­Banks and investment funds that scrambled to cut their losses from bad loans have good opp­ortunities right now to cut their spending, as well. They ought to know that a dollar saved with better purchasing has the same value to the bottom line as a dollar earned on an investment. Since banks sell a service, the place to look for savings is in their indirect spending. And what works for a bank will work for any company looking to control indirect spending costs.

When they were making strong profits from growth in revenue, banks lost discipline “below the line” in their purchasing practices. Some banks were criticized for using government bailout funds to pay for perks and large-scale marketing events for credit card offers. Now is the time for banks to do an about-face and be thrifty. This is a big opportunity for banks to use cost savings initiatives as a way of promoting good public relations with customers.

Based on our experience, it is not uncommon for banks to save 15 to 20 percent in major indirect spending categories when they apply disciplined approaches. The first place to look is generally information technology. Perhaps in the interest of providing data security, financial institutions often have made huge investments within their organizations to process information. Through mer­gers and acquisitions, there may be significant redundancies in their systems that exist primarily because there wasn’t the will or the need to streamline. At the same time, advances have been quick in communications technology, and some have not kept up.

This is the perfect time for organizations to review their IT requirements and analyze what makes sense to keep in house. Like many organizations that have facilities spread over a large territory, banks with branches around the country are prone to have inconsistent and costly variations in their indirect costs from location to location. There may be advantages in some cases to support local businesses that have deposit relationships with a bank, but they should be weighed against the leverage of buying in quantity for commodities such as office supplies. Institutions might gain operational benefits, as well as cost savings from agg­regating security services contracts.

Any organization that hasn’t embraced smart purchasing in its culture has to prepare itself for a successful initiative to re­duce indirect costs. Here are five steps that