Important ways in which banks can improve and optimize spend management
Low-interest rates and not-so-low revenue gaps continue to trouble financial institutions. Reducing expenses is topmost on the to-do lists of most banks. Focusing on reducing third-party expenses is one of the best ways to begin expense reduction. A bank’s third-party spend involves 35-40 per cent of its total costs, which typically increases by 7 per cent every year. By controlling third-party expenses, a bank can insulate itself from internal cost pressure and also have more funds free for investment.
Banks can optimise their third-party spend across all departments by focusing on a few key areas — organisational efficiency, management of supplier relationships and procurement costs. Procurement processes can be streamlined, and operations could be fortified to become more efficient and resilient against any future disruptions. Organisational silos can be removed so that any new spend management techniques can be implemented across departments.
Process optimisation combined with spend management software addresses many aspects of procurement. For example, speeding up the sourcing process, streamlining relationships with suppliers and automating the contract management process are valid options to consider. Here are some details:
- Boost internal efficiency:
Although the desire to change procurement processes is quite high among organisations, they frequently do not know how best to go about it. Internal efficiency can be boosted, and costs can be significantly reduced by automating routine tasks and reducing some of the manual work involved with spend management. Adopting digital procurement is one such way to control time and costs. The time saved can be used to focus on formulating strategic initiatives and other value-added tasks.
A centralised procurement window enables banks to have a better picture of spending patterns across branches. This can quickly highlight any duplicate payments, unauthorised purchases and even fraud. Such a centralised system also works in favour of suppliers who are likely to receive bulk orders rather than small orders from different branches. This can lead to discounted prices and better relationships.
- Bring down costs of third-party spend:
Procurement costs involve two aspects - internal demand for products and services; and efficiency, affordability, and supplier performance. When both are managed well, the savings add up significantly. For example, third-party sourcing can be optimised by:
- Using rapid RFX (request for information, request for proposal, e-auctions) processes that make price reduction and other incentives at the top of the priority list.
- Negotiating better rates with vendors by conducting pointed discussions based on pricing benchmarks, supplier capabilities, SLAs, role rationalisations and other factors.
- Using automated benchmarking procedures to analyse the performance of existing suppliers based on different metrics such as quality, delivery delays and compliance rate. Poor performers can be removed, and banks can look for more cost-effective vendors.
- Bring down demand of third-party services:
This involves reviewing and modifying sourcing procurement protocols throughout the organisation to boost control and transparency. Budgets need to be re-evaluated to identify any possible cost cuts. Outsourced services that are no longer aligned with the organisation’s business goals can be eliminated and it is important to ensure that any services and products that are still outsourced are relevant to the business.
An important factor that needs to be addressed is the shift in customer experience and expectations, and operational needs. Certain expenses that were a necessity three years ago may need to be analysed now to check their necessity or utility. Contracts signed earlier need to be revisited and analysed along these lines.
- Enhance relationships with suppliers and vendors:
It is essential to understand that vendor and supplier risks could easily become business risks and trigger service downtime, regulatory issues and customer complaints. Being aware of the possible risks and maintaining a productive relationship with vendors can help reduce procurement costs and prevent future financial issues too.
Effectively implementing strategic supplier relationship management (SRM) programs can help banks manage other important initiatives such as enhancing the sustainability of supply chains, boosting diversity among suppliers, and driving innovation. In an effort to reduce management and overhead costs, banks could collaborate with fintech partners and work toward a common set of standards in pricing, compliance and data sharing too.
Banks could add another layer of protection by implementing a vendor risk program. The pandemic years showed the importance of vendor health since they were supplying vital services to both customers and employees. Vendor risk management is a critical part of business continuity. In addition, digital tools offer efficiencies through automation and the ability to manage vendor risk through a single point.
It is clear that the reduction of third-party spend plays a critical role in a bank’s financial efficiency. Banks that can navigate these waters are sure to emerge stronger and better prepared for future roadblocks. Procurement needs and techniques need to be analysed afresh for positive results and banks should take advantage of all the digital resources available in the market to boost efficiency and reduce costs.
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