Pushing the Value Envelope in Procurement for Banks

Due to a bank’s wide range of projects make proper demand planning and anticipation of future purchasing requirements a challenge. In addition, internal processes and limited involvement of a dedicated category management often hinder transparency on future purchases and limit any influence on procurement activities. Demand analytics of the past as well as forecasting of the spend on a budget level is critical to identify overlaps and therefore allow pro-active demand planning and collaboration across projects.

A bank’s category management requires a wider range of specialized commercial and technical know-how and expertise to enable strategic procurement. However, due to the volatility of the requirements, the changing procurement workload, and the geographic distribution, the organizational design and model (decentralized, center-led, or centralized) needs to be reviewed in particular.

Project management needs extensive autonomy to meet deadlines, as well as a great deal of agility. As a result, there are changes in the scope of work and cross-functional teaming are critical, but not yet established in the majority of banks.

All this leads to a deadly mix that calls into question the contribution of category management at banks: When savings are hard to measure and tight timelines for project execution enable sidetracks, a focus on technical excellence rather than on costs can mask the contribution that procurement makes, and companies often stick to established suppliers to avoid quality or capacity risks, or due to customer requirements, without challenging incumbents.

Typically, category management at banks started with a comparably low number of levers used systematically. Still, it took them just a few years to almost double this by means of systematic approaches and reviews. Another aspect is that leaders in the banking world came to realize that procurement needs the mandate to create value beyond cost: For banks, only 1/3 of companies have fully implemented this today. So what is the secret for bank’s CPO to transform their operations and potentially even outpace today’s leaders? In short, it means expanding their horizons beyond pure price levers and leveraging the full power of digitalization to increase efficiency (e.g., RPA) or effectiveness (e.g., big data and analytics for demand planning across projects, AI-based negotiation coaches), which allows them to apply demand levers, as well 

Getting procurement involved at an early point is critical. To do that, a bank needs to effectively combine demand management, category management and the business/other function Furthermore, while costs arise towards the end of the project process, the potential influence of purchasing is highest at the beginning. Therefore, the role of purchasing should be expanded to include the budgeting phase. Procurement and project portfolio management are closely interlinked and need to be in sync to realize the full potential.

However, a differentiated view is needed on what is bought. Not all categories are suitable for price optimization, but a bank’s category management needs to challenge established routines to reduce demand, facilitate purchasing activities, and thus reduce costs. However, this can only work with an integrated approach. Once define to purchase has become the philosophy and the scope is optimized from a commercial perspective, knowledge of the supplier can be included in the evaluation of alternatives and to provide further improvements.

 Today’s procurement leaders are heavily involved with other functions. While this is already highly beneficial for repetitive business, it becomes even more important for banks, where commercial levers alone provide a limited range of benefits. BCG’s procurement toolbox comprises a set of demand tools for the opening move and commercial tools for the closing move.

Today, banks are significantly behind in exploiting levers to change the nature of demand—which can only be done cross-functionally. With the right cross-functional approach, the benefits can be increased immensely. Bank should actively work to integrate their functions along the value chain and to seek opportunities aside from pure commercial activities.

 In this context, it is crucial to do good and to talk about it. Marketing one’s own success stories internally and especially to the top management is even more important in the challenging environments of a utility, where a procurement often has only a limited reputation. Digital tools like BCG’s Savingsguard help reconcile procurement savings in the bottom-line.

Bank’s purchasing organization needs to combine elements of demand planning, category management and good project purchasing. Typically, a center-led organizational setup is beneficial. The purchasing organization is built around three pillars: demand planning, category management, and project purchasing. The required expertise differs in each of the three pillars. The key success factor is to differentiate between category managers to support standard purchasers and project purchasers to actively manage ad hoc spending. A clear differentiation of request types and the underlying processes is crucial to maximize the success of the overall business. The project business will maintain a share of non-manageable spending that has to be procured outside of optimized boundaries. However, project purchasers need to acquire the skills to optimize beyond the obvious and to get the most even out of this cost share.