The 3 Rs of Procurement in European BFSI
From the great financial recession in 2008, the global BFSI sector has traversed a difficult yet reassuring journey along its path of recovery. According to a 2019 report by Deloitte, European banks are still struggling with profitability amidst Brexit and various banking regulations.
According to the report, the profits of the top 5 European banks dropped from $60 billion in 2007 to $17.5 billion in 20141.
Various factors added to European banks’ woes, some of them being structural deficiencies, overcapacity, low/negative interest rates, and the absence of a pan-European banking regulatory agency, according to the report1.
So in a scenario as such, what is the future of procurement function in European banking and finance? This article investigates the following three to find out:
- Relationship: Relationship between the procurement function and European BFSI
- Regulations: Regulations by EBA that are guiding procurement in European BFSI
- Reforms: Reforms brought by procurement technology in these challenging times
Relationship between Procurement and BFSI
Financial institutions are one of the highest profit-generating sectors. Their procurement teams play a major role in contributing to the organisation’s revenue and profits. For example, in retail banking setting up the contracts and rates for cheque clearing networks, cash handling, and inter-bank payments are some of the major responsibilities these teams perform.
If we consider insurance and financial services, then allocation of funds, selection of fund managers, etc. are some of the strategic decisions that procurement teams are involved in. In essence, the profitability and revenue of financial institutions strongly depend on the performance of procurement teams and their efficiency.
In addition, regulations ensure that procurement teams maintain transparency and structure in all the outsourcing activities and buying decisions mentioned above. Transparency ensures that indirect procurement costs are under control and tracked.
Compliance and supplier relationship management becomes the onus of procurement teams to keep their banking and financial institutions away from scrutiny and violations. Thus procurement teams have a major role to play in financial institutions. They work in unison with internal and external auditors, finance and legal teams, and most importantly suppliers and consultants.
Regulations & EBA Guidelines
All outsourcing activities of the European banking and financial sector come under the purview of EBA Guidelines on Outsourcing2. By following these guidelines or regulations, we can ensure that transparency is maintained in the system. Also they can identify weaknesses in the capital structures of financial organisations.
Apart from banks, insurance companies, credit institutions, investment firms, payment, and electronic money institutions also come under the purview of EBA Guidelines on Outsourcing.
These points encapsulate what the guidelines entail and how procurement teams abide by them in Europe:
- The guidelines have many recommendations and best practices for BFSI organisations that outsource back-office activities, customer relationships, cloud services, etc.
- The purview of EBA includes work which is outsourced offshore. The best example of this being the IT services contracts which usually tend to be offshore
- When we outsource cloud services, we monitor data protection thoroughly.
- EBA guidelines also monitor “how much” outsourcing is done to ensure not everything is outsourced, so much so that the essence of the financial institution is lost
- The guidelines recommend procurement teams to be monitory bodies. Hence, they can ensure that supplier-related risks are identified, mitigated and predicted well in advance
- We can select a supplier for outsourcing based on the supplier’s ability to provide services, plan for re-allocation and data protection in case of IT services
- The guidelines insist that attention and focus need to start from the top management and continue down the organisation
- Lastly, the EBA guidelines recommend procurement teams to avoid “concentration risk” by not outsourcing all activities to one common supplier
All in all, the EBA guidelines on outsourcing follow the same path the previous banking guidelines followed; to ensure transparency and stability in European financial institutions through procurement.
Reform through Procurement Technology
As mentioned before, the BFSI sector remains to be one of the most profitable sectors and as a result, their procurement teams are certainly leaders in adopting and leveraging procurement technology like Source-to-Pay suites. Suites can help in centralising all their data across different geographies and functions and establish a common data standard.
Higher the visibility through spend data and contracts, greater the transparency and compliance. Almost everyone expects this out of banking and financial institutions. Data management, procurement technology-enabled with AI, machine learning and other data analytical capabilities helps the BFSI sector to monitor and manage their supplier relationships better.
While we can identify risks beforehand, past spend data and supplier ratings are also used in supplier selection. Also, procurement technology closely monitors maverick indirect spending.
Here is a whitepaper by Zycus that builds a business case for Artificial Intelligence in BFSI procurement technology to turn procurement into a profit centre for banking and financial institutions.
When we compare the performance of these organisations, procurement technology acts as a key differentiator. The leading adopters clearly outshines the technology laggards.
The future of procurement function in the European BFSI sector seems pretty clear going by the above three considerations. Procurement teams in banking and finance organizations indeed have a great role to play as strategic decision makers. They also monitor bodies and are early adopters of technology.
Procurement teams indeed have a major role in helping these European financial institutions. Hence, these institutions realise greater value and profits in the coming years.
COVID-19 and Procurement Teams
Given the current situation across the world, it’s hard not to talk about the Effects of Coronavirus on procurement and supply chain. The world is still figuring out its combat strategies against this epidemic. Hence, the immediate action items for procurement teams seem to be clear. Avoid concentration risk as mentioned above and diversify the supplier networks to minimize dependencies and risks.
Cost savings and rigorous checks on indirect spending should also be a priority for procurement teams in the wake of another financial recession.