BPO Backchat talks about procurement in the financial markets with Peter Smith of Spend Matters.

Over the last few years, we’ve seen a difference between procurement in retail banking and investment banking. In the latter, procurement organisations have found it difficult to gain traction, attention and impact. If you’ve got people making millions of euros / dollars / pounds / yen for their companies, it’s extremely difficult for procurement to say, “You can’t buy that software; you can’t travel on that airline; we’re going to put this control in; we’ve got a preferred supplier for that.” The bankers will inevitably retort with, “I’ve made ten million dollars for the bank this week, what have you done?”

If you look at the retail banking industry, however, from the early 1990s it started to become almost like manufacturing: process-driven and focused on cost-income ratios and efficiencies. Procurement has therefore had a long time to respond to these focuses and in most of the big retail banks it is a long-established function. Retail banks are still not quite comparable with true manufacturing organisations like those in the automotive industry, but procurement has a role (although it still has further to go). Investment banking has been more of a struggle.

Insurance on the non-life side is more like the retail banking market. In the late nineties we saw the likes of Royal Sun Alliance and Legal & General starting to take procurement seriously, realising that procurement disciplines were effective and brought value. In the last few years there have been several things that have made it easier for procurement to gain traction. In difficult times when banks and insurers are struggling or when (as now) the economy is in a downturn, the focus tends to be on savings and efficiencies. The problem in investment banking is that it is so cyclical. You can get one year where the shout goes up, “We need to save money,” and suddenly procurement teams start to recruit and controls are put in place. The next year profits go up and the response is, “Well, forget all that,” and procurement staff either get kicked out or at least have no control. Generally procurement controls are on an upward trend but there are ups and downs in that trend.

The other thing that has had an effect on the whole sector is the swathe of regulations. Back in 1999 or 2000 one of the first big sets of EU banking regulations required banks to be much more structured and provide information to the regulators about their large outsourcing contracts, which were seen – for the first time – as being critical to the banks’ stability. The recent regulatory changes, both extant and planned, have done nothing but push that trend further. Organisations need to show that they have aligned controls and contracts in place with key suppliers, particularly where they’re handling money or crunching data. It’s not always the procurement function that has taken advantage of this situation; some financial institutions haven’t seen their procurement functions as being strong enough, so business management or IT management has taken hold of the relationships. Procurement may handle the technical contractual issues or help in the retendering but the strategic management of vendor relationships still generally sits outside the procurement function.

Procurement in retail banks has tried to bridge that gap by setting up teams outside of the core function; for instance Barclays has set up their smart-sourcing team. As acceptance has grown that these contracts are not just of the type of procurement that sits alongside stationery, this has been populated by senior folks; a lot of them with business experience, rather than “just” procurement people.

The other thing that is beginning to emerge, driven by the Bribery Act, is the feeling that banks and insurers need a better audit trail to show why buying decisions have been made. This is going to become increasingly imperative over the next few years.

What of the interface between procurement, HR and legal within large corporates? The governance structure is becoming ever more important; both externally – to governments and regulators – and internally. This raises the question of whether there is going to be an increased closeness between legal and procurement in the short to medium term. There is often competition between procurement managers who say, “I don’t need legal as I know sufficient contract law to write a decent contract.” Legal in these circumstances will only be brought in if there is something particularly difficult, novel or contentious. As a result, there is often a power struggle between the two. But generally, financial services are getting increasingly tied up by regulation at national, international and global levels and the only response is to think that procurement and legal will and should usefully get closer.

There is also an interesting link with HR and the whole boundary between what is employment and what is a procurement item. This has become increasingly blurred over the last few years in terms of procuring professional services, where there is the option of taking people on as consultants, buying a service, taking on individuals working through service companies or engaging contractors on long-term contracts. It can be difficult to know whether such items should be handled by HR (because they are fundamentally people), or by procurement because you may be buying that resource as a service (with payment to a company) – and where all this sits with IR35 and tax regulations. The feeling is it’s becoming a higher profile issue everywhere, which would suggest that HR and procurement need to collectively work together.

