Strategic sourcing for banks

Item processing: Re-engineering for the crucial make vs. buy decision

“By re-engineering item processing, banks can reduce costs by 20 to 35 percent.”

Item processing is at a crucial juncture. Declining volumes of checks, unwieldy and inflexible legacy infrastructures, increasing per unit costs and the introduction of remote imaging technology are all contributing to the complexity of everyday business decisions.

Larger banks operate at costs under 5¢ per item processed, and are making further cost cuts through remote imaging. But there is more to do. Transforming processes and outsourcing (albeit selectively) will further reduce costs. Yet such cost-cutting strategies are not accomplished without first understanding and planning for the subsequent impact on the organization—especially the increased complexity. When re-engineering processes—from the front counter to the back room—getting buy-in from the entire retail branch network is a necessity.

As industry dynamics force a re-evaluation of your make-vs.-buy decisions, a big question remains: Do we re-engineer item processing and perform the process in-house, or outsource it to a qualified provider? Either way, the process must be re-engineered—examining the configuration of the current processing site, determining prospects for consolidation or clustering, and gauging the impact on bank branches and customer service.

By re-engineering item processing, you can reduce costs by 20 to 35 percent.

A.T. Kearney applies the following strategic sourcing strategies to re-engineer item processing:

• Volume concentration—consolidate proof sites and number of suppliers
• Product specification improvement—analyze return on investment (ROI) and potential for remote imaging at the teller, branch and ATMs, among other options
• Joint process improvement—map current process and cost of operations, model the future state, re-engineer processes and analyze make-versus-buy decisions
• Relationship restructuring—establish or develop relationships with key suppliers and build partnership framework for outsourcing item processing
• Global sourcing—determine optimal level of outsourcing with best-in-class suppliers
• Best price evaluation—compare total costs, model should-costs, negotiate prices and unbundle pricing 

Real estate lease and rental: Seizing opportunities in the commercial real estate downturn

“An informed assault on real estate costs can deliver 15 to 20 percent in savings.”

As commercial vacancy rates soar, U.S. landlords are lowering lease prices and offering more flexible terms. Banks with extensive branch networks and acres of prime office space are in a strong position to profit from an informed, aggressive assault on real estate costs.

A quick tour of the business district in any major U.S. city features block on block of empty storefronts and “see-through” floors in office towers. Companies across all industries are aggressively cutting back their real estate outlays and using space more productively. Best-practice companies now devote an average of 150 to 175 square feet per workstation for most administrative space and offer telecommuting options to their employees.

To gain the most advantage from the downturn, banks, particularly those with legacy space or space obtained in a merger or acquisition, need to take an enterprise-wide view of their space needs. It is vital to explore all opportunities, including ways to renegotiate or exit short-term leases and plan for longer-term leases. The evaluation includes a detailed assessment of space use by function to determine the potential for shared or flexible workspaces, implementation planning, and change management. An informed assault on real estate costs could deliver 15 to 20 percent in savings.

A.T. Kearney applies the following strategic sourcing strategies to review your real estate portfolio and seize cost-saving opportunities:

• Volume concentration—increase utilization of owned and leased buildings
• Product specification improvement—establish corporate standards and policies for vacancy and density
• Relationship restructuring—explore options to renegotiate or exit near-term expiring leases and plan for longer-term leases
• Best price evaluation—benchmark lease rates to the market and identify gaps, and review lease agreements to identify overpayments

ATM hardware and maintenance: Resetting the cost structure in a time of change and competition

“Developing an ATM strategy begins with a high-level view—taking into account channel strategies, customer service offerings and technology…”

The combination of improved vendor capabilities and competition, state-of-the-art ATM technologies and declining costs are all playing havoc with the bank operating model. There are numerous decisions to be made—and none can be made in isolation.

Banks are dealing with an enticing menu of advanced ATM technologies: imaging, automated deposits, self-healing/remote monitoring, and open architecture software, to name a few. And service providers are expanding their offerings to a full suite of ATM services, including first- and second-line maintenance, help desk services, cash forecasting, monitoring and janitorial services. Adding to these dynamics—a decline in ATM hardware and service costs requires all banks to have a deeper understanding of life-cycle costs by service lines.

Developing an ATM strategy begins with a high-level view—taking into account channel strategies, customer service offerings and technology to build a unified enterprise operating model. At a more detailed level, it requires reviewing legacy operating models, analyzing contracts for service levels and pricing, aligning vendor agreements to remove redundancies, and evaluating all in-house activities, including first-line maintenance for outsourcing. Indeed, by sourcing ATM hardware and maintenance, banks can reduce costs by 10 to 20 percent.

A.T. Kearney applies the following strategic sourcing strategies to reset legacy costs, leverage vendor capabilities and upgrade ATM technologies:

• Volume concentration—consolidate spend with preferred service vendor(s)
• Product specification improvement—rationalize ATM models and optimize service requirements
• Joint process improvement—work with suppliers to improve service, both in delivery frequency and quality
• Relationship restructuring—continually track supplier performance in operations and service
• Best price evaluation—develop vendor price scenarios to obtain the best price, while balancing risks and maintaining service levels

Telecom: Capitalizing on changing market dynamics

“There has never been a better time to wring costs from the telecom category. Savings could reach 10 to 20 percent.”

