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Management Strategies

02:56 PM
James Thomas, Zycus
James Thomas, Zycus

3 Steps to Reducing Spend Through Procurement

To help reduce costs and offset the bottom line, financial institutions should consider these procurement guidelines.

Although the economic environment is more benign than at this time last year and there are signs of recovery, banks and financial services firms are still facing uncertainty. Slow economic growth coupled with new banking regulations on the horizon -- such as Basel III, which will require banks and financial services firms to hold more capital and low-yielding liquidity -- could translate into unprofitable business lines and higher costs for bank customers. Predictions of negligible business expansion and low levels of demand have also created global uneasiness. Consequently, many executives are looking across their organizations for ways to deliver crucial savings opportunities, such as the adoption of procurement technology.

According to Supply Management, a 5-percent reduction in indirect spend can translate to a 1- to 3-percent impact on the bottom line. As such, the global economic scenario is forcing businesses to reduce costs on a sustained basis and improve compliance with corporate purchasing policies. With most processes already optimized, procurement is one of the few areas in an organization that still provides ample opportunities to reduce costs and improve bottom-line profits.

So where does an institution start in an effort to streamline its indirect procurement? Here are three critical steps to consider.

Step 1: Classify Spend Data

Before proceeding with analyzing spend data, it is critical for banks and financial service organizations to have a clean, accurate and unduplicated source of data. Data management is an important process and one that often presents numerous challenges. These challenges typically include too much data, lack of standardized data and/or lack of quality data.

Step 2: Collect and Analyze Data

Even though financial service firms understand the value of spend data analysis, it's surprising to see how many institutions still rely on manual processes or rudimentary excel sheets to tackle their data. What institutions need is a single taxonomy structure to classify all of their spend data. A spend analysis solution automates the process of collating geographically disperse data and assigning a single taxonomy to it across the organization.

One of the most used taxonomy standards is the United Nations Standard Products and Services Code (UNSPSC), which covers products and services for use in e-commerce. Another popular taxonomy is the homegrown variety. Regardless of which option it chooses, an organization will need to come to terms and agree upon a single acceptable taxonomy that can be implemented across the entire enterprise.

The data classification should be granular and then combined with an analytics tool that not only reads the data and gives a full picture of your spend but also provides what-if analysis and suggestions on areas where savings opportunities can be mined. If done efficiently, spend analysis provides organizations with item-level visibility that can help them create a spend portfolio that identifies how much is spent, in what category and with which suppliers; identify savings opportunities; and devise future sourcing strategies.

Step 3: Execute On the Identified Opportunities

Once you've analyzed your spend and identified the categories to target for cost savings, the next step is to prioritize those opportunities and conduct sourcing initiatives for each. When launching a new process, it is recommended that institutions start their sourcing issues with a category where achieving success is easier and has little risk. Simple categories like office suppliers where several competent suppliers compete against each other with fervor may be the first place to look for easy savings.

Once a procurement department gets through the easy categories and identifies areas for savings, they can then expand their efforts and look for other opportunities to use sourcing to save money, including new categories that have been traditionally managed outside of procurement. These areas include health benefits, advertising and travel.

Providing Benefits at Every Stage of the Sourcing Process

Identifying the areas for savings and learning to work with your new internal customers can be a challenge in itself. Because of this it's helpful to consider your entire sourcing process as divided into three main stages, which include:

  • Sourcing planning: Encourage enhanced collaboration between business units to enable streamlined planning within the sourcing process. Profiling should also take place at this stage to indentify and understand the various and multiple categories that may exist.

  • Event creation: Replicate existing events so they can occur faster and more effectively. By doing so, more suppliers can be invited to the institution's sourcing events and greater cost savings can be realized.

  • Supplier evaluation and awarding: Review, score and analyze supplier responses in order to make evaluations simpler and more objective. In fact, multiple "what-if" scenarios can be built to analyze the cost before awarding contracts to suppliers.

    Particular issues plague each of these stages when the sourcing process is purely manual or managed using spreadsheets. In terms of the planning stage, lack of collaboration between sourcing teams, or even sourcing departments at multiple locations, is a common problem.

    Procurement technology can help institutions avoid these issues and also realize savings from indirect procurement initiatives. With demand on the decline, financial institutions are challenged to maintain their bottom line, let alone increase it. The savings generated through these initiatives not only helps companies to offset the impact of low demand on the bottom line, but also will set the stage for increased profitability when the economy eventually rebounds.

    James Thomas is a Strategic Marketing Manager at procurement technology solutions provider Zycus.

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