Calling Card
May 2012
Five Percent Efficiency Through
External Spend Management
New Models to Build Capabilities and
Reduce Spend in Financial Services
This document is confidential and is intended solely for
the use and information of the client to whom it is addressed.
Executive Summary
While managing cost is considered the new norm across the financial services industry, a return to
historical performance in efficiency would require banks to rethink their approach to spend
management. The large and changing scope of external spend makes it a necessary and major
component of any cost program.
Banks can reduce these costs by 10 to 20 percent and deliver a 5 percent or better improvement in
efficiency while enhancing capabilities. Accomplishing this requires the use of these key levers:
– Manage discretionary spend as an investment pool
– Build a demand management culture to eliminate waste
– Restructure the supply base to access economics and capabilities
– Manage supplier partnerships to capture efficiencies
– Create a new operating model to sustain and enhance results
When you look at external spend with this new lens, you move expense management to the
executive agenda. Your costs are no longer problems; they are now choices.
Booz & Company
1
To return to historical performance, banks must cut costs to lower
their efficiency ratios
Efficiency Ratio
 The average efficiency ratio
for mid-cap banks since 1989
has been 60%
70%
Efficiency Ratio for 18 Banks
(Midsized: Asset Size $50M - $350M)
64
 As of 2011, it is 64% and still
climbing
62
 Each point of efficiency
improvement will require a
2% cost reduction
61
60
60%
 To return to historical
efficiency ratios between
57% and 60%, a typical bank
would need to reduce costs by
7% to 12% or grow revenue
by 10% to 15%
63
62
59
61
60
60 60
59
58
57
57 57
58
57
60
59
57
58 58
Historical
Average
Best in Class
50%
1989
1994
1999
2004
2009 2011
Average Efficiency Ratio
Note: The efficiency ratio (ER) measures what a bank must spend in order to make $1. The higher the ER, the worse the performance; ER = non-interest expense / operating revenue (expense calculated
as non-interest expense less depreciation and amortization of intangibles; revenue calculated as net interest income + non-interest income).
Source: SNL Financial Data 1989-2011
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2
The large and bifurcated nature of external spend presents a real
opportunity—for cost savings and capability building
For a Typical Bank, External Spend Comprises
Nearly Half of the Total Cost Base
Cost Profile of Typical Bank
Spend (%)
Amrt & Goodwill Foreclosure & Repo
Interest Expense
12%
Spend Is Bifurcated … Banks Must Manage Large Supplier
Relationships and Fragmented Spend
Supplier Distribution by Spend
35
2%
1%
Concentrated set of
large, strategic
suppliers
30
25
45%
10
Long tail of small,
transactional
suppliers
<$KM/year
5
External Spend
Comp & Benefits
$XM-$YM/year
20
15
40%
>$YM/year
0
0%
Minimize
Transaction &
Management Costs
<$00K/year
Suppliers by Size (%)
<$000K/year
100%
Maximize Joint Value
Creation (Productivity,
Capability, Innovation, etc.)
Source: SNL Financial Data 1989-2011; top 15 midsized banks; Booz & Company experience and analysis
Booz & Company
3
Most banks still address spend through price and cost – higher
impact comes through demand and value levers
Transformational Opportunities
Price
Cost
Levers
 Increase coverage of spend
 Basic cost insights
 Credible threat to switch
supplier
– “Designed-in” competition
– Consistent messages
 Auctions
 Multiyear target commitments
 Timing of the buy
Demand
Levers
Value
Levers
 Rationalize supplier base
 Switch to cost-advantaged suppliers
 Manage drivers of total cost of
ownership, to reduce internal costs
 Reduce internal process burden to
manage supply and transaction flow
 Streamline logistics/processes at
supplier interface
Levers
 Reduce consumption
 Reduce/standardize specification
 Use industry standards instead of
custom designs
 Switch to substitute technologies
with desired functionality
 Leverage supplier innovation
capabilities
Procurement Role
Procurement Function Delivers
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 Find appropriate make/buy/
outsource balance across
value chain
 Supply base restructuring
 Influence product mix/regional
preferences to favor products with
greater supplier base leverage
 Ongoing supplier development set
against “should be” cost and
performance targets
 Enhance operating model to sustain
impact and efficiency
Procurement Function Enables
“Traditional” supplier-facing
procurement role
“Nontraditional” skills increasingly required
to influence internal stakeholders
Lower Impact
Higher Impact
4
A fundamental rethink is required to get the most from external
spend—five levers to achieve five points of efficiency
Rethinking External Spend Management:
5 Key Levers for Financial Services
 Approach with an “investor’s
eye”—make explicit investment
decisions
 Proactively manage the
spend—establish KPIs and
measure results
 Hold executives accountable
 Establish strong relationships
between procurement and
business partners …
 … to facilitate demand
discussions during business
planning
 Establish KPIs that provide
stakeholders with insight into
their demand trends
1 Proactively Manage
Discretionary Spend
2
Build a Demand
Management Culture
5%-25% savings
Near-Term Savings
4
2%-5% savings
20%-40% savings
5
Manage Supplier
Partnerships
Establish
New
Sourcing
Operating
Model
3
Restructure Your
Supply Base
10%-20% savings
 Establish a robust program that
captures value
 Build vendor management
capabilities into normal
business operations
