IT Procurement within financial services (FS) represents a complex mix of functions. There are many requirements, stakeholders, and suppliers to tackle. This is not to mention the need for regulatory compliance as well as third party risk management and operational resilience.
In addition, the nature of the market, particularly within the banking sector, is changing significantly. The demand for branches and ATMs has significantly decreasedm with much more appetite for on-demand digital services. This shift has created an opportunity for new agile, digital-centric banks to enter and quickly steal market share. These challenger entities are doing so largely through highly tailored and slick customer offerings. These digital offerings allow for rapid adaptability. They enable offerings to be quickly changed or configured in order to rapidly adapt to external market factors. For example: interest rate changes.
By contrast, traditional banking institutions still operate ‘mainframes’ and complicated legacy architecture. This is complex and costly to change and update.
Compliance and governance should be seen as a critical part of procurement’s purpose. However, it is imperative that it is not allowed to dominate thinking, neglecting the broader value of IT procurement. It’s crucial now more than ever that IT procurement proactively seeks to redefine its role. It must focus on being more than just a function that enforces compliance and process. Rather, it must be a valued thought partner to the IT function that guides and enables transformation and drives greater efficiencies.
Below are some of the key challenges that IT procurement professionals may face within financial services:
Complexity requirements
There is a broad range of evolving services in FS. In turn, this results in wide ranging requirements for technology to deliver. This is invariably coupled with a broad and diverse set of stakeholders with competing objectives and agendas. These stakeholders can often be in conflict with each other. This can lead to two key issues. Firstly, a long list of suppliers who provide the same or very similar core capabilities. Secondly, the over adoption of some platforms and deploying the wrong technology for the wrong reasons. Both outcomes will result in a higher cost base. And, in the latter instance particularly, sub-optimal performance and a high supplier concentration risk.
Processes, policies and regulations
Tight process and governance is a must-have in all FS organisations; regulators such as the Financial Conduct Authority (FCA) in the UK exist to protect individuals, businesses and the economy, and organisations need to evidence compliance. There is a risk, however, that processes and policies become a dominant focus of IT procurement. This, in turn, can lead to a negative perception or the function being seen as a barrier to transformation.
Suppliers
Suppliers can always be challenging regardless of the sector. In particular, however, there’s often a heightened level of incumbent supplier dependency within FS. This makes them especially tricky to manage. This supplier dependency is largely driven by complex legacy architecture and integration. Unchecked, it creates a scenario where suppliers understand that it would take years to move away and a resultant position of higher leverage for the supplier. Add to this diverse and competing stakeholders and requirements, as well as the perception of FS organisations being “cash rich”, and suppliers will often see the opportunity to increase their revenue via expanding their product offerings, or applying increases to cost on current contracts.
To that end, below are five essential tips for any financial services IT department to help manage this challenging environment.
1. Align with technical categories
Due to the large and diverse nature of FS organisations, it’s highly beneficial to align spend by category technology type. It’s important not to purely align to stakeholders as this will
significantly reduce consolidation and rationalisation opportunities. Aligning by technology also presents further opportunities for procurement to leverage organisational scale and build up SME knowledge within each category. For each category, understand what your renewal pipeline is and ensure that you align this with the technology roadmap and strategy. This will enable key priorities and a strategic sourcing approach to be defined.
Given the digital transformation challenge that many FS organisations face, a long-term
view is critical to avoid running into contract renewals with embedded suppliers with little
leverage and opportunity to influence. Appropriate planning and strategy (and time to do so) is key to ultimately ensuring successful negotiations that strike the right balance of long-term commercial protection vs unlocking value.
2. Build relationships and be willing to flex
It’s imperative that collaborative relationships are established with both ‘on the ground’ stakeholders and decision makers. This is about understanding the organisational objectives but also being proactive in presenting opportunities, risks and potential actions to address. What is particularly important and valued within FS is the ability to flex and work with stakeholders to approach each situation in the best way possible, acknowledging that in many circumstances market tenders may often be of little value. This doesn’t mean that formal tenders are redundant, far from it, but where long-term cost certainty of a current platform is the priority, it is essential to consider other ways of approaching the negotiation and generating leverage.
The ability to offer alternative approaches such as benchmarking and understanding how to leverage this alongside supplier organisation objectives are key to ensuring that IT procurement is seen as a solution-based enabler, even in challenging unavoidable single source scenarios.
3. Understand and objectively challenge requirements
Given the complexity of the technology landscape within FS, there will often be a gap between aspiration and reality, which can lead to over-buying or shelfware. Given this, it’s critical that requirements receive appropriate challenges and are objectively pushed back on. This is not a case of simply saying no, but rather providing a commercial interpretation of the situation and playing back potential options or approaches. It’s important to remember that this area of thinking often won’t be the priority or core competency of a given IT function who will predominantly be focussed on fulfilling a business requirement in the best way possible. It is therefore IT procurement’s responsibility to provide healthy and collaborative challenges.
4. Own the negotiation and know how to do it
Given the complex nature of infrastructure within FS organisations, IT is rarely negotiated in circumstances where an incumbent solution can be easily and cheaply swapped out. Incumbent technology platforms are often deeply embedded whilst investment in new technology is usually seen as critical to digital transformation (with a specific technology often pre-determined or highly favoured).
When considering negotiation approaches in this context, an essential starting point is establishing a minimum baseline of requirements and focussing on this as a priority – noting the often misalignment between aspiration and reality. Only once you have achieved an appropriate outcome on your baseline requirements should further conversations be entertained with suppliers. Given the often-complex nature of potential requirements, suppliers will often present over-scoped proposals based on what they see as the opportunity, badged as client requirements. It’s critical to not let suppliers drive the requirements but rather start from a minimum baseline of established requirements, whilst also starting to build a good understanding of the suppliers’ objectives.
Finally, whilst IT procurement should own the negotiation, this doesn’t mean going it
alone. Senior stakeholder relationships should be leveraged appropriately to arrive at the desired outcome, influenced by clear, insightful and influential briefings from IT procurement. This ensures that key messaging is delivered consistently.
5. Master the art of effective communication
To effectively act as a strategic thought partner to the IT function, it’s key that all of the great work and due diligence undertaken by IT procurement is communicated in a clear and concise manner. This may be done verbally. Often, when it comes to senior executives and decision makers, mastering the art of compelling written communication is key. This is the case both in terms of encouraging a decision to move in a particular direction or seeking support.
Rather than providing rigid bullet point summaries outlining key terms, benefits and risks, it’s important that IT procurement has the ability to clearly articulate the scenario, the practical options that are available, and most importantly an informed and objectively considered recommendation.
Final thoughts
In conclusion, now more than ever, the value that a high-functioning IT procurement can add cannot be undervalued.
In a sector with ever evolving regulatory requirements and highly digital agendas, it’s essential for FS organisations that procurement acts as the commercial interpreter and advisor, guiding IT leaders through the process and helping to foster a collective focus on unlocking value and driving optimal outcomes.
