How Strategic Procurement Can Help You Optimize Your Business’s Digital Transformation Efforts

Table of Contents

Introduction

Most global business leaders today acknowledge the need for their organization to digitally transform. However, prior to embarking on efforts to create a digitally enabled organization, business leaders need to have a nuanced view of what digital transformation means for their business. In essence, digital transformation is the process of using innovative technologies to alter business processes and tools, meet changing market requirements and enhance customer experiences. In the banking space, digital transformation in banking can range from simple automation of repeatable tasks such as validating signatures to a complete digital overhaul of the business model across loan sales, operations and customer services. As new technologies mature and benefits become palpable, banks are slowly but steadily embracing them. This is in part due to new age competitors such as fintech startups and tech giants like Amazon & Google, who have entered the financial market and have re-emphasized the need for banks to stay on top of the latest technologies or lose market share. In fact, a recent study showed that 90% of all banking leaders across the globe envisage a digitally transformed industry in the next 5 years.

What Leaders in the Banking Industry said about Digital Transformation

90%

Envisage a digitally transformed industry in 5 years

60%

Consider strategic procurement to be critical for optimized digital transformation costs

Digital transformation can sometimes be considered as a disjointed effort to modernize existing processes and tools, but to derive its true benefits, it needs to be intimately tied to a company’s strategic vision. Businesses must view digital transformation as an innovative business model that is focused on customer needs, connected products and services, emerging technologies and real-time data. Therefore, companies need to come up with a comprehensive digital transformation strategy to compete in the ever-changing market.

Elements of Digital Transformation

Employees

Digital tools and processes to ensure seamless communication between the front office, middle office & back office. Repeatable tasks are automated so that the workforce can focus on more value adding tasks.

Core Systems

Often the first to get digitalized, advanced core systems offer real-time transaction management and integrated customer management solutions which are consistent across the globe.

External Systems

Seamless integration with third party tools and resources used by the firm helps reduce turnaround time, ensures data consistency and increase customer satisfaction.

Customers

A unified digital experience for customers ensures they are always connected to the firm and all their consumer needs can be delivered as a one stop solution

The Role of Procurement

Digital transformation can provide tangible benefits in reducing costs, increasing efficiency in the servicing process and improving overall customer satisfaction. However, digital transformation can lead to a surge in capital expenditure along with increased future IT maintenance & support costs, consistent with increased consumption of digital technologies. If the market changes or cost pressures increase, some firms may find it difficult to sustain this transformation. It is therefore important to optimize costs and the effectiveness of a digital transformation program to realize its maximum potential.

Strategic procurement can help businesses contain one time and ongoing costs associated with digital transformation. It is advisable that companies include procurement in the core team responsible to drive digital transformation within the organization. If procurement strategy is involved in the transformation journey from the beginning, it would not only help in reducing transformation costs but would also help in identifying the most suitable partners that can play a key role in driving success.

Here are the major benefits procurement can drive for a digital transformation program at any company:

Procurement Benefits to Digital Transformation

Cost Optimization

Digital transformation is a strategic initiative which requires considerable investments from companies in any industry. However, procurement can help businesses in optimizing both the initial investments and subsequent maintenance costs.

Capital Expenditure

  • A digital transformation requires initial investments running in tens of millions of dollars for up to 4 years.
  • Procurement can help reduce such investment costs by 10 -15% through spend consolidation, contracting best practices, sophisticated sourcing techniques and negotiation expertise.

 

Capital Expenditure

  • Digital transformation essentially leads to introducing additional digital systems to run business processes efficiently. While these systems will increase overall efficiency and reduce costs, IT spending will increase to maintain and support these systems.
  • Procurement can optimize maintenance and support spend by aggregating new spend with legacy support spend to negotiate competitive pricing and other terms with suppliers.

Supplier Evaluation & Selection

Choosing the right partners is critical to the success of a digital transformation program. Companies can either partner with one or more of the existing service providers in the supply base or choose to partner with other providers in the market. In both cases, supplier capabilities need to be carefully vetted to ensure success. Some companies like banks are typically built over the years on long standing supplier relationships, which in this case, can lead to unintentional biases to work with certain providers.

As such, procurement can help the business remain objective through comprehensive bid analysis which includes evaluating both quantitative and qualitative aspects of supplier bids and choosing the right partner carefully. Some of the key qualitative aspects to look for are:

  • Supplier’s clarity about what digital transformation means for the bank.
  • Supplier’s experience and track record of working with similar companies.
  • Does the supplier provide digital solutions along with consulting services as well? Typically, a unified approach including consulting and implementation works best for digital transformation engagements.

After careful evaluation, if your business decides to go with an existing supplier partner, procurement can realize incremental value by following best practices such as leveraging aggregate relationship value during negotiations to obtain most competitive rates.

Contracting Best Practices

Contracts governing digital transformation activities are typically done for a duration of 1 to 3 years. Companies incur high costs if these contracts are not drafted efficiently with favorable terms & conditions. Procurement can work with legal to ensure the firm is protected. Some best practices are:

  • Having the contract on your own paper rather than using supplier paper
  • Milestone based payment structure to ensure success and avoid disproportionate payouts
  • Termination for convenience without any minimum commitment, to avoid paying huge penalties in case things don’t go as planned
  • Strong indemnity and insurance clauses to partially or fully delegate liability in case of a security breach

Third Party Risk Management

A comprehensive third-party risk management process established by procurement can go a long way in protecting a company against cyber security breaches and other third-party risks. This is especially important for companies looking to digitally transform data and operations as you would likely have to work with several startups to mobilize latest technologies in your ecosystem. Given that startups typically do not have the strongest cyber security measures, a third-party risk management program will help companies monitor vendors to effectively manage risks. While most firms would conduct due diligence when onboarding suppliers, strategic procurement can establish continuous risk management processes to monitor risks and performance throughout the supplier engagement lifecycle.

Change Management

The benefits of digital transformation are realized slowly and steadily as the workforce transitions from legacy systems to new processes and solutions. Hence, to ensure success, change management is critical. Procurement can work to ensure all required trainings are included as part of all supplier contracts. In case external trainings are required, procurement can work with specific business units to source training programs as needed.

Conclusion

To go for enterprise-wide digital transformation is a big decision for any company. Therefore, it is in your company’s best interest to take your time and choose an approach that works best for you. Procurement’s proactive involvement can add monumental value to digital transformation efforts and results. By ensuring competitive pricing, optimizing contracts, selecting partners objectively, reducing third party risks and assisting in change management, procurement can increase the probability of success manifold.

Author

Consulting Manager, Manufacturing and S&OP (IN)

Rohit is a Senior Consultant based in Valorant’s India office in Bangalore. He is experienced in driving operational efficiencies with a focus on Supply Chain, S&OP and Manufacturing Effectiveness.
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