 Invest the same level of
resources and commitment
externally as you would
internally
 Think higher in the bill of
materials
 Leverage supply base to
access new/differentiating
capabilities
 Select suppliers to play in their
“sweet spot,” but be aware of
full complement of service
offerings
Longer-Term/Ongoing
Note: Savings opportunity is applicable to addressable spend for that opportunity lever.
Source: Booz & Company analysis
Booz & Company
5
Using this approach, 10% to 20% of external spend can be
restructured or eliminated
EXAMPLE
Savings Potential by Key Lever ($M)
100%
2%-4%
2%
2%
3%-5%
-10%
2%
3%
3%-9%
80%-90%
-20%
6%
3%
10%
1%-2%
1%
1%
High Savings Opportunity
80%
Low Savings Opportunity
Total External Spend
1
2
3
Discretionary Spend
Demand Management
Supply Base
Restructuring
4
Supplier Management
Resulting Spend
Thereafter, sustainable annual savings of 3-5% or more should be achievable
Source: Booz & Company experience and analysis
Booz & Company
6
1
Discretionary Spend
Discretionary spend is an investment pool, not an expense—
manage it proactively at the enterprise level
Discretionary Spend Year-over-Year Growth
Client Example: U.S. Regional Bank Without Active Management
($ Million)
+20%
$130
$145
$100
Year 1
Year 2
Year 3
-25.0%
Year 1 Actual
 Discretionary spend is defined by categories that
the business can “dial-up/dial-down” (e.g., travel,
consulting, charitable contributions)
 Executives should view discretionary spend as an
“investment pool” vs. an “expense pool” …
Discretionary Spend Trend
With Active Management
100.0%
Discussion
70.0%
Year 2 Target
75.0%
Year 3 Target
 … and strategically manage their decisions based
on the best “investment” for the bank
 Unchecked, “discretionary” spend will grow yearover-year
 A “lights-on" approach that deploys targeted
policies can reduce non-revenue-related
discretionary spend
 To manage the spend effectively, structured
dashboards/scorecards should be developed and
shared with stakeholders regularly
 Putting a robust discretionary management
program in place can yield 20% to 30% savings
Source: Booz & Company experience and analysis
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7
2
Demand Management
Demand management delivers savings in alignment with the
degree of change/effort the organization is able to make
Critical Success
Factors
Demand Management Cost Potential Matrix
Aggressive
EliEliminate
minate
Demand
Demand
Reduce
Quantity
Benchmarking
Best Practices
Reduce
Requirements
Level of
Effort
Encourage
Substitution
Conservative
Heighten Cost
Awareness and
Tighten
Policies and
Standards
Lowest
Booz & Company
Executive
Commitment
Technology &
Tools to Manage
Reduce
Frequency
Impose
Approvals
and
Tighten
Procurement
and
Monitoring
Processes
Tracking &
Measuring Results
Savings
Greatest
Change
Management
8
3
Supply Base Restructuring
Supply base restructuring can enable access to best-practice
economics and differentiating capabilities
Make-vs.-Buy Decisions Across Spend
Typical FS Institution
IT &
Communications
 Cost advantage: To take advantage of the wagerate differential between the manufacturers and the
supply base
 Superior competency: Over time, service
providers offered a degree of sophistication that inhouse specialists could not match
Real Estate
 Asset transfer: Selling assets to suppliers
improved the balance sheet and gross margins (due
to superior supplier competency)
Professional
Services
 Utilization improvement: Suppliers utilized unused
capacity by selling to other firms, lowering the
overall cost of goods and services
Business
Services
Other G/A
0%
Percent of Spend
Insourced
Booz & Company
Why the Move from Make to Buy?
Outsourced
100%
 Economies of scale: Concentrating on fewer
capabilities and pooling demand helped suppliers
create economies of scale for Original Equipment
Manufacturers
 Business risk mitigation: Customers and
suppliers collaborated to reduce business risks such
as inventory obsolescence and stockouts
9
3
Supply Base Restructuring
Financial services is following the lead of other industries to
establish an integrated, tiered supply base
Supply Structure Considerations
Supplier Structure Model
 The supply base is changing, relying more and more
on outsource partners for the delivery of both noncore services and core operations
Existing Supplier Landscape
In-House
Business 1
In-House
Business 3
In-House
Business 2
Multiple Tier One
Interfaces
FM
FM
FM
FM
MA
MA
PM
PM
PM
PM
PM
FM
FM
FM
FM
MA
MA
PM
PM
PM
PM
PM
PM
High fragmentation in Tier Two interfaces
 The structure of this supply base is changing too,
evolving to resemble the tiered structure typical of
an automotive Original Equipment Manufacturer
PM
New Integrated Supplier Model
1 Office focused
In-House Central
Property Team
Portfolio A
1
Multi-Service Provider
Tier One
Tier TwoTier 2 Tier Tier
Two 2
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Portfolio B
Tier Two
Tier
2
2
2 Branch focused
Multi-Service Provider
Tier One
Two2
Tier 2 TierTier
TierTier
2 Two
Tier Two
 The benefits of developing Tier One suppliers
include:
– Necessary scale and network
– Capable of continuous innovation, coverage of
multiple technologies
– Cost competitiveness
 Success factors include:
– Capable network of partners and Tier Two
suppliers
– Appropriate scale to offer broad range of
capabilities required from a systems supplier
– Innovation to avoid cost pressure and keep up
margins
10
Vendor Management
4
Vendor management ensures sustainability and advantage beyond
the deal
Key Elements
1
Partner
Segmentation
2
Setting the
Agenda
3
Performance
Management
4
Governance
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Description

