CIPS Financial Services Purchasing Forum · CIPS Financial Services Purchasing Forum 17th February...

CIPSFinancial Services Purchasing Forum

17th February 2009

Managing Risk in Financial Services Procurement

Hosted by Northern RockSponsored by KPMG

Agenda – Managing Risk

• 10:00 – 10:30 Networking• 10:30 – 10:45 Welcome and introductions• 10:45 – 11:15 Northern Rock• 11:15 – 11:45 KPMG – A Suppliers perspective of risk in the current marketplace• 11:45 – 12:30 Risk Workshop• 12:30 – 1:30 Lunch• 1:30 – 2:00 HSBC – Outsourcing Management• 2:00 – 2:30 PSD – Recruitment Retention in the current market • 2:30 – 2:45 Coffee break• 2:45 – 3:15 Lloyds Banking Group – Supplier Risk in the current economic

climate• 3:15 – 3:30 Risk workshop feedback• 3:30 – 3:40 AOB• 3:40 Close

A supplier’s perspective of risk in the current marketplaceHow procurement can help reduce business risk

Jon Howell - Director

© 2009 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG logo are registered trademarks of KPMG International a Swiss cooperative

Overview

In 2008, KPMG carried out a survey of 600 procurement and business leaders− Beyond Purchasing: Next steps for the procurement profession

In an economic downturn, the need to deliver more value and to manage risk are vital, putting procurement at the centre of the businesses strategic agenda

What the business sees and wants What procuremendelivers

t does and Closing the gap – and buildingon the opportunity


Beyond Purchasing – some of the key findings of KPMG’s 2008 report

The biggest barriers to a greater strategic impact for procurement:

Procurement will only win a seat at the strategy table when it can demonstrate it’s value to the wider business

CPOs, Procurement Executives and Supply Chain Directors Non-Procurement Executives

Other functions lack interest in, or understanding of, how procurement expertise can be used strategically

Failure of other departments to consult procurement early enough in making major purchasing decisions

Resistance to change within the organisation as a whole

Senior management lacks interest in, or understanding of, how procurement expertise can be used strategically

Procurement function is underfinanced/overstretched

Procurement staff lack understanding of the wider business

Other functions are not able to adopt a central procurement strategy

Other/don’t know

Procurement function not aligned with broader corporate strategy

The procurement function lacks a united voice (eg a strong figurehead)

% of respondents

54%38%

44%32%

41%32%

27%25%

22%12%

20%34%

14%23%

13%21%

13%17%

5%6%

0 6 12 18 24 30 36 42 48 54 60

Source: ‘Beyond Purchasing: Next steps for the procurement profession’, KPMG, 2008


Beyond Purchasing – some of the key findings of KPMG’s 2008 report (continued)

Procurement at our organisation focuses too much on simple cost reduction and not enough on value

Procurement at our organisation is too focused on compliance and rules-based processes at the expense of delivering innovation in the value chain or business operations

Agree strongly DisagreeAgree Disagree strongly

Don’t know/Not applicable

Neutral

CPOs, Procurement Executives and Supply Chain Directors

Non-Procurement Executives

% of respondents

9% 26% 18% 33% 13%

11% 42% 23% 17% 4% 2%

1009080706050403020100

1009080706050403020100

CPOs, Procurement Executives and Supply Chain Directors

Non-Procurement Executives

4% 26% 26% 27% 16% 1%

11% 29% 25% 23% 6% 7%

% of respondents



Beyond Purchasing – some of the key findings of KPMG’s 2008 report (continued)

Procurement functions are gaining control over corporate purchasing, and are becoming more centralisedTotal procurement spend (direct and indirect) which is negotiated or contracted by procurement professionals, today and in three years

100% 75-99% 50-75% 25-50%

1-25% 0% Don’t know

Currently

In 3 years

1009080706050403020100

% of respondents

3% 21% 28% 20% 16% 7% 4%

9% 38% 22% 12% 8% 4% 6%



So how are some organisations building on that opportunity and managing their organisations risk?

