BCG’s Banking Procurement Excellence Monitor points towards opportunities in third-party spend optimization

Cost pressure on banks has further increased lately, notably as the economic impact of the COVID-19 crisis becomes fully visible. As banks need to unlock additional savings potential, BCG’s Banking Procurement Excellence Monitor points towards opportunities in third-party spend optimization. Banks can draw on important lessons learned from other industries and realize substantial savings.

Compared with other industries, financial services are lagging behind in managing third-party spending professionally and effectively. The results of the BCG Banking Procurement Excellence Monitor confirm that significant value can be gained from optimizing third-party costs. Seizing these cost saving opportunities will require an upgrade of the procurement function, going beyond tactical maneuvers.

We have formulated three recommendations:

Focus on better third-party spending practices to deliver value: The top-rated banks with the highest scores also achieved the highest procurement-induced savings of 8% per year. Their holistic approach focuses on value creation through a supplier-oriented Pareto approach to buy better and systematic expenditure management to buy less. This requires an effective strategic trade-off approach to spending and necessitates a collaborative & multidisciplinary Procurement team.

Assign procurement staff predominantly to strategic purchasing activities beyond day-to-day delivery: A maybe counterintuitive finding is that a larger absolute number of procurement staff in relation to spending is not correlated with higher value delivery. However, focusing a higher percentage of the staff on strategic procurement activities is a crucial move: Best-in-class banks had at least 50% of their procurement staff assigned to strategic purchasing activities, compared to an average of 25% for the rest. Strategic activities include structural changes as well as strategic value levers:

• Structural changes: e.g., vendor landscaping and procurement-driven preselection, establishment of “tandem teams” with specifiers, a savings pipeline filled with a low number of large initiatives, and aligned and communicated procurement strategy in place
• Strategic value levers: esp. best-cost-country sourcing/offshoring strategy, demand planning, standardization, simplification, and TCO-based make-or-buy decisions

Invest in people, processes, and digital tools: Top performers that deliver the highest value score strongly particularly on people, processes, and digital tools. The following insights can be derived from this:

• Gain talent for the purchasing function: Give talented professionals a platform that allows them to grow in line with their peers in other functions, with attractive career paths
• Invest in people: Develop a tailored procurement training program enabling the team to deliver strategic tasks and apply all value creation levers
• Jump-start the digital procurement journey: Banks need to base their procurement digitization strategy on the dimensions of value, enablers, and the data foundation that are most relevant for their specific competitive context.

 If you would like to participate in the survey or discuss the results in more detail, please reach out to Stephen Easton, Lukas Haider, or myself