Non-compensation cost reduction through procurement transformation
In banks, non-comp expenses are typically 45 percent of the operating expense base, and of this 80 percent are generally amenable to strategic sourcing. This expense base is addressed aggressively as it delivers in-year savings and is relatively straightforward to implement.
Challenge
A major North American institution wanted to dramatically reduce their non-comp expense base (primarily vendor related), through procurement and process reengineering. The client sponsor was a member of the Executive Committee, with an unequivocal mandate from the CEO and senior leadership.
The bank engaged A.T. Kearney for the initiative because the firm invented Strategic Sourcing and was the first to bring this expertise to financial services companies across spend areas that span Retail Banking, Brokerage and Wealth Management, Investment Banking, Insurance, Credit Cards, and Payment Operations.
Approach and benefits
At the end of the first phase, the bank was realizing annualized savings of over 15 percent, with a consulting ROI of 15X. The consulting project was paid for by the results achieved in one category related to IT hardware.
Strategic sourcing categories included:
- Print, Postage and Paper – used a proprietary combinatorial mathematical tool to optimize the supply chain, relying on suppliers to provide bids for their most preferred solutions based on their scale curves (a first for financial institutions)
- Legal – negotiated rates with Wall Street firms, plus achieved even greater savings by bringing work in-house to take advantage of the wage-cost differential of 3X between outside and in-house legal counsel, without a linear increase in the internal staffing model
- IT hardware (PCs, Servers), software and global ADM – realized IT hardware savings of ~ 40 percent (despite vendors claiming best-in-class prices), and more modest double-digit savings for software and ADM
- IT contractors – normalized requirements, roles, etc., and conducted an exhaustive RFP in which we disaggregated wage costs from margins, statutory costs, etc. and negotiated reductions of over 30 percent
- Cards branding – drove substantial, preferential agreements on various fees and incentives in credit and debit over the next 5 years, for both Visa and MasterCard
- Employee Benefits – implemented regional solutions in NA, without reduction in quality of cover, for this significant expense base
- Marketing – addressed creative agency, media, and production spend to realize double-digit savings through streamlining client/agency operating models, spotlighting and rate-carding production costs, agency contract restructuring, etc.
- Real Estate outsourcing and footprint optimization – leveraged cross-business-unit power to significantly reduce facility management, transaction processing, and portfolio management costs, as well as optimizing space utilization across the bank
Results
Besides substantial savings, the bank gained two other equally critical transformation objectives:
- Savings were maximized by normalizing and consolidating requirements across lines of business and/or across regions (where applicable) – critical for kick-starting the operating model transformation, and also accelerating benefits from a major cross-border acquisition
- The cost transformation effort introduced, within the Procurement function and the businesses, new processes and practices (such as end-to-end category management, 7-Step Sourcing, and baseline-analysis) – essential for sustaining savings and structural transformation of the procurement activities across the bank, and strengthening the strategic sourcing organization to continue the cost transformation
The bank attests to A.T. Kearney’s fanatical analytical rigor and comprehensive process and practices that never fail to deliver results.
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