Strategic sourcing and procurement systems are paying off in terms of cost reduction and also in terms of good governance, which is essential for IT departments to avoid a repeat of the technology failures of the past, says Dan Barnes.
As the clock counts down towards the close of a reverse auction for personal computers, a last-minute bid is entered. As it undercut the previous bid by $100 per PC, the bank hosting this sourcing event has just saved $500,000 on its normal costs for the order.
The system the bank is using has created an electronic trail for any auditors wishing to view the decision-making process. The department that initially requested the equipment was involved from day one of the procurement process and provided their detailed requirements. The IT function confirmed the specifications required for the equipment to be easily integrated with existing systems – and the whole process took 10% of the time that was previously needed.
This fictitious example shows how electronic sourcing can save banks money, time and paper. And with third parties increasingly being used to provide services and systems, the need to control purchasing is growing, since no-one wants to repeat the mistakes of recent years that saw banks overspending on the wrong technology.
Better transparency
Electronic sourcing also responds to the desire for greater transparency as there are no opportunities for preferring suppliers. Leading banks have different strategies for achieving their sourcing objectives.
At Deutsche Bank, Accenture has taken on the procurement function, providing a front end, web-based portal with a single point of purchase for all departments. This directs the potential buyer to what is determined as the most appropriate method of purchase, whether a purchasing system or a vendor website.
Chris Broyden, capital markets partner at Accenture, says that by combining his organisation’s technology spend with the aggregated spend of its customers it can significantly reduce their costs. Additionally, where large-scale technologies are being purchased, he says that the outsourcing provider can retain specialists with knowledge of particular equipment that would normally be purchased once every few years. For a bank it could be uneconomical to keep such specialists when their skills are not regularly needed. Due to the mass of orders that an outsourcing provider receives, this level of expertise is sustainable and invaluable in gaining a bargaining position for major IT purchases.
Automated savings
Lloyds TSB developed its procurement system with an external company, and now supplies it to other financial services providers. Using an auctioning methodology, the bank can drive down prices when purchasing, as well as removing the need for manual paper-based processes, which are less open to scrutiny and more open to human error.
Malcolm Rosier, senior manager, marketing for Vantage Lloyds TSB, says: “It’s a totally transparent process. If an auction runs for two hours, for the first hour and a quarter people will put in a couple of bids just to draw a line in the sand. What happens toward the end is that bids come in very quickly and price tends to go down and will find a market level.”
In addition to the cost savings, he says the process ensures good governance. “As a bidder you don’t know who the other bidders are, but you know what the bid prices are so you know what you’re competing against. It’s not sealed envelope tenders where you’ve got a price that’s fixed. You have the opportunity to say ‘I can do it at a better price so I’ll put in a lower bid than that’. It’s flexible, transparent and auditable; everything is recorded.”
One technology issue associated with public online auctions is the use of ‘sniping’ software, used by public bidders to submit a last-minute bid and undercut competitors. Lloyds TSB uses a mechanism called ‘Autoextend’ that prolongs the auction by a fixed length of time to allow everyone a fair chance at putting their most competitive quote forward. Much of the procurement process is electronic and the bank is seeking to automate more of it in the future.
Commerzbank has also taken a technology-led approach to purchasing, using an Ariba solution to provide the core of the system. Michele Edis, global implementation manager at Commerzbank, says that this was just the start of the process.
“In Frankfurt we’ve made procurement more closely aligned with the business. There is increased visibility of procurement and whereas we started off the project focused on e-sourcing, the slant has changed to focus on people and process and the e-sourcing tool helps us in the sourcing process – it’s become part of the strategy not the [entire] strategy,” she says.
The new approach allows the procurement function to become involved at the start of the process, whereas previously it may have come in at the contract stage. When a line of business determines a requirement, it then effectively become a client of the procurement function. This means that they determine expectations and requirements together while the procurement function retains control of the process. The line of business must submit detailed requirements before going out to the market, which gives a more accurate specification than was previously seen and prevents misunderstanding or uncertainty.
Straight answers needed
Potential vendors have just as tough a job in being specific. “Ariba makes the supplier answer the question,” says Ms Edis. “Commodity managers and sourcing managers have to think very differently as to how they’re structuring their request for proposal (RFP) document. If you’re looking at IT services for the trading floor, for example, whereas before it was a question of ‘what hours are you available to support traders?’ the commodity manager will actually say ‘we want you available from 8am till 9pm, seven people, can you do this, yes or no?’”
Although it is hard work to identify efficiency savings in financial terms, turnaround time was clearly reduced. “Historically it took four to six months to identify a need, going out to market, evaluating the request for information (RFI), selecting a supplier and negotiating. The first four stages of that – up to selecting a supplier – we’ve now reduced to between four and six weeks,” Ms Edis says.
Internal resistance to new systems can also seriously undermine a programme. However, any concerns that the departments at Commerzbank may have had were allayed. When the telecoms function saw that it took just 20 minutes for procurement to put their request onto the Ariba platform for review, and that the reverse auction function saved them 42.96% on required equipment, they were impressed.
Repeat success
Any worries that this was a one-off were quashed when, for a further request, procurement was able to reuse the content of the previous event and provide the department with documentation just two days later.
Ms Edis believes that having the foresight to plan out the workflow early on really facilitates internal acceptance. “Companies looking to implement any e-sourcing tool should use templates as much as possible. Invest time in the implementation phase; coming up with your one strategic sourcing flow; then thinking what documentation is required for the RFI, the RFP, the request for quote (RFQ) or the auction; and build templates. That’s going to assist in driving stakeholder buy-in,” she advises.
Signing deals over lunch can be a hard habit to break out of and Steve Muddiman, chairman of Ariba, is keen to stress the role that the board must play in supporting these strategies.
“It’s easy to maintain a relationship with an existing supplier. If you’re going to implement [sourcing] at the higher level of the company under the mandate of the CEO or the board you need transparency,” he says.
“This isn’t about technology, this is about business process and what comes with change in business process is quite significant. What that means is that your approach to placing greater levels of spend under management becomes more transparent and it becomes consistent in terms of methodology.
“So those who choose to become a maverick purchaser – that is, those who choose to buy from existing relationships, often personal ones – will in time be sought out.”
To put sourcing on the radar of the higher echelons of the bank requires a shift in perception, says Mr Broyden, “There’s a management mindset in financial services that says [procurement] is not really part of our core business. Procurement has not really been a boardroom topic. I think that’s changing.”
Historically, the sourcing of services and systems often came through the IT department. This is also changing. Simon Kent, head of retail banking at financial consultancy Troika, notes that this has partly stemmed from a shift in power from vendor to bank. “The supplier had done a number of deals before and knew how to negotiate them. That power is now shifting to the purchaser who has become more experienced at purchasing third-party services, has generally done it before and in a few cases has had its fingers burnt and has learnt its lesson.”
That does not mean that departments other than sourcing or procurement should be excluded. The “burnt fingers” can make the pendulum swing too far, resulting in a draconian procurement function, the intention being to tightly control costs during an economic downturn. This can ignore the concept of value.
Board-level queries
Mr Kent believes there are some serious questions to be asked at the board level: “Does procurement really understand what the business is requiring? Is procurement going to be involved from an operational point of view if there is not representation during the process? Does procurement think beyond the contract and the price in terms of the ongoing relationship and the developing partnership? Is the procurement function sufficiently briefed in terms of the complexities and differences in services in some of those product sets?
“While it’s a good thing that procurement are getting involved and providing discipline and rigidity around the process, it shouldn’t be at the expense of business and IT input. That balance needs to be struck,” he says.
