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The Squeeze Is On: Belt Tightening As An Opportunity


16-Mar-16 12:09
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“’We need to stop the focus on percentage savings alone, and change the conversation to driving value’ - nearly every CPO on the planet, 2014-2015.” This neat little piece of satire came courtesy of Joanna Martinez of Supply Chain Advisors LLC, who was speaking on value-driven procurement at Procurement Leaders’ Americas Congress 2016. The faux-quote made me chuckle. It also made me think: right now, when cost-cutting in banking is so rife, how good are the prospects of procurement reaching new levels of maturity?

 

Back to basics

Major efforts to trim the balance sheets might be seen to risk procurement’s engagement by the business as only a two-dimensional force, employed to contribute little more than cost savings: bad news for ambitious CPOs.

 

Naturally, examples of the kind of forward thinking, partner-to-the-business transformations we all talk so passionately about do exist, and that’s promising. For others, though, it’s not hard to imagine that the margin squeeze is forcing rather a different focus; RBS, for instance, has accumulated losses of £50bn since the financial crisis. In its move to scale back its investment business and simplify, the Edinburgh-based bank this week announced further cutbacks to add to its so-far four-week long efforts which have seen almost 1,600 jobs lost.

The latest cuts mainly affect back-office support and technology staff – roles which will be off-shored to India, however reduced over time as the investment shrinks further – and financial advisors, whose place has been taken by (it turns out, a not so robotic) ‘robo-advice’ service.

 

It’s not just RBS, though. Despite various initiatives, among the top-ten US and European banks, operating costs actually rose last year, by nearly 3% according to the FT.

 

Investment banks have taken the biggest hit, especially in Europe, and RBS’ shrinkage activities attest to that. Liquidity remains low, regulatory costs high and interest rates continue to drag somewhere in the region of the floor. As a result, investment banking revenues are set to fall further, by 10% in 2016, with the squeeze gripping Europe the most, with revenues set to shrink by 10% in the region compared to 5% in the US, according to a study released this week by Morgan Stanley and Oliver Wyman.

 

Expanding reach

The reaction to this? The drive towards greater efficiency is only going to deepen in the short to medium term, and Procurement Leaders expects buyers will have to contend with wrapping their arms around more external spend (as we have already begun to see) as a result, as process and technology in the back and middle offices become big outsourcing targets: good news for ambitious CPOs.

 

Procurement has historically struggled to gain traction in financial institutions, with various factors restricting buyers’ influence to relatively few areas of spend. As they re-emerge from the era of regulatory change, however, financial institutions are being forced to rethink their business models, which means unsustainable levels of inefficiency are set to bring about significant change – the same forces that saw (for instance) contact centres fall under the remit of sourcing and procurement are combining to transform the way management is considering other, previously off-limits and now undifferentiated areas of the banking value chain.

 

The prospects for change are greatest in respect of infrastructure costs, which, the authors of the Morgan Stanley-Oliver Wyman report assert, represents a $15bn savings opportunity. The scale of this opportunity suggests few organisations have made much progress to date, and that improved performance relies heavily on transforming this cost base. The front-office headcount can only be cut so far, and while many back and middle office processes have long been unattainable, thanks in part to cultures of internal control, opportunities to automate and remove inter-organisational duplication of efforts are beginning to be seized.

 

Burgeoning demand for external supply chains in areas like Know Your Customer (KYC) and trade processing is there to see, and the recent successes of market infrastructure suppliers like SWIFT, Markit and Broadbridge in these areas will continue to grow as a result. Interviews I have had recently reveal that some firms are waking up to the benefits of a more influential team of professional buyers, associating the need to automate, simplify and streamline with procurement expertise.

Managers will have to make sure their teams strike the right balance of skillsets: technical abilities in the areas of negotiation, competitive bidding and selection make the function the obvious choice to take ownership of some of these new outsourcing targets, however ‘softer’ skills will also be required to manage the transfer of ownership from (potentially) unhappy stakeholders.

 

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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