What the business sees and wants What procurement does and deliversClosing the gap – and buildingon the opportunity


Cash is king – aggressive cost management – internally or externally

What Who Why/benefits How Things to consider

Aggressive cost management policy

A large UK retail bank

A large UK airline

comprehensive cost management policy

‘real’ consequences for non compliance

Procurement lead

no exceptions to the process

all spend subjected to a thorough vetting process regardless of financial approval levels

reduction and alignment of delegated authorities

Procurement ran the revised cost management process

process relentlessly implemented

continuous process

Clear executive sponsorship at board level

embedded in the psyche of the organisation

‘Sharing the pain’ –Getting suppliers to deliver immediate cost reductions or other cost benefits

a significant downturn in their business

approached key suppliers and asked them to help share the pain.

asked to support them through some short term discounts , deferred payments

quid pro quo in writing for when economy up-turns

Process: letter, briefing, meetings, iterative proposal process

Who are the key suppliers to approach

What is in it for them? Co-operation driven by mutual benefit

“in it together –needs mutuality for when there is an up-turn


Cash is king – a more innovative approach to supply chain financing. Reduced payment terms to suppliers


Working Capital optimisation(1) –innovation in supply chain financing

A number of clients across different sectors

Trade creditors in effect extended DPO from buyers perspective but

Suppliers paid earlier than usual

thereby generate a positive balance sheet movement

resulting in significant cash flow improvement

Suppliers obtain early payment at a funding level that can be highly competitive

Tool also provides enhanced controls and compliance for the P2P process

Implementation of technology solution to manage payment cycle and measure procurement benefits

Requires high credit rating to make the financing model work

It’s a complicated financial model

Supplier take up process is critical, however they can choose not to participate and same cash position is achieved when the buying organisation moves them to 60 days


Cash is king – extending payment terms to suppliers


Working Capital optimisation(2) –stretching payment terms

A large mobile telecoms manufacturer

significant cash flow benefits

temporary measure

consider with quid pro quo when economy returns to normal

applied universally

Different approach by segment

Personal approach to strategic suppliers

Approach imposed on transactional or substitutable suppliers

bullying the supply base?

recent PR issues from Tesco’s decision to extend payment terms to 60 days

Risk to smaller suppliers in the current market


Managing supplier risk – taking a strategic approach and adapting your approach to meet the needs of the supply market situation

UNDER-PERFORMANCE CRISISSTRESS DISTRESS

SUPPLIER TURNAROUND FINANCIAL RESTRUCTURING STABLISATION CRISIS MANAGEMENT AND RECOVERY

Procurement role is to identify where key suppliers are and determine the strategic approach required:

What to look forHow to respond

The objective is to move organisations from crisis, through stabilisation to strong performers


Each situation requires a clear view on the issues and a tailored response

UNDER-PERFORMANCE CRISISSTRESS DISTRESS

SUPPLIER TURNAROUND FINANCIAL RESTRUCTURING STABLISATION CRISIS MANAGEMENT AND RECOVERY

HowRapid cost reductionCash regenerationDeveloping and implementing turnaround plansDirectors’ workshops

HowBalance sheet restructuringFinancial planningContingency planningAccelerated M&ARefinancingStakeholder management

HowCash managementOptions analysisStakeholder co-ordination and management performance

HowSecuring on-going supply/distributionNegotiation supportAcquisition supportInsolvency support

What to look for Need for rapid performance improvementCost reduction programme not delivering expected benefitsDifficulty in responding to market pressuresDeclining operational performance eg. delivery or quality

What to look forRequests to restructure payment patternsNeed for new fundingCapital structure no longer appropriateBusiness has difficult relationship with existing lenders or stakeholdersFinancial stress

