Five 'back to basics' questions procurement should be asking

17 March 2021

Procurement could prove to be a major source of untapped value for financial services companies as their external spending rises, according to a report.

The report by consultancy Alvarez and Marsal identified third-party spend as a prime candidate for optimisation, adding its share of the total cost base had been increasing for many years.

The report said in banking external spend was close to staffing as a percentage of the whole cost base, representing 36% of overall spend, compared to 41% for staffing costs.

A third (35%) of spend within financial services firms was on IT, while 25% went on banking operations, 20% on support functions and 20% on real estate.

“C-suite leaders should be prepared to think expansively and ambitiously about optimising procurement and positioning third-party spend as a true value lever,” the report said.

“However, despite the potential for significant productive change, few management teams are actively exploring disruptive routes to reorient procurement functions.”

The report called for a more robust approach to supplier and spend management, not only to optimise cost, but to enable procurement to become a value creation lever.

It said steps for companies to take included establishing market benchmarks on supplier practices, entering “easy-win” contract renegotiations, and bringing in high-performance leaders with operational expertise and change management capabilities.

Up to 50% of procurement savings in financial services companies can stem from effective demand management.

The report recommended procurement heads ask “back to basics” questions to identify the nature of the required change. Such questions include:

1. What is our predetermined ‘affordability envelope’, and what can we live without?

2. Which in-house capabilities give us a competitive advantage?

3. Are we buying the right things at the right specifications?

4. Are we buying at the right prices?

5. Are we using our global consolidated buying power to best effect?

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