October 2021 | Point of View

Don’t overlook your bank’s spend management as a source for innovation funding

Uncover potential savings on your journey toward digital investments and innovation by focusing on third-party spend

Don’t overlook your bank’s spend management as a source for innovation funding

With an increasing focus across the financial services industry on accelerating the move to be digital, organizations must find ways to rapidly prioritize budgets to make room for digital-related investments. For many financial services organizations, a key driver of forward-looking innovation is likely tucked away in the back office. Specifically, third-party supplier budgets and spend is an often-overlooked driver in optimizing and driving value. This activity—when done well—can unlock value quickly to create room for much-needed investment.  

While it’s generally accepted that financial services organizations need to enhance their digital capabilities, bank leadership often isn’t offering increasing budgets to address this issue; in many cases, banks have to find the funds on their own. 

Among the ways to find those funds, banks can consider evaluating their existing third-party spend. It’s often fragmented, undermanaged, and ripe with opportunities to identify and drive value and cost savings—which can in turn be reinvested in other areas, including digital capabilities. 

How much is potentially up for grabs will vary by institution. But when employing this approach at multiple financial services clients, we’ve identified and captured savings of 15% on $300-400 million in contingent labor spend, and savings of upwards of 20% on over $10 million of print-related spend. With the demand for innovation dollars only intensifying, the potential bottom-line savings cannot not be overlooked.

We’ve outlined three steps that banks and other financial services organizations that want to explore this option can begin following: 

  1. Assess existing third-party spend: How much third-party spend does the bank have? How actively is it managed? Asking those questions allows an organization to move to more involved questions such as: When was the third-party spend last competitively sourced? How much overlap of services and supplier partners exists? Answering these questions allows for determining what the overall opportunity size may be for finding value that can be unlocked.   
  2. Evaluate opportunities to optimize spend in-play: This often involves an analysis of existing third-party supplier segmentation, wherein the bank can evaluate the primary suppliers that drive the bulk of the existing spend. This commonly results in a focus on the roughly 20% of total suppliers, which (in many cases) are responsible for 60-80% (and sometimes more) of the total spend. Banks will want to evaluate these contracts and relationships to determine what opportunity there may be to improve in this area. Improvements might hinge upon the implementation of competitive sourcing events or supplier/scope consolidation. If these types of levers were pulled within the prior 12 months, the bank will want to evaluate the value that was realized and determine if there were opportunities that might have not been tackled that should be revisited.  

    The bank also will want to consider whether there are opportunities to implement more effective supplier relationship management processes and procedures with key suppliers to ensure maximum value is realized on an ongoing basis. This can include determining if certain key partners to the bank may not be leaning in and providing collaborative suggestions for improving value and efficiency. Banks can take a hard look at their tail spend, which is typically the bottom 20% of spend—but which is often driven by a much more significant number of supplier relationships than necessary. 

    Banks may also want to evaluate if there are too many suppliers that receive small amounts from the bank and whether there may be opportunities to consolidate some, most, or all of that long tail to drive additional value and pricing discounts.  
  3. Get the savings: Banks can then move to the final step, which involves developing a plan of attack. That usually will center around prioritizing the actions that will deliver the greatest return. This will include detailing what’s needed to flesh out and pursue the savings initiatives to the finish line such as specific expertise, market information, or other resources and tools.  With this understanding in mind, banks can then begin to execute to realize value that can in turn be reinvested in digital capabilities.   

    Other items to consider include the importance of banks to engage suppliers to let them know about the upcoming activities. This includes more than just alerting suppliers—it’s important to request input and suggestions from some of the larger and/or more important suppliers the bank deals with. Those suppliers may have ideas to share or activities they may have undertaken with other customers in the same spirit, which could unlock further value for the bank. It also ensures the key suppliers are confident in the relationship with the bank and feel valued as partners, not just vendors. 

    It’s also important that any of the initiatives that banks pursue out of an exercise like this are not just short-term fixes—it’s critical for banks to ensure they develop an approach that will ensure ongoing operations in the long term, allowing the bank to both keep the lights on and identify valid and long-standing steps that can translate to freed up capital to invest in future capabilities.

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