What to look forUnexpected requests for changes to payment terms or requests for funding supportAdverse feedback from credit insurersBorrowings close to existing facilityPressure from creditorsManagement time increasingly absorbed by cash concernsSignificant or sudden deterioration in operational performance

What to look forSevere pressure from creditors, in particular secured lendersInability to secure suppliesInability to pay wages and salariesAdverse informationInsolvency appointment

ON-GOING RISK MANAGEMENT

Informal discussion of issuesSupplier watch listing

Supplier score cardsDevelopment/review of early warning systems

Trading terms reviewTraining/seminars


How some clients are responding in the current environment to manage risk –taking a strategic approach


Tax Efficient Supply Chain Management (TESCM)

International mobile telecoms

Significant additional savings/revenue

Creation of a tax efficient supply chain

Procurement SPV/company was set up in a low corporate tax rate country

Ireland, Switzerland, Luxembourg considered

spend channelled via this organisation for all operating companies across the world

significant time and investment is required

what products, services are put through the tax efficient location

Be sure that you can resource the procurement activity in that low cost locationWhat Who Why/benefits How Things to consider

Off shoring procurement processes

International investment bank

created a team in a lower cost economy

able to address their resource constraints within budget limitations

resource was recruited to take on ‘low value low risk’tasks

e.g. setting up and running eSourcing activities

set up as part of the banks Indian operation

Talented resource in India needed to be stretched, not happy to undertake simple tasks

Great thought needed to be taken into the type of tasks that can be moved off shore

involve business stakeholders



Outsourcing elements of procurement delivery

A UK based retailer

additional savings benefits from categories which were viewed as non strategic

leverage of volume is the key driver of additional savings

The commercial arrangements are based on gain share with the outsourcer.

Full procurement process control has been handed to the outsourcer for certain categories

Travel, recruitment, MRO, office supplies

Be clear around baselines and methods for measurement of savings

Think through any exit strategy or competitive bidding approach before you outsource to avoid ‘lock in’

Make sure you drive maximum value out before giving it to the outsourcer

How some clients are responding in the current environment to manage risk – taking a strategic approach


Invest in your people

What Who Why/Benefits How Things to consider

Aggressive investment in developing your team through training and development

A large UK electricity company

increased the level of core procurement skills

Pan business

Created an emphasis on procurement excellence with a joint agenda to deliver savings

Academy approach covers all aspects of people development, including e-training, coaching, support for new starters and the chance to learn new skills

The academy achieved value generation of £35m in the first year, and penetrated 83% of spend.

5% more of the procurement team achieved promotion

most internal applicants cited the opportunities in the procurement team as one of the main reasons for applying

Training is often the first casualty in a downward market, so getting the investment signed off can be difficult

Developing a ROI will help sell the benefits to the business


Some other areas we see organisations focussing on

Other ideas or things to consider in the current climate:Agile Procurement – the need to be able to respond to volatility in markets and to have a more adaptive sourcing approach

Drive greater innovation through collaboration with your suppliers

Procurement ‘right sourcing’ – deploying your resources to deliver the maximum value from specific opportunities, as opposed to deploying resources across all categories

Procurement move to become ‘market makers’ as opposed to ‘market takers’

Procurement needs to have a voice at the highest level of the organisation

What the business sees and wants What procurement does and deliversClosing the gap – and buildingon the opportunity

Risk Workshop

PROCUREMENT ADVISORY

© 2008 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG

logo are registered trademarks of KPMG International a Swiss cooperative

The Categories to be considered

Marketing (eg media, advertising, merchandising, creative)Professional Services (eg Consultancy, legal)HR (eg recruitment, temporary staff, benefits)Print (eg marketing and business print, office supplies, paper)Infrastructure and Property (eg hard fm, soft fm, utilities)Corporate Services (eg mail, courier, reprographics)Travel (eg travel management, rail, air, hotels)Technology (eg application development, telecoms, business applications, IT hardware etc)

© 2008 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and the KPMG

logo are registered trademarks of KPMG International a Swiss cooperative

The questions to be asked – consider these generally and also in relation to your category

From a Financial Services perspective, what does your group regard as the most significant sources of risk at the present time?

