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Procurement for Money

Procurement Function in its classical form usually controls company’s activities directly related to costs: purchasing IT products, marketing and administration support, logistics services, etc. Conceptually, there aren’t any blind spots left in these areas for Procurement, both in terms of strategy and tactics. Still, any large business has certain areas where Procurement remains uninvited. How about shedding some light on one of them?

Let’s call this area “procurement for money”.

The larger the business, the more instruments it applies to support its operations. All these instruments have their own cost which typically isn’t included in cost-related activities covered by Procurement. A CFO who welcomes Procurement’s engagement in shopping for money is a rara avis indeed, although, Procurement’s approach and techniques can 100% generate direct savings (confirmed by P&L) and also deliver indirect benefits that can significantly improve company’s operational efficiency. If a company operates on a global scale, Procurement’s expertise in building competition, may result in a 2-digit efficiency improvement. Seriously.

When I was a part of indirect procurement team in a bank, I often participated in tenders on a supplier side, since the bank received RFPs for delivery of financial services almost every week. And since services of the bank included a share of outsourced services, I was regularly requested for quotes. And I can say that in 10 out of 10 cases clients’ RFPs were written by Finance or Treasury people. And there was never a single Procurement specialist involved. Never. Even though the bank sold financial services that can be easily standardized, structured and later streamlined. If we look at the situation from a client’s perspective, we get a classical case: client holds a tender between banks organised by its financial sector people that have to deal with professional sales force on a supplier side (banks). Certainly, clients always felt they’d managed to get the best price. And at the same time bank’s Sales got their bonuses for improving annual sales. Well, this situation is typical for any uncontrolled purchases. Why does it happen? The answer is obvious: in a financial services industry, on a universal scale, there’s an erroneous perception that “money procurement” is a club des élites, where they know best about best terms and best financial services, which means it’s a prerogative available to a limited number of people.

I believe this situation emerged due to the following factors:

  • Financial reporting format — historically, money costs haven’t been interpreted by financial people as direct costs similar to logistics costs, marketing costs and other. As a result, discussion of procurement for money remains within the scope of Finance and Treasury departments.
  • Money talks have always been associated with atmosphere of discretion and exclusivity. Like when a deal is sealed not as a result of transparent and fair competition but with a handshake during a round of golf or dining in a gentlemen’s member-only private club.

As a Procurement professional I can assure you: financial services aren’t more complicated than other categories we’re used to dealing with. Some may think that bank products are only about numbers and dates, in reality, though, a banking agreement may include up to 50 parameters of various SLAs.

At the moment, banks and financial institutions offer a lot of standardised services. Also, on a global scale there are many banks with significant presence in the country. Popular services that are used by any business and can be easily adapted for insights and optimisation include:

  • Cash & transaction services;
  • Corporate lending and overdrafts;
  • Trade finance / factoring;
  • Deposits;
  • Derivatives.

You probably think that “shopping for money” doesn’t entail many costs, so why don’t we take a look at annual reports of some Fortune 500 companies.

Let’s start with Microsoft for instance. According to their 2016 report, the company’s financial instruments costs scored USD 1 bn. The company reported multiple derivatives used to support its operations, while I’m certain they could’ve engaged Procurement in negotiating price terms with financial institutions and managing this area as a separate category.

https://www.microsoft.com/investor/reports/ar16/index.html

In 2016, on a globale scale Coca-Cola spent a little bit over USD 700 mn on banking operations and instruments.

http://www.coca-colacompany.com/investors/annual-other-reports

BMW company is listed as the 53rd in the Fortune 500 rating and in 2016 its expenses on financial instruments exceeded half a billion USD.

https://www.bmwgroup.com/content/dam/bmw-group-websites/bmwgroup_com/ir/downloads/en/2017/GB/13044_BMW_GB16_en_Finanzbericht.pdf

I’d like to emphasise that when we talk about “shopping for money” we definitely mean financial resources and not cash itself. Companies require financial services and look for digital experience as well. At the moment, the banking market is highly competitive. And the most important thing is that this market is open to such solutions and transformations. I’m absolutely sure about that.

It’s high time Procurement took action and became a member of this club des élites, isn’t it? And Procurement does have benefits to bring with it.

@olegremizov

25/05/2017

Published in Procurement