Clear segmentation of the supply base based on spend
and criticality

Balances capturing a significant portion of the spend with
including a manageable number of partners

Framework to guide productive discussions with
suppliers to drive desired outcomes

Four key elements: relationship review, improving on
delivery, opportunities for growth, joint planning

Systematic approach to managing vendor performance to
drive consistency across the org

Three key elements: performance measurement, contract
management, risk management

Holistic operating model outlining the level of “touch” and
processes, tailored to each relationship type

Clear delineation of roles, responsibilities, and processes
to manage each relationship type
Key Changes for Success
 Establish a robust vendor
management (VM) program
to capture value and build
capabilities from vendor
relationships
 Embed VM capabilities in the
business operations, not just
as part of the procurement
function
 Invest the same level of
commitment and resources
externally as you would
internally
11
5
Sourcing Operating Model
Sourcing operating model—define the right organization construct
to align the team
Major Areas for Sourcing Organization
Category Sourcing
Procurement Operations
Center of Excellence
Develop and execute category
sourcing strategies jointly with
BU / Functions
Ensure efficient & effective
strategic sourcing processes &
support functions
Drive advanced analytics and
related capabilities on an on-going
& project basis
 Category Strategy - develop the category
strategy and drive the execution through
implementation at the BU level
 Process Standardization - champion
standardized processes & methodologies
 Thought Leadership - drive leading-edge
thinking around on-going topics (e.g.
BCC sourcing, market intelligence)
 Category Expertise - develop and
maintain deep category expertise
 Stakeholder Relationships - ensure
intimate understanding of business
needs
 Category Performance - establish
targets/ goals and track performance
against them
 Coordination - coordinate strategyrelated activities with operations team
 Organizational Talent - manage human
capital, professional development and
growth
 Vendor Management - identify supplier
diversity opportunities, develop and
maintain contracts, manage vendor qual
process
 Event-driven support - provide sourcing
event support, with a focus on process
adherence & e-sourcing tools
 Systems & tools – support implementation
and management of tools
 Best Practices - work with category leads
to implement best practices & next-level
change
 Analytics - provide advanced analytical
support and spend analytics
 Strategic Projects – plan & execute
projects to enhance org capabilities, e.g.,
SRM,
 Value Measurement - track & report
performance metrics & provide ad-hoc
analysis, and link to finance
Best-practice strategic sourcing organizations focus on three capability areas to deliver
value to business partners, efficient delivery, and ongoing improvements
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12
5
Sourcing Operating Model
Enhance the three key supply management capabilities
Outsourcing
Vendor Management
The end-to end process to identify and execute the outsourcing of
large/complex business operations
Key Activities
Identify
Opportunities &
Build Business
Case
Approve
Business Case
Manage
Sourcing Process
& Refine
Business Case
Select
Provider &
Negotiate
Contract
Manage &
Execute
Transition
Managing strategic partner
relationships for business
outcomes to maximize value
Key Activities
Manage
Day-to-Day
Operations
Determine Partner
Segmentation
Designation
Key Capabilities
Project
Management
Risk
Management
Change
Management
Communications
Planning
Talent
Management
Manage
On-going
Partner
Performance
Establish
Partner
Operating
Model
Sourcing/Procurement
The process to aid Business stakeholders in identifying supply strategies
and procuring products & services to support daily operations
Set Partner
Agenda
Key Activities
Support Business
in Requirements
Planning
Support Business
in Managing
Demand
Develop
Category
Strategies
Manage Sourcing
Process
Select
Provider &
Negotiate
Contracts
Support Dayto-Day
Purchasing
Needs
Key Capabilities
Category
Management
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Contract
Management
Risk
Management
Procurement
Operations
e-Procurement
Key Capabilities
Relationship
Management
Risk
Management
Contract
Management
Performance
Measurement
13
5
Sourcing Operating Model
Increase engagement with the business; change “red zones” to
“green zones”