Traditionally, Procurement haven’t been viewed as risk managers. How much more involved are we now, and what implications has this had?

What about the issue of global sourcing and the risks inherent in extended supply chains?

Has your organisation changed their attitude to your category significantly in response to the sort of risks you have identified?

What practical steps would you suggest a Financial Services company to manage risk better?

Looking ahead a couple of years, what are your expectations about how your organisations risk environment will change, and what will Procurements involvement be in this?

OUTSOURCINGOUTSOURCING• Outsourced Services Contracts

• Risk Management

Sue JonesPurchasing Manager, OperationsFebruary 2009

FSPF February 2009

• Third party suppliers

• Financial Services Authority

Control and consistency in Outsourcing and Supplier Relationship Management

FSPF February 2009

• Definition of Outsourced Services/Contracts in Scope

• Pre Contract

• Post Contract

• Contract Review

• Contract Expiry/Termination

• Roles & Responsibilities

• Mandatory

Control & Control & MngtMngt of Outsourced Services of Outsourced Services Policy & Governance ProceduresPolicy & Governance Procedures

FSPF February 2009

PrePre--ContractContract• Risk assessment (loss of skills and expertise, concentration risk, business

continuity)• Business Relationship Manager• Due Diligence• Contract• Service Level Agreement• Business Continuity Plan• Exit Strategy• IT Security• Data Protection• Information Risk• Contract Alignment• Regulatory

FSPF February 2009

• Governance Procedures (SLA, Operational Performance, Incident Management, Risk Assessment, Review Meetings)

• Outsourced Services Contract Database

• Contract Alignment

Post ContractPost Contract

FSPF February 2009

Contract ReviewContract Review• Annual Review• Due Diligence• Business Continuity Plan• Exit Strategy• SLA• Benchmarking• Re-negotiate/Tender• Materiality Review• Procurement Strategy• IT Security Review• Annual Risk Assessment

FSPF February 2009

Contract Expiry/TerminationContract Expiry/Termination

• Termination

• Account Reconciliation

• Equipment and Data

FSPF February 2009

Control & Control & MngtMngt of Outsourced Services of Outsourced Services Policy & Governance ProceduresPolicy & Governance Procedures

• Communication

• Supplier Relationship Management

FSPF February 2009

Questions?Questions?

PSD

– Founded in 1991

– Ten offices globally

– 400+ Employees

– Quoted on the London Stock Market

– Part of the OPD Group

– Investor In People

– ISO9001 : 2000

– FTSE4GOOD

– Strong Values Based Culture

PSD Procurement and Supply Chain

PSD

High

Low

Importance of

Salary

High

Seniority

PSD% of Placements per Sector

0

10

20

30

40

50

2005 2006 2007 2008 2009

Life & PensionsRetail BanksInvestment BanksInsurance

PSDFinancial Services Values

– The highest personal standards of integrity at all levels;

– Commitment to quality and competence;

– Trusted – Acting with the highest level of integrity and being able to take responsibility for decisions and actions.

– Respect for the individual

– Responsibility

– Citizenship

– Client focus

PSD

– Why do I want to work for this company?

– Why is the company recruiting against such a turbulent background?

– Why choose your organisation over another?

– Do I want to work for the person interviewing me?

