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Accenture

Financial services organizations can convert the early promise of procurement intorealized value through outsourcing.

Procurement Out, Value In

Financial services companies face an unrelenting challenge to lower their cost base and streamline operations to keep pace in today’s competitive and unforgiving world markets. With margins shrinking and customers wary, senior executives must focus all their energies on what can lift their businesses above the pack and deliver shareholder value, while strategically offloading functions that don’t serve that purpose. One of the first processes they should look to outsource is procurement.

The procure-to-pay function is a noncritical one. It is also an area that has been plagued by operational inefficiencies, rising labor costs and expensive, ill-used technology. Early attempts at e-procurement implementations several years ago promised banks and insurers the moon and instead grounded them with overly complex, segmented systems that failed to generate employee compliance or deliver significant savings or efficiencies.

Times have changed. Financial services organizations now have an opportunity to realize the incremental value they missed before. A new closed-loop approach to procurement outsourcing can provide seamless electronic centralization, automation and coordination of all relevant purchase-to-pay and accounting functions – effectively reducing direct costs, upgrading information quality and raising compliance through greater accessibility. The savings potential in procurement is real. The best tool to extract it is outsourcing.

Global financial institutions sink or swim in today’s highly competitive markets based on their ability to source and distribute capital at attractive prices with the right service package, while keeping costs down across the board. In such a challenging environment, purchasing and paying for everything from paper to computers can be a costly distraction. Now these companies cannot only eliminate this distraction through outsourcing procurement, but also can realize significant savings in the process by taking advantage of economies of scale and greater cost efficiencies.

Collecting Dust

In recent years, large financial services organizations were swayed by the early promise of pricey e-procurement systems to rationalize purchasing and cut overhead, then left to wonder why they bothered as higher spend coverage, employee usage and savings all failed to materialize. When managers at one global financial institution examined e-procurement performance as part of a major cost-cutting program, they were shocked to discover just 10 percent of employees used the application.

This level of rejection by employees is not unique. Yet poorly executed implementations and employee noncompliance with these systems belied a larger problem. Most companies focused too narrowly on e-procurement as a panacea without first examining the broader issues contributing to poor procurement performance, such as a lack of internal skills and flexible processes. It’s not that the systems didn’t do what they were supposed to; they just weren’t designed to address the full range of issues that lead to poor purchasing, procurement and accounting decisions.

Peeling the Onion

There is more than one way to fix what is broken in procurement, but the key to success, regardless of method, is to take a holistic view of all its components – people, technology and processes. A traditional consulting approach can help improve an under-leveraged internal system. But the core of most procurement problems stems from a flawed organizational model.

Traditional business models at most companies have divided procurement into a series of steps, each handled by a different unit or department. From requisition through payment, too many hands on and too many hand-offs add unnecessary expense, delays and errors. Here an innovative business process outsourcing (BPO) approach encompassing all purchase-to-pay (P2P) functions can be the best way to remodel the nondistinctive components into an endto- end value-generating entity.

Simply attaching a sophisticated e-procurement system to such a built-in organizational burden is like harnessing a pricey racehorse to a plow. The horse soon breaks down and the plow doesn’t move. No progress is made, and a big investment goes down the drain. Despite past shortcomings, e-procurement remains a large part of the outsourcing solution, but as part of an overall balanced approach spanning all capabilities, IT infrastructure, applications and requisition- to-pay (R2P) processes.

For large companies seeking to reverse past losses and gain additional incremental value from the procurement area, BPO can provide the most direct path. By outsourcing P2P and R2P processes, related procurement components, infrastructure, staff and even location, the potential to achieve economies of scale, deliver operational efficiencies and tap the accompanying cost reduction benefits can no longer be ignored.

Closing the Loop

The P2P outsourcing strategy addresses noncompliance and systemic inefficiencies by centralizing, automating and coordinating the various purchasing and accounting functions involved. It links processes from requisition and procurement through accounts payable. The P2P solution also opens the door to new skills, such as tactical buying or client sourcing, that e-procurement alone could not address. This closed-loop approach not only reduces direct costs, but also improves the quality of information surrounding the company’s purchases.

In turn, better information about purchase volumes builds a stronger negotiating position vis-à-vis suppliers. Better information about savings can then motivate more employees to use the system. Automation takes time and effort out of the purchase process, and can lead to a seamless, fully electronic progression from order placement through approval, invoice matching and payment.

Strategic sourcing, which identifies preferred suppliers, can cut costs by 5 to 25 percent. State-of-the-art processing technology improves operational efficiency by eliminating manual intervention. Whatever handling remains necessary can be executed at more costeffective service centers around the globe, shaving still more from the expense line. By matching the right plan and the right provider, the savings can be considerable. For example, Thames Water, the United Kingdom’s largest water utility, and Accenture formed a P2P outsourcing model called “Connect 2020.” The success of the overall program, including the procurement outsourcing component, has been unprecedented:

• $150 million drop in overall operating costs;
• Thirty-five percent savings in services and materials;
• Fifty percent reduction in inventory;
• Significant improvements in customer service; and
• A dramatic rise in materials availability, which now exceeds 99 percent.

Advantages of Scale

P2P is not an all-or-nothing proposition. Smaller institutions, or those with relatively limited opportunities to cut costs, may prefer to take a series of modest steps focused on achieving improvements in particular areas of procurement. The critical element for success at this level is to identify the areas where the greatest cost savings or compliance improvements can be achieved.

For large regional or global financial services providers, the bigger the institution, the greater the savings can be. This makes the often overlooked BPO opportunities in procurement particularly ripe for those companies with high spend and staff levels in the purchasing and accounting functions. A well-run P2P outsourcing program can deliver overall savings of 30 to 40 percent. That translates into real money for major banks or insurers now spending at least $500 million a year or more on supplies and services, excluding the administrative and accounting activities necessary to support procurement.

BPO enables institutions to change quickly, to access skills not available internally, and to tap economies of scale by sharing technology and personnel costs with an external provider, while retaining control over distinctive elements like procurement strategy. It transfers risk to a third party, often through structured contracts that make payment contingent on achieving service and cost improvements.

Deutsche Bank is among the top global financial organizations leading the way in this area, having agreed to outsource its global procurement, payment business processes and related IT functions to Accenture as a means to increase purchasing efficiency and lower costs across the board. Like leaders in other industries, progressive financial services executives are beginning to recognize P2P as a welcome remedy for the disappointments and frustrations of earlier procurement efforts. A P2P program puts responsibility for purchasing and payment functions – nondistinctive by any definition of financial services – into the hands of people whose business it is to ensure they are done right and at the lowest possible cost. That can mean a world of difference to any major organization’s bottom line.

And, in addition to potentially reducing costs by hundreds of millions, outsourcing procurement can free senior management to focus on the strategic nuts and bolts of their businesses that will distinguish their products and services and elevate shareholder value – instead of worrying about the actual nuts and bolts.