It would seem there is still a black hole within financial services whereby procurement is failing to play a role in internal and external cross charging between services, such as payment to the cheque clearing network, cash handling and inter-bank payments (all retail banking services). Moving beyond retail banking, the black hole encompasses services such as commissions to sales agents, broker fees and dealing fees, and questions such as who in a big life insurance firm is making the decisions about how to allocate the fund, who are the fund managers, what payments are to be made to them, how are they going to be incentivised and which brokers and pension advisors are going to be used? There are billions of pounds in these transactions, as retail customers are looking at fees for investment trusts. There doesn’t appear to be much sign of a dynamic, competitive market. 

In a business to business environment, how often do firms actually run a proper procurement competition to decide which investment bank is going to advise on a merger or competition for fund managers? Ultimately you are choosing someone to supply services, paying them money and incentivising them to perform better; however, it is rare for those things to go anywhere near procurement now.

In large, complex deals, the day-to-day management should sit with the relevant business unit or senior manager. In a large organisation, you cannot centralise the management of outsourcing delivery contracts in procurement or anywhere else. The role of procurement is to put overall processes in place for governance over how things are reviewed, and what happens towards the end of the contract renewal process. Procurement should be the guardian of the contract in terms of any significant changes or renegotiations. Procurement shouldn’t necessarily set the performance metrics and do the measurement, but should oversee and act as a centre of expertise to the business. It should also provide ideas, support and lessons learnt from other outsourcing deals, supply good ideas in terms of SLAs and KPIs and provide the basis of a standard measurement system. In addition, procurement should be actively involved in strategic supplier relationship management, taking a helicopter view, providing best practice common processes and common governance and be particularly involved in looking after senior relationships.

Procurement technology is becoming more of a differentiator, as it’s hard sometimes to say which banks or insurance companies are the best at procurement. But what we are seeing currently in other sectors is genuine differentiation in performance based on how well they use emerging procurement technology. Banks do not appear to be at the forefront of capitalising on this but perhaps in next two or three years that could change.

Large outsourcing and strategic relationships are only going to get more important for financial services organisations as people recognise specialisms. Therefore, the procurement functions that do well will be ones that continue doing a good job on the “bread and butter”: driving efficiencies on all the day-to-day matters and putting the right controls in place. And also by demonstrating the real value procurement can add to big strategic outsourcing contracts without taking over from the business unit.

It may have changed a lot but one obvious problem was the power that so many senior managers held within their organisations. Procurement had to work really hard to persuade and get buy-in to corporate decisions and work in a collaborative manner. For instance, any category where you really had to manage the policy and demand, such as professional services, was extremely difficult due to the inherent powerbases which existed in the business units.

In the insurance sector, procurement has been getting involved in matters on the claims side. There’s been a huge increase in the amount of spend for customers to buy stuff – probably ten times what is spent on internal business. Actually procurement becoming involved in contract negotiations is a major development within the sector today.

So where does that leave us? Probably with a B+ for effort. Procurement in financial markets has some way to go before it becomes as effective as it is within other industry sectors – principally in manufacturing. Nevertheless, the procurement market, its interface into the outsourcing vendors and the impetus provided by increased regulation will inevitably lead to closer working relationships with the core banking and insurance business units, which can only be a good thing.

“Buying stuff; but better” is a good mantra to have when financial institutions strive for increased profits and enhanced shareholder value – particularly if the tax-payer owns a chunk of the asset…

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Guy Kirkwood was talking to Peter Smith who has 25 years’ experience in procurement and supply chain as a manager, procurement director, consultant, analyst and writer. He edits Spend Matters UK / Europe, and with Jason Busch, the founder of Spend Matters in the US, has developed it into a leading web-based resource for procurement and industry professionals. Peter worked as Procurement Director for the NatWest Group, the Department of Social Security (the DSS), and the Dun & Bradstreet Corporation, and held senior positions in the Mars Group during his management career. He has an MA in Mathematics from Cambridge University, is a Fellow and was 2003 President of the Chartered Institute of Purchasing and Supply, and his first (co-authored) book, Buying Professional Services, was published by the Economist Books in June 2010.

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BPO Backchat has had several incarnations but only one writer: Guy Kirkwood, whose day job is head of channel at Xchanging.

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