What Financial Services Companies Should Do When Cost Cutting Isn't Enough

As anyone who’s grappled with a household budget knows, striking the perfect balance between saving for the future and enjoying today can be tricky. Even those who virtuously skipped that $5 daily latte may experience a rude awakening: Experts have pointed out that obsessing over coffee splurges may be inconsequential to what really shapes personal financial stability. 

In financial services, many institutions face similar uncertainty as they grapple with a variety of forces that for years have put tremendous pressure on the industry. Left with unsustainable cost-income ratios due to sustained low interest rates, compressed net interest margins, new regulations, and aggressive fintech upstarts, these players need to cut costs without slicing the digital transformation and customer experience budgets that are integral to their futures.

Not unlike the “latte factor,” banks and financial institutions are finding that traditional cost-cutting methods like closing branches aren’t going far enough—and are causing pain in the process. After closing a record 3,324 branches in 2020, banks are now looking for new ways to control costs without harming the customer experience or reducing access to service.

For banks and insurance companies, the procurement process offers ample opportunity to improve operational efficiency and drive down costs while enhancing supplier relationships and increasing agility. In fact, for financial services institutions that build best-in-class procurement organizations, Hackett Group findings suggest they can lower costs by 25% compared to organizations with less agile procurement.

Here are four considerations that will help banks and insurers transform procurement into a strategic powerhouse to save money and drive business impact.

Develop Full Transparency Through a Single Comprehensive Procurement System

In many banks, procurement teams are siloed across business units and do not engage with business partners enough in the cycle, obscuring enterprise-wide savings opportunities. To effectively contain costs, organizations need to adopt a modern system that brings business process controls and analytics into a single system, creating consistency and providing real-time visibility into spending trends. An automated cloud-based system can give stakeholders, suppliers, and business partners a clear view of the end-to-end procurement process, increasing efficiency. 

In these spend management systems, employees can effortlessly create purchase requisitions, generate purchase orders, receive goods, process supplier invoices, and analyze costs all in one place. And suppliers can access the same system through a portal, allowing them to view their purchase orders, see and respond to requests for quotes, and view and create invoices.

Use Data to Improve Suppliers’ Affordability, Efficiency, and Performance

To control costs, bank procurement teams need to dig deeper into sourcing data to find new avenues for cost savings. With the right system and key data at their fingertips, chief procurement leaders can better understand historical trends and identify previously hidden savings. Cloud-based tools allow banks to centralize contracts, gain full visibility into all agreements, and make data-driven decisions using automated tracking and analytics to manage supplier risk, compliance, and performance. 

Full visibility into existing supplier segmentation, performance, and contracts also allows executives to determine which contracts to target for renegotiation and equips them with historical and benchmark data to strengthen their position. After new deals are signed, the system tracks and makes clear exactly where savings are realized.

On a larger level, data helps procurement leaders look beyond sourcing decisions and transform processes and workflows to wring more value from every dollar spent. Bank executives can analyze side-by-side comparisons of bids, use scenario planning to calculate savings, and provide real-time feedback to suppliers about how to improve the bid.

Layer in Powerful Analytics

Organizations that upgrade to a single source of truth can easily automate sourcing tasks and procurement processes, such as requiring a purchase order and routing invoices to the appropriate approver. Cloud-based spend management solutions can go even further, using advances in artificial intelligence and machine learning to process supplier invoices and suggest relevant spend categories for hassle-free requisitions. 

In the future, this automation will only intensify. In fact, consulting firm McKinsey & Company estimates that nearly 60% of the hundreds of tasks involved in the source-to-pay process can be fully or mostly automated. Cloud solutions are at the forefront of automation, reducing cycle times and freeing workers from reliance on manual processes so they can focus on higher-level strategic work and decision making. In this way, new systems allow procurement to deliver not only cost savings but also growth through new and innovative supplier partnerships.

Manage Supplier Relationships

In the insurance industry, the unpredictability of external events impacting claims payouts has always made cost containment a critical priority. And because business insurers rely heavily on third-party contract arrangements with service providers in the claims department, these providers offer ample opportunity for expense reduction.

The key, however, is to cut costs while maintaining the providers’ exceptional customer service. 

To accomplish this, insurers must maximize the impact of every supplier relationship by using the same system, sharing information, and monitoring performance in real time to gain insight into the suppliers’ activity, risk level, and contracted spend. The right technology will manage supplier onboarding and data collection for all downstream transactions, simplifying insurers’ compliance and risk assessments. Insurers can also manage suppliers’ performance through regular business reviews and development plans.

Banks and other mortgage lenders have that same opportunity to manage supplier relationships. For example, some rely on a third-party appraisal management company to select an appraiser for conducting a property valuation, a requirement for issuing a mortgage loan. 

Looking to the Future

Outdated legacy systems can’t give banks and insurers the automation and insight they need to become more agile as they face growing cost-cutting pressures. Cloud-based systems provide immediate integrated data, analytics, and machine learning to help financial services organizations improve margins by reducing costs and increasing efficiency. By embracing a modern procurement model that creates a more strategic approach, financial services can create both bottom-line improvements and improved top-line growth.