When banks consider streamlining their trade services, risk mitigation is always high on the agenda.Daniel Cotti takes a practical look at partnering as a means to control risk and improve efficiency.
The role of banks in the traditional corporate supply chain has changed considerably over the past few years, driven largely by new technologies that enable buyers and sellers to communicate directly and efficiently with each other and the resultant shift to open account trading between them (and with their own suppliers and customers).
It is estimated that today, over 80% of all trade activity is conducted through open accounts. The bank’s traditional ‘intermediary’ role (e.g. providing trust services/letters of credit) has shifted considerably, to the point that a bank may be involved only in trade financing and payment.
Maintaining a viable trade business requires that banks create a new role for themselves as direct “participants”, focused on bringing efficiency to all the links in the chain – the corporation, its suppliers (and their suppliers) and customers (and their customers).
Fulfilling a need
Supply chain financing (on both the buy and sell sides) and purchase order invoice-matching are examples of services that fulfil part of this need. Today’s new supply chain economy, however, demands that financial institutions are able to offer cost-effective access to an extensive integrated network and comprehensive service offering that facilitates the timely flow of information – and cash – between all parties in the chain.
However, large investments in network technology are only viable economically if there are associated revenue benefits, for example, through scale efficiencies.
Where there are not, banks may seek a partner to complement their trade expertise and to support their growth objectives whether by sharing the cost of investment, by purchasing access (for a fee) to technology innovation (white labelling), or by outsourcing to another bank some, or all, of their trade activity.
As well as cost savings, a key benefit of outsourcing is the transfer of some of the business and operational risks from the buyer to the supplier; it reduces the risk inherent in opening for business in new countries or in introducing new products and it significantly reduces the business risk of investing in, migrating to – and the potential obsolescence of – new technologies.
While the theoretical benefits of outsourcing are clear, the practical reality can be somewhat different. While some risks are clearly shifted from the outsourcer to the service supplier, these can often be replaced with new and different risks caused by the impact of the outsourced activity on other elements of both banks’ businesses – for example, reputational risk (on both sides).
If the first rule of outsourcing is to determine exactly what can and should be outsourced (and why), the second should be to consider the impact of the x and y variables (see chart).
Why things go wrong
While this seems obvious, when good outsourcing partnerships go bad it is typically because of poorly defined requirements and/or the failure of either or both parties to take into account ‘disturbance variables’.
In addition to being able to physically fulfil the outsourcing brief, the ideal partner for growth is one that cares as much as you do about your institution’s growth strategy, is capable of adapting over time to the changing needs of your organisation and most importantly, is committed to maintaining a leading presence in the provision of trade services. ABN AMRO’s experience is that the most successful partnerships for growth are those that develop and mature over time and where the benefits to both sides exceed the specific and original objectives of the outsourcing brief.
Making it work
It is unlikely that a partnership for growth will be perfect from the outset - irrespective of how well each party behaves with respect to fulfilling the terms of the agreement. The fact is that the introduction of an outside component to the equation will inevitably impact an existing set-up.
If, however, both parties accept that commitment, trust, flexibility – and a step-by-step approach to meeting the requirements of the outsourcer – are essential prerequisites of a successful partnership, synergies can be exploited and disturbance variables can be minimised in favour of real risk mitigation and efficiency gains.
Daniel Cotti, Managing Director, Global Transaction Products, ABN AMRO daniel.cotti@nl.abnamro.com
TYPES OF BUSINESS MODEL AND THE POTENTIAL PARTNERSHIP OPPORTUNITY Maintenance (Total Costs) Banks not strategically focused on either lateral or organic growth but with a strong customer franchise in a geographic or trade services ‘niche’ will typically be seeking to maintain a total cost/total revenue efficiency ratio in line with the industry. This is increasingly difficult as large-scale, low-cost providers go after their business. In this situation, banks will be looking to convert as many fixed costs as possible to variable costs – and further, to lower those variable costs. In this example, possible solutions include reducing IT infrastructure, people and branch network/location costs and by outsourcing/offshoring processes to a partner. Organic Growth (Total Revenue) The primary objective of organic growth is to maintain total revenue either by reducing the price of the offer (with an associated compensatory increase in volumes) or by increasing the value of the offer (consumer surplus) with enhanced product content and/or service quality. Since either option could have capacity constraints, in this situation, the financial institution might procure additional back-end technology/processing capacity from a scale-provider such as ABN AMRO for a small marginal cost (relative to the cost of building it themselves). Lateral Growth (Incremental Revenue/ Incremental Cost) An aggressive strategy, focused on incremental revenue and costs, this approach suits banks willing to respond to client demand by making significant changes to their value proposition and being able to exploit new revenue streams. These banks will look for opportunities to participate more directly in the supply chain of their corporate customers – delivering physical (and virtual) services globally across the chain (e.g. agency services, financing etc.). This strategy calls for significant investment in additional capacity (people, technology and locations) with a short time to market. Taking this line, in order to increase revenues, a bank with limited geographic or ‘reach’ capabilities will need to partner with another bank with complementary strengths (e.g. a wider global ‘footprint’ or more comprehensive range of services). The right partner can introduce scale and time to market benefits while optimising incremental costs. (An alternative might be to procure individual components from different sources but this has attendant risks in respect of integration and cost management).
