Procurement for Banking: Adjusting to the New Norm

After a period of immense volatility, the banking sector appears to be reaching some level of normalcy. The financial crisis of 2008 was the trigger for drastic changes in the way the industry manages spend. As revenue streams froze and the spending behaviors of banks become front-page news, procurement was invariably thrust into the spotlight as a means of preserving the reputation and profitability of these organizations. Procurement teams operating in the banking environment face a challenging landscape when it comes to controlling spend. A great deal of change is needed, both structurally and culturally before banks can truly take control of their spend. However, procurement technology, if used effectively, can be a vital catalyst for these required changes.

What are they buying? Banks are essentially service organizations. The vast majority of their spend passes the professional service category (roughly 40%) in the form of management consultants and other temporary workers. Information technology and facilities management make up the next largest spend categories accounting for roughly 20% of total spend each. Spend on services is traditionally more difficult to analyze, understand and control than spend on goods, and this presents a challenge for a service heavy industry like banking. However, by leveraging procurement technologies, leading banks are addressing these areas with great success.

Buying better. By developing more detailed, automated rate cards, buyers can get a granular understanding of exactly what they are buying and what level of service they can expect from the purchase. This goes a long way to managing the traditionally ‘flexible’ billing patterns of some service organizations. Supplier relationship management (SRM) technology can also be utilized to provide buyers with insight into what is happening within their supplier base. These tools can also be used to facilitate collaboration with service providers. The rapid growth and prosperity of banks prior to the financial crash led to a business environment where many internal processes were disregarded in order to move more quickly and make more money. Revenues were flowing in quickly so banks had little incentive to closely check that procedures were being followed. Amongst many other issues, this led to a significant amount of slipping between agreed contract rates and what banks were actually being charged for the services they bought. With a new focus on costs, contract management is enabling procurement teams to better tackle slippage in agreed contract rates.

The importance of transparency. Since the crisis, the banking industry has come under more intense public scrutiny. Media outlets have developed an intense interest in the corporate spending behaviors of banks. As result of this, the importance of transparency, tracking and compliance in an organization’s procurement processes have never been more important. The industry has also been responding to increased regulatory pressures from governments and regulatory bodies. Across the world, banks have been pressured to improve the way they manage and govern risk. Many banks are now taking direct action to integrate risk management, compliance and purchasing ethics more closely into their organizational culture. Again, the most effective way to ensure compliance in purchasing activities is to leverage procurement systems that support this process. By implementing end-to-end procurement technology solutions, banks can limit the approval levels of purchase managers, ensuring that spend commitments closely match their procurement policy. A fully integrated procurement system is a prerequisite to any bank looking to adequately manage its compliance requirements. These systems handle all compliance and audit issues from managing approvals all the way through to reporting and spend tracking. While the global economy may be showing signs of recovery, it’s clear that banks will not simply be able to ride this surge in the economy. Based on the previous excesses present in the industry and the sectors calamitous fall, the rules of game have changed for good. The big question is whether or not banks can adapt to this new environment.