Typical company
Reqmnt.
Planning
Demand
Mgmt
Sourcing
Strategy
Dev.
Vendor
Selection
& Negot.
Contract
Mgmt
Order
Process
Mgmt
Performan
ce Mgmt
/Tracking
On-Going
Value
Mgmt
Reqmnt.
Planning
Demand
Mgmt
Sourcing
Strategy
Dev.
Vendor
Selection
& Negot.
Contract
Mgmt
Order
Process
Mgmt
Performan
ce Mgmt
/Tracking
On-Going
Value
Mgmt
OVERALL
IT &
Telecom
Procurement’s
view of procurement
Marketing
Corp.
Services
Business
Services
Real
Estate
OVERALL
IT &
Telecom
View of procurement held
by other stakeholders
(including top management)
Marketing
Corp.
Services
Business
Services
Real
Estate
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14
There is no one “right” way—one of three approaches will work
based on the opportunity and change required
Three Approaches to Delivering the Benefits
 Run the effort programmatically and outside procurement
Transformational
Program
 Engage business stakeholders and senior management
 Prioritize the opportunity and address in waves to build momentum
 Integrate the capability and opportunity road map and manage change throughout
 Address one lever at a time to maintain focus and sustainable impact
Focus on a Specific
Opportunity Lever
 Prioritize the effort to ensure it’s not “just another project” on the list
 Think holistically and implement the solution across relevant enterprise spend
 Engage a cross-functional team, beyond just procurement, to gain the necessary
buy-in
Address
Specific Functional
or Spend Area
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 Strategically select the area to align with business needs and/or priorities
 Address all opportunity levers to ensure maximum impact
 Engage key stakeholders early and throughout the effort
15
Lessons learned by banks making this transition
 Put third-party spend management on the executive agenda: Big impact requires “big”
attention
 Make it worth the effort: If it’s too easy or too small, it won’t get the necessary attention or be
worth the change required
 Manage the opportunity at the top and “outside the lines”: It’s an enterprise problem, not a
procurement-, function-, or line of business-specific problem
 Become capabilities-centric: Look beyond the answer to develop the supporting skills and
ongoing operating model
 Manage the change: Mitigate risks and drive adoption by understanding the impact on all
elements of the operation—people, processes, governance, and tools
 Continue to make the effort: It has to be sustainable; the solution isn’t “once and done”
Booz & Company
16
When companies have followed this approach, they have realized
significant savings
Project
Impact
Description
Supply
restructuring and
deployed new
model—20%
savings
Strategic sourcing
direct-mail program
at a Tier One bank
Conducted enterprise-wide
direct-mail marketing spend
and spec baseline across 13
distinct business units and
nearly 800 unique specs
Identified demand-side,
process, and supply-side
opportunities and quantified
savings estimates associated
with each lever for three
categories
Implemented a comprehensive
strategic sourcing process
including distribution of a
nationwide RFP, supplier
negotiations, and creation of a
preferred vendor base to
achieve savings
Demand management
and sourcing program
at a major bank
Performed a comprehensive
review of IT, marketing,
operations, and HR spend to
identify savings opportunities
Identified demand
management opportunities
and developed a program,
outlining policies and
procedures to more
effectively manage demandside requirements
Implemented a reorganization
to align the sourcing
organization with business
units for effective
management of spend
Identified areas of opportunity
and potential savings
estimates for several spend
categories; Identified
capability-building priorities
for sourcing team
Developed implementation plans
for each commodity; Created
and implemented strategic
sourcing organization structure,
including senior team buy-in and
sourcing team training
Strategic sourcing
program for leading
bank
Conduced spend baseline
and categorized externals
expenditures across the bank
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30% annual
savings achieved
over an 18-month
period
Established a
structure to
realize ~10%
savings within
one year
17
Contact Information
Chicago
Lisa Mitchell
Principal
+1-312-578-4802
lisa.mitchell@booz.com
Florham Park, NJ
Pat Houston
Partner
+1-973-410-7602
pat.houston@booz.com
New York
Jodi Miller
Principal
+1-212-551-6639
jodi.miller@booz.com
Booz & Company
18
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