Key Candidate Questions

PSD

– Emphasise the long term stability of the FS sector as a result of Gov support

– Highlight the strengths and successes of the procurement function

– Convey your company’s vision and brand values throughout the process

– Tap into the motivations other than money. Candidates are deeper than you think

– Look at the transferrable skills of candidates as well as sector knowledge. This will increase the pool of capable candidates

– If a candidate is a 90% fit, then make the hire. The enthusiasm to learn will make up the shortfall quicker than you think. The step up will motivate the candidate

– Ensure the recruitment process is clear and keep candidates informed

Proactive approaches

37

Supplier Management Academy

Supplier Risk in the Current Economic Climate

David Clegg – Supplier Management Academy, Group Procurement

38

Supplier Risk - Agenda

• The macro economic environment• SMs in the driving seat• Identify risk factors• Look out for warning signs• React• Opportunities?• Questions

39

Macro Economic Environment

Current climate is very different from the benign, relatively stable, growth environment we have been in

40

The Chief Economists message

“Our analysis of early warning indicators continues to suggest that economic growth will fall further below the long term trend rate, and is getting close to a recession signal. Trends in most indicators are worsening, the housing market and consumer confidence are particularly weak, and real interest rates are much less benign than the metric suggests as the decline is due to rising inflation, rather than falling interest rates, but wage growth is not rising.”

Chief Economists Office. 17th July 2008

41

Falling asset values

Leverage too high

Reduced bank capital strength

Asset sales

Higher credit losses

Reduced credit supply

Weaker economy

Round 1Financial markets driven

Round 2Real economy driven

Credit crisis 2nd round only just beginning

42

Supplier Risk – information sources

• Chief Economists Office• Trade press• General press and news

43 43

• Postponement of investment plans

• Looking to cut costs wherever possible

• Reducing employment

• Potential for more companies becoming insolvent.

Implications for our suppliers

44

The Defence Team

• The Supplier Manager (It’s your responsibility to co-ordinate the defence)

• BU specialist support (Finance, Risk etc)

• Group Procurement• Group Outsourcing Centre

45

SMs in the driving seat

Windscreen is very large –looking forward for risks

Rear mirror is quite small –already behind us

Side mirrors – for what is coming up fast

Instruments to monitor key factors

ICE

46

Supplier Risk

Identify Potential Risks

47

Identify potential problems – planning ahead

• Cost increases – (fuel, wages, but some things may come down – interim staff, vehicles)

• Labour unrest due to above, strikes, fuel blockades (Gate Gourmet)

• Adverse press coverage (reputational issues)• Weak financial position (potential financial failure or takeover)• Trigger conditions in contracts (if RPI over x%, volumes below y)• Reliance on much smaller sub-contractors• Supplier heavily dependent on a few customers (may be us!)• Consolidation of supply base – Consolidation of Banks!!!

– More power to supplier – More power to customer?

48

Supplier Risk

Warning Signs

49

Supplier Behaviours – through the windscreen

• Sudden strategy shifts, such as– Attempting to renegotiate contract price or payment terms– Looking for new long-term or volume commitments– Unresponsive to change requests

• Chasing new business – at any price and without ramp up in resources

• Share price volatility• Reduced investment in their infrastructure• Service deteriorates due to focus elsewhere• Non-availability of key staff• Chasing payment/ orders• Reduced bonuses and other cost cutting• Loss of staff/ Low morale• Paying their staff late

50

Supplier risk

Keeping an eye on your mirrors –Supplier Financial Reviews

51

Supplier Risk

REACT

52

Supplier Risk - Recommended actions

• Arrange a workshop with your business, risk, finance (budget andsupplier review) and Group Procurement category team and Corporate/Commercial Banking (if appropriate)

• Identify key/ likely issues, (Pestlee, Porters, Checklist)• Undertake sensitivity analysis (for volume or cost changes)• Identify key sub-contractors/supply chain – which are critical?• Update contingency and exit strategies and plans• Prepare for more rigorous annual audit of relationship• Proactively brief your Accountable Executive or Line Manager on

any concerns – you may need a quick response from them if your fears are confirmed!

