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Banking Procurement: It's Time To Think About Value


18-Feb-15 09:30
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I recently wrote on the importance of technological expertise to financial services procurement, both now and in the future, but there’s another big question that needs addressing: what about expertise among the supply base?

With technology picking up the slack left by an ever-shrinking branch footprint, demand for third-party banking applications as a way of cutting cost and stripping complexity is expected to grow. It’s procurement’s place to consider how these service providers are contributing to organisational value, beyond fiscal metrics.

 

A recent paper by Deloitte raises some interesting points about IT outsourcing and its benefits for financial institutions, suggesting that this really is the only way to go for banks looking to remain successful amid heightened competition and a growing compliance burden.

 

The woes experienced at Royal Bank of Scotland (RBS) back in 2012, however, continue to highlight well the issues associated with outsourced IT and operational control over system management. You only have to look so far as a bank’s twitter feed to understand the level of frustration induced by service outages, for example.

 

Using data from trade publication The Banker, the study finds that those banks running on out-of-the-box third-party applications enjoyed much improved profitability metrics over five years, relative to those who continue to use legacy systems (specifically, 28% higher return on capital, 19% higher return and assets, and a 6% lower cost-to-income ratio).

 

Compelling stuff. But what does the data really say about value delivered as a result of outsourcing? It’s tempting to think of these results as good enough, as a job well done. But, thought-provoking studies such as these always raise more questions than they provide answers (which isn’t a bad thing).

 

I would argue it’s more compelling to ask how we think about value, and whether these measures are effective enough given the state of modern banking. Profitability is one thing, and I’m not going to suggest the sector is a social enterprise, but there is now an unrelenting pressure to put customers first, and procurement has to consider how it is helping to achieve these goals.

 

You don’t have to look far; post-crisis marketing now posits institutions as friendly, helpful and “there” for their customers. So it’s fair to say that the management of services entrusted to third-parties has to reflect this - the customer experience now has to guide how the community thinks about delivering benefits to the wider business.

 

The importance of digital experiences to customer interactions will only intensify in the future, and this means making a thorough assessment of the supply base, in terms of product-centric skills, expertise and capabilities. It may mean looking outside of the traditional supply base, to vendors with a broader portfolio of skills such as user experience (UX), or dedicated software performance management. The key is to ask how relationships with suppliers will contribute to setting the organisation apart in the eyes of its customers.


This article is a piece of independent writing by a member of Procurement Leaders’ content team.


Harry John Harry John is category research manager at Procurement Leaders, specialising in financial services procurement. He draws upon a background in academic research and analysis, and experience in cross-industry indirect category research. Follow Harry on Twitter @aharryjohn

 
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