How Procurement can play a strategic role in outcome based models for financial services.
The speed and complexity of businesses and their dependency on agile external partners continues to accelerate in a digital world. Procurement organizations within financial services firms, which have been largely tasked with transaction-level roles, have always acted as the “guardians at the gate” for external partners. In other words each vendor has to go through legacy processes established by procurement before they can be engaged.
Today, the procurement function is facing a sea change. There is an opportunity to shift roles from largely tactical to enterprise-wide drivers of business outcomes and operations.
As digital organizations become more entwined in partner ecosystems of all shapes and sizes, procurement needs to evolve from its more traditional reactive role to that of a strategic influencer. This can be achieved by expanding capabilities and adding strategic sourcing tools to its toolkit.
A number of clients I work with are looking at procurement to create lasting partnerships with all stakeholders, from internal IT to third-party partners in order to advance enterprise objectives.
Companies in the financial sector are also looking for ways to create and bring newer customized product offerings to market faster, which means that speed and agility are critical to how they work with a third-party supplier.
On the whole, organizations are evolving and maturing. They are using outcome-based models that measure vendors not by the lowest rate, but rather the effectiveness and efficiency with which they deliver agreed upon outcomes. Procurement organizations can help build the framework to ensure internal IT teams and vendors are building the right partnership model.
Lowest Cost to Outcome-based Model
With lower investment yields, shrinking global footprints, shorter product lifecycles and competitive pressures, financial services are under tremendous pressure to reduce the cost of operations. Even so, today’s delivery model is becoming more outcome based, where the focus is on ensuring the vendor delivers on its promises.
Consider a recent experience I had with one of our bank clients who was dealing with outcome-based models in a legacy, rate card-based procurement process.
Working with a reduced budget, the bank’s IT team was asked to deliver a new service in six months in order to be market competitive. Partnering with procurement, the IT team followed the traditional RFP process and after a shortened search with the firm’s strategic partners decided to go with the lowest-bid provider.
The model was set up to be outcome based but the vendor evaluation process from procurement continued to be rate card-driven. The lowest cost provider won on rate cards and within two months, the client realized that the established objectives would not be achieved because the tools, frameworks and capabilities required for outcome-based models were not part of the rate card. In the end, the project wound up costing more because procurement was focused strictly on rates and not on vendor performance and outcomes.
In the digital world where technology changes rapidly and gaps in skillsets exist, procurement organizations must retool in order to build the “right partner” model instead of focusing on the lowest-cost providers. To be sure, cost remains critical to managing any vendor relationship, but the framework to evaluate vendors must ensure predetermined outcomes are achieved.
How Procurement can facilitate the ‘Right Partner’ Framework
Agility and ownership are key attributes when selecting the right partners. By tying vendor commercials to a desired business outcome, procurement is securing the balance needed to achieve business success.
As they move to an outcome-based model, procurement organizations should consider the following:
- Governance Capabilities – What expertise is the vendor providing for oversight and governance of outcome-based models? Without this ability, the client will spend extensive time and cost managing outcome-based models.
- Tools and Processes – How mature is the organization and what tools and capabilities does the organization provide to track outcomes?
- Agility and Adaptability – Outcome-based models require flexibility in people, execution and governance; is the organization able to provide that?
- Architecture Expertise & Technical Versatility – Today’s IT requires more than one skillset and considerable experience across the full stack of platforms and technologies to be successful. How is the vendor bringing its technology expertise to bear instead of simply providing staff resources and hours?
- Design Thinking – How well has the vendor matured its internal staffing and processes so that the teams bring the right industry depth and user perspective?
Procurement must adapt and evolve to an outcome-based way of thinking or risk falling behind as a strategic partner. Looking beyond cost and putting the right framework in place to evaluate, measure and deliver on vendor performance will make procurement a key enabler for financial services firms. It’s an incredible opportunity for procurement teams to ‘delight’ versus ‘fight’ its stakeholders.