53

Supplier Risk - Recommended actions

• Research – industry, financials, supplier’s customer base • Understand suppliers cost base so can identify how cost changes

will impact• Talk to the supplier – share your concerns, ask what they are

doing about their sub-contractors – add to monthly meeting agendas

• Site visits (shabby premises, many new staff)• Set up your own dashboard, what are the key instruments you

need• And how regularly do you need to look at them• Get expert support from finance, risk etc

54

Supplier Risk - Supporting our suppliers

• Helping them may be less painful then losing them• Tough love• Work with supplier if they are less advanced in their thinking on

this subject, review their supply chain and key risks with them– (KIV some suppliers or even whole sectors such as mobile telecoms may not

have been through a recession before)

• Work with supplier to take costs out elsewhere in process e.g. Lean, Process Owner Team, supply chain review. (Not a quick fix,got to react early)

• Will pay dividends for the future relationship

55

Supplier Risk – Supplier failure

• Not the end of the world – receiver will usually try to keep as a going concern– more difficult in shared service arrangements

• Problems likely to be in the service deterioration beforehand and loss of key personnel

56

Supplier Risk - Mitigating actions

• Give the supplier as much notice of likely changes in our requirements/volumes (share our thinking) otherwise we can seriously impact them

• Demand challenge – can we reduce our volumes or specification to offset price rises? (KIV this could increase pressure on supplier)

57

Supplier risk in the current economic climate

Opportunities

58

Supplier Risk - Opportunities

• Early payment discounts may be negotiable – but be careful of paying in advance

• Short term price reductions• Change to contractual relationship, more power to

customer• Factoring – Commercial Banking• Funding – Corporate Banking

59

Supplier Risk - Opportunities

• Not all negative or out of our influence• Will need to work closely with

– Accountable Executive– Group Procurement– Service user Business Units– Possibly other BUs e.g. Commercial, Corporate, LDC

60

Supplier Risk

Tools and useful contacts

61

Supplier risk

Porters Five Forces• Porter's Model emphasises the need for

us all to think big and think future • Rivalry Among Competitors

Economic conditions can affect how intense this rivalry is: in times of growth and prosperity, everyone should be able to claim a share of the market - quite the opposite during a recession, though.

• Bargaining Power of Suppliers Think about all those suppliers on which the success of your organisation depends. If there are a number of such suppliers, it is likely that the organisation will be able to call the shots, but in certain sectors, where there is only one supplier, they might be able to hold the organisation to ransom over terms and conditions.

62

Pestlee Analysis – Couriers

POLITICALGovt. Reaction to fuel protests/blockades. Strength of unions.

Weakened Govt authority leading to lack of resolution on

key legislation.

SOCIAL/DEMOGRAPHYIf un-employment rises

greater availability of van drivers at lower rates? Lack

of motivation/quality.Increased risk of

fraud/crime.

ENVIRONMENTALPressure by Group to reduce carbon profile.

Increased energy costs drives quicker adoption of

green agenda.

LEGALTrigger points in contract?Injunctions against union

action.Increasingly litigious

behaviour.

TECHNOLOGICALGreater use of scanning

to reduce volume moved.Ability to maintain

investment.

ECONOMICAbove inflation rises of fuel and wages. Consolidation

within industry.Increased cost of funding

for resource intensive industry. Congestion

charging. ETHICALPressure from us to

maintain their rates, give us further

discounts.

63

Supplier Risk - Summary

• Supplier Managers - It’s your responsibility to make sure a review is carried out

• Call on your specialist support team (Finance, Risk, GP category team, etc)

• How we will measure success?– Quality of coverage of this area in the annual review– Early warning of issues

64

Supplier Risk

Thank you for your time

Any questions?

AOB & CloseFSPF Chair - David Allcock

Many thanks for attending the FSPF today

CIPS Financial Services Purchasing Forum · CIPS Financial Services Purchasing Forum 17th February...

Documents

Transcript of CIPS Financial Services Purchasing Forum · CIPS Financial Services Purchasing Forum 17th February...