As the world continues its love affair with information, old and new telecom players are vying for market advantage. There has never been a better time for banks to capitalize on the competitive energy to demand more services and lower prices from their telecom providers.

Since 2000, the price for wireless services has plummeted 66 percent. IP transit rates have fallen 5 to 10 percent in the past five years, and toll rates dropped about 20 percent between 2005 and 2008. Over the same period, demand for data on a plethora of devices has continued to grow, as the world increasingly depends on mobile bandwidth, IP-based networks and cloud computing. Market dynamics are changing as new telecom players such as Wipro and Infosys provide managed services, while large players such as AT&T and Covad are expanding.

What does this mean for banks? There has never been a better time to wring costs from the telecom category. Simply bundling services and opening annual commitments to competition can cut costs. Taking advantage of new entrants and expansion by traditional players can increase the quality of managed services and reduce outlays. Investing in new bandwidth can improve the business case for innovative technologies such as VOIP and TelePresence, while cloud offerings will make for a more variable cost model. Potential savings can total 10 to 20 percent.

A.T. Kearney applies the following strategic sourcing strategies to capture savings in the telecom category:

• Volume concentration—consolidate telecom spend with fewer suppliers, while leveraging MACs and other volume discounts
• Product specification improvement—standardize telecom equipment and services, and consider investing in more advanced cost-effective technologies
• Joint process improvement—rationalize unused capacity (phone lines, for example) and share costs for productivity gains
• Relationship restructuring—build relationships with key suppliers and continually benchmark supplier performance
• Global sourcing—consider new players such as Wipro and Infosys for managed services
• Best price evaluation—use benchmarking and competitive pricing, bundle spend across all telecom services, and develop should-cost models for telecom services and operations

IT services: Tailoring the IT services model to meet your needs

“A tailored IT services model can yield savings of 10 to 20 percent.”

Yesterday’s IT services model may not fit today’s banking realities as customers become accustomed to speedier and more efficient processes. IT service providers are also living through changing business realities and the accompanying pressures. The result? Banks have an opportunity to tailor a new and more cost-effective IT services model.

As prices of outsourced IT services continue to fall (forecast to shrink 5 to 20 percent in 2009-2010) IT services offerings are continuing to evolve: Desktop management has become a commodity. Help desk software boasts self-service options and knowledge management features. Niche providers offer focused expertise. And there are more “best shore” options than ever. As a result, banks can tailor their IT services model to their needs at less cost than ever before.

A tailored IT services model can yield savings of 10 to 20 percent. The process begins with a strategic evaluation—gauging the impact of upheavals in the banking industry against the existing IT services model. Is the current model delivering its expected value? Is your organization using the available automation and asset management tools effectively?

Have agreements been renegotiated to reflect today’s competitive rates?

A.T. Kearney applies the following strategic sourcing strategies to tailor an IT services model to your needs:

• Volume concentration—leverage spend across multiple third-party service providers and develop a companywide end-user support delivery model
• Product specification improvement—adjust service-level agreements (SLAs) to reflect true business requirements
• Joint process improvement—implement self-help and automated services. Streamline IMACs request and fulfillment processes and streamline processes to manage builds and updates
• Relationship restructuring—benchmark supplier performance continually and share cost-to-serve productivity gains
• Best price evaluation—perform benchmarking, competitive pricing analysis, and should-cost modeling; adjust prices to market conditions as needed

IT hardware: Taking advantage of commoditization

“With commoditization of IT hardware comes a range of cost-cutting, value-enhancing opportunities.”

As IT hardware prices are being driven down, manufacturers are under pressure to boost margins and volume. This is no time to watch from the sidelines. Using sound strategic sourcing strategies, banks can save between 8 to 20 percent in their IT hardware category.

Across all categories, IT hardware is turning into a commodity. Prices of servers, mainframes, PCs and storage are falling 10 to 30 percent even as new developments—server virtualization, new-generation mainframes and improved storage capacity—continue to add value.

With commoditization comes a range of cost-cutting, value-enhancing opportunities, from identifying alternate manufacturers and re-evaluating warranty terms, to controlling changes to specifications. Now is the time to standardize PC and server configurations, investigate “utility pricing” to improve server and storage utilization, and where feasible, use remanufactured equipment. Unbundling software, services and accessories from hardware will increase competition and enable apples-to-apples comparisons, while forward-pricing strategies can capture annual price drops and control technology upgrades.

A.T. Kearney applies the following strategic sourcing strategies to capture savings and value in IT hardware:

• Volume concentration—consolidate volume across categories with a similar supply base, and source the entire category rather than specific projects
• Product specification improvement—ensure that configurations are not “overkill” for needs, redefine service-level agreements (SLAs) to match true business requirements, and align configurations and SLAs with standard offerings
• Joint process improvement—execute mega-supplier strategies
• Relationship restructuring—benchmark suppliers’ performance continually
• Best price evaluation—perform competitive pricing analysis

Armored carriers: Think regionally

“Armored carriers are extremely sensitive to changes in demand, particularly loss of contracts.”

When the cost-per-branch trip can vary among regions by a factor of six, it is time to take a closer look at armored carriers. Banks can gain the upper hand — consolidating the supply market to obtain a best-in-region rate.

In the New York Metro and New Jersey area, a branch trip by an armored carrier costs from $20 to $40. In remote locations in Maryland and Virginia, banks could pay from $25 to $125 per trip. With prices this variable, it is worthwhile for banks to study their armored carrier suppliers by region, factoring in their reputations, scale and operational efficiency to deliver quality service.

Given armored carriers’ high labor costs and low margins, they are extremely sensitive to changes in demand, particularly the loss of contracts. This gives banks the upper hand in leveraging the supply market to consolidate suppliers and obtain a best-in-region rate. Negotiations begin with a full understanding of all costs: number of branches and ATMs, service and footprint coverage, frequency of pick-ups and replenishments, extra waiting time, excess boxes or bags, and unscheduled or special deliveries.

Potential savings can range from 7 to 12 percent.

A.T. Kearney applies the following strategic sourcing strategies to improve the price and performance of armored carriers:

• Volume concentration—consolidate the number of suppliers and consider awarding multi-year contracts for more total volume
• Product specification improvement—standardize ATM and branch visits and service levels and consider reducing the number of pick-up days
• Joint process improvement—work with the carriers to determine the frequency of branch and ATM visits
• Relationship restructuring—create a governance structure that continually tracks supplier performance
• Best price evaluation—renegotiate prices to obtain best price for the region, while balancing risks and quality of service; define fuel surcharge policies

Credit bureaus: Taking a hard look at bureau spend vs. value delivered

“Unbundling and restructuring credit bureau contracts can increase transparency and yield savings of 7 to 12 percent.”

What are credit bureau services really worth? Banks are redefining the answer by consolidating spend and volume and negotiating service prices more aggressively.

The credit bureau industry has been on the receiving end of the credit and economic crisis, particularly the transaction side of the business that depends on origination and prescreening. The industry is dominated by a few traditional players, with variations by geography and the type of information provided. Some new players such as Innovis are trying to capture share. Yet as the trend is toward consolidating spend and volume across lines of business, it is time to evaluate the intrinsic value of credit bureau services and negotiate a pool of consulting hours, analytics and value-add services.

Unbundling and restructuring credit bureau contracts can increase transparency and visibility into volume tiers, usage and frequency of extracts. Moving to multi-year extended contracts allows unused volume to roll over, and covers the ups and downs of business cycles. These strategies, plus comparing price-volume cost curves, can yield savings of 7 to 12 percent.

A.T. Kearney applies the following strategic sourcing strategies to help banks improve their credit bureau relationships and services:

• Volume concentration—consolidate spend and bureau usage enterprisewide, and ensure that service-level agreements (SLAs) are consistent across bureaus and lines of business
• Product specification improvement—manage specifications, eliminate redundant information, and rationalize attributes across lines of business
• Joint process improvement—evaluate the frequency and depth of extracts and the impact of additional attributes in driving value; include an option to roll over unused volume
• Relationship restructuring—conduct competitive, concurrent negotiations for best rates, explore options for performance guarantees, and benchmark supplier performance continually
• Best price evaluation—model should-costs and their impact, unbundle all costs to gain visibility, benchmark prices, and compare price-volume cost curves

Collections and recoveries: Managing performance to drive value

“Success in collections requires a structured process—selecting the right agency and managing its performance.”

With the growing number of incentive structures and new agency models, banks are raising the competitive bar to increase netbacks and reduce payouts. Success requires a structured process—selecting the right collection agency and managing its performance.

Numerous incentive structures are driving liquidation rates in collections and recoveries—ranging from 21 to 23 percent commissions to 5 to 7 percent liquidation rates for primary stage tier 2 collections. And a cadre of champion-challenger models is providing rival agencies with commissions two to five points below incumbent rates. At the same time, sending early stage or lower-value work to offshore providers can reduce costs by 30 percent or more, while late-stage collection is increasingly being considered for offshore or nearshore agencies.

Today, the trend in collections and recoveries is to select agencies based on performance. This requires not only doing some homework but also thinking across lines of business. How many collection agencies do we use, and what are the selection criteria? What allocation of revenue will spur stronger performance without leading to overexposure? What are the performance and cost reduction benchmarks, for example, commission and liquidation rates by tier operational metrics? Where does it make sense to use a champion-challenger model, or a dynamic work allocation model?

A.T. Kearney applies the following strategic sourcing strategies to help banks select their collection agencies and manage their performance:

• Volume concentration—consolidate collections and recovery efforts across lines of business and adopt a consistent view of the customer relationship, focusing on risk exposure
• Joint process improvement—review efficiency of processes and effectiveness of systems and techniques applied across types and asset classes
• Relationship restructuring—adopt structured programs, such as performance-based dynamic allocations, to improve yield
• Global sourcing—outsource early stage or lower-value work to offshore supplier to reduce costs by 30 percent or more
• Best price evaluation—use agency should-cost model to negotiate prices and ensure value sharing with lower-cost models