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Crisis accelerates Financial Services Procurement transformation

Crisis accelerates Financial Services Procurement transformation

While the COVID crisis is unpredictable and fluid, a true Black Swan, the cumulative, impact on Financial Services will remain unknown for many months.

From a cash flow perspective, for small retail banks it could mean bankruptcy, or a rapid transformation opportunity. Mortgage lenders will be struggling as payment holidays hit, investment and asset management firms may experience contraction, even insurers will be hit by greater occurrence of claims and lower investment returns. Remote working infrastructure will be expanded and business continuity plans and services will be tightened.

Succeeding in the rebound cannot mean merely returning to business-as-usual. Success will depend on agility, willingness to change, and prioritisation of deep impact transformation opportunities.

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As Afonso Nascimento, BCG Managing Director and Partner, puts it,”COVID has made it abundantly clear that banks can no longer lag behind in the digitalisation race for business critical and back office purposes. Procurement must support this while, particularly now, ensuring cost transparency and more importantly access to and resilience of supply chain partners.”

Procurement in times of COVID

Procurement has a material role to play. In our recent Rapid COVID procurement survey, companies across sectors share their insights on the size of the impact as well as the challenges ahead:

  • 70% of respondents expect revenues to drop by 10%, 30% by more than 20%, compared to last year, putting additional pressure on cost to income ratios
  • 86% of respondents already report supplier bottlenecks and realise supply will have to be secured while cost has to be driven out rapidly
  • Most participants have taken no steps to re-assess supply and information security risks beyond the top strategic suppliers
  • Non-producing firms found their continuous, non-critical spend opaque and un-managed and are looking to rapidly reduce non-critical demand
  • 70% of respondents have identified cash targets and strategies via war rooms. Few have implemented cost-out or demand management solutions at scale yet, due to focus on short-term business continuity management needs

When it comes to launching or accelerating current efficiency programmes, banks, asset managers and insurers have realised that action is necessary to improve the bottom line, optimise cash flow through the supply chain (especially with SMEs) and protect their teams and customers from COVID related risks.

Procurement must engage with the business in five areas to flatten the impact of COVID and to be ready to capitalise on the future:

1. Commercial ‘boost’ and resilience

Businesses require a short-term commercial ‘boost’ from procurement, rapidly deploying procurement best practices, for example:

  • Delaying and cancelling non-critical events and projects not just for safety, but also cash-flow. HSBC may delay its restructuring plans, instead re-focusing on procurement opportunities
  • Creating contract transparency for payment terms based cash flow improvement. Nationwide target paying micro, small and medium enterprise (SME) suppliers 10 working days from the invoice date
  • Exploring market pricing options as suppliers grapple for recovery business
  • Leading collaborative discussions on long-term deals, for example, to hold terms with professional services suppliers
  • Segmenting critical suppliers to monitor their business continuity in the coming months. Lloyds Banking Group are continuing prompt payments to ensure supplier survival, and scoping critical suppliers

Banks’ revenues have risen slower, or even declined, compared to operating expenses over the last decade.

Counteracting this exacerbated situation while ensuring business continuity in critical suppliers will be a tough balance.

2. Deeper vendor risk management and supply chain resilience

While the financial impact of COVID is being managed with strategic suppliers, further risks in intermediary supply and in IT are being overlooked. Procurement needs to step in and, in the short-term:

  • Re-assess upstream bottle necks, for financial services this may be something as simple as license access rights, or something as critical as auditors
  • Scope IT risks, such as continuity with smaller cloud supplier (non-AWS and Azure)
  • Monitor service levels to identify red flags and appropriate remediation
  • Ensure business continuity plans and exit strategies are appropriate for now and far-reaching Black Swans in the future
  • Complete short and long term scenario planning to balance necessary security transformation and cost-control

3. Re-visit make vs. buy decisions and reinvent business models

COVID has revealed fundamental flaws and risks in the way globalisation has been embedded in our supply chains.

While financial services firms will not source as much raw materials from far lands and GDPR has brought PII (personal-identifiable-information) back to the continent, procurement needs to fundamentally re-assess outsourcing arrangements to match not just total cost of ownership and fit of suppliers, but also the suppliers ecosystem in case of crisis.

4. Accelerate company and procurement digitalisation

For digitalisation in procurement and in financial services, the gap between early adopters and laggards has grown. COVID has hit this home. Companies with modern systems and ways of working will emerge faster and better. Beyond 2020 it will not be an option any longer to stay behind the curve. If not already planned, procurement will lead in 4 key areas:

  • Creating spend transparency, clarity, and uniformity via end-to-end sourcing, contract management, compliance, risk management and spend tools and analytics
  • Agile and collaborative ways of working across the business and supplier ecosystem
  • Digital knowledge to propose leaner modifications and implementation, not just commercial restructuring in IT
  • Mapping digitalisation requirements and maturity for other functions and categories based on market options, see sample below.

5. Vision and vitality

Top performers in times of crisis also have vision and vitality, according to Christoph LayChristoph MeuterLars Fæste and Ramón Baeza.

They stick to a clear purpose and vision. Even as they looked for new sources of growth, top performers pursued the clear purpose that they had before the crisis – and a vision that was based on a small number of long-term themes.

They increase vitality. Defined as the ability to innovate, explore new ideas, and reinvent the corporate strategy in order to achieve sustainable long-term growth.

 

Future state Financial Services procurement

It is clear that companies and procurement will not be the same post COVID. BCG research has shown that whilst many companies struggle to survive in this type of environment, 14% of companies thrive and grow.

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