Although the economic environment is more benign than at this time last year and there are signs of recovery, banks and financial services firms are still facing uncertainty. Slow economic growth coupled with new banking regulations on the horizon — such as Basel III, which will require banks and financial services firms to hold more capital and low-yielding liquidity — could translate into unprofitable business lines and higher costs for bank customers. Predictions of negligible business expansion and low levels of demand have also created global uneasiness. Consequently, many executives are looking across their organizations for ways to deliver crucial savings opportunities, such as the adoption of procurement technology.
According to Supply Management, a 5-percent reduction in indirect spend can translate to a 1 to 3 percent impact on the bottom line. As such, the global economic scenario is forcing businesses to reduce costs on a sustained basis and improve compliance with corporate purchasing policies. With most processes already optimized, procurement is one of the few areas in an organization that still provides ample opportunities to reduce costs and improve bottom-line profits.
So where does an institution start in an effort to streamline its indirect procurement? Here are three critical steps to consider.
Step 1: Classify Spend Data
Before proceeding with analyzing spend data, it is critical for banks and financial service organizations to have a clean, accurate and unduplicated source of data. Data management is an important process and one that often presents numerous challenges. These challenges typically include too much data, lack of standardized data and/or lack of quality data.
Step 2: Collect and Analyze Data
Even though financial service firms understand the value of spend data analysis, it’s surprising to see how many institutions still rely on manual processes or rudimentary excel sheets to tackle their data. What institutions need is a single taxonomy structure to classify all of their spend data. A spend analysis solution automates the process of collating geographically disperse data and assigning a single taxonomy to it across the organization.
One of the most used taxonomy standards is the United Nations Standard Products and Services Code (UNSPSC), which covers products and services for use in e-commerce. Another popular taxonomy is the homegrown variety. Regardless of which option it chooses, an organization will need to come to terms and agree upon a single acceptable taxonomy that can be implemented across the entire enterprise.
The data classification should be granular and then combined with an analytics tool that not only reads the data and gives a full picture of your spend but also provides what-if analysis and suggestions on areas where savings opportunities can be mined. If done efficiently, spend analysis provides organizations with item-level visibility that can help them create a spend portfolio that identifies how much is spent, in what category and with which suppliers; identify savings opportunities; and devise future sourcing strategies.
Step 3: Execute On the Identified Opportunities
Once you’ve analyzed your spend and identified the categories to target for cost savings, the next step is to prioritize those opportunities and conduct sourcing initiatives for each. When launching a new process, it is recommended that institutions start their sourcing issues with a category where achieving success is easier and has little risk. Simple categories like office suppliers where several competent suppliers compete against each other with fervor may be the first place to look for easy savings.
Once a procurement department gets through the easy categories and identifies areas for savings, they can then expand their efforts and look for other opportunities to use sourcing to save money, including new categories that have been traditionally managed outside of procurement. These areas include health benefits, advertising and travel.