The changing dynamics of procurement in financial services
A unique spend profile
In a manufacturing environment, ‘direct spend’ is easy to define; the goods and purchases directly incorporated into a product being manufactured or sold.
Direct spend typically has a much greater procurement focus than indirect spend; it includes the spend with key strategic suppliers and high volume spend; critical to production and integrated into core process. It usually forms around 80% of all spend and is subsequently the priority area when it comes to procurement. ‘Indirect spend’ (usually the remaining 20% of expenditure) covers the areas that make’s the organisation’s activities possible - typically business overheads such as IT, utilities, fleet and office suppliers. Whilst dedicated procurement teams often have a remit to manage indirect spend, it’s usually less of a priority as it forms a smaller proportion of the overall picture.
In a Financial Services company, all spend is considered ‘indirect’.
The breakdown below shows the typical spend profile of a Financial Services organisation. Spend can be segmented into four category groups; IT & Telecoms, Admin & Services, FM & Buildings and Marketing & Advertising.
The growing impact of procurement in financial services
Procurement can have a very significant impact in the Financial Services sector, not just in terms of profitability, but in terms of efficiency and assurance as well.
Senior Director Procura Consulting, Brendan McVeigh comments:
"Where procurement is undeveloped, there is almost always an opportunity to take out costs through the introduction of strategic sourcing. We see organisations delivering 10% - 20% in savings from categories that have not been professionally sourced."
In Financial Services organisations where procurement is more established, there are significant opportunities in extending the influence of procurement into the non-traditional spend areas (IT services and marketing services for example) whilst at the same time, taking a supply base management approach.
Initiatives such as supplier rationalisation (focusing on ‘tail spend’ in particular), supplier performance review, lean (and digital) supply chain, supply chain integration, brand development and innovation will drive value enhancement and efficiency.
A world of ever increasing regulation
Whatever the level of procurement maturity, regulation is creating an increasingly challenging procurement environment. Following the controversies of 2008, the FSA SYSC 8, SYSC 3, CONC, GDPR and even OFCOM all require a high focus on compliance.
From this perspective it could be argued that suppliers who have customer contact (call centres, payment processing, the use of customer surveys for example) and suppliers managing customer information (transaction processing, BPO, etc) right through to suppliers interfacing with potential customers (advertising and marketing) are the new ‘direct spend’ category.
Regulation is driving these suppliers to be managed in a different way to suppliers in the non-customer focused categories.
Two points follow from this;
- The requirement to manage customer focused suppliers differently. Increasingly, they should be selected through a structured and rigorous strategic sourcing process taking into account all business requirements – assurance, quality, service, cost, innovation and (importantly) regulation.
- In a regulated environment, supplier management is critical. Supplier compliance activity is demanding and intensive. Creating separate functions within procurement that own this process is a growing area of consideration.
Points to consider
- Procurement can have a significant profit impact to Financial Services companies
- After Strategic Sourcing, consider Supply Base Management initiatives to drive value
- Customer focus categories – either customer contact or customer data – should be considered as “direct” spend categories for Financial Services companies and managed accordingly
- Consider separating supplier management from sourcing and contract management to ensure compliance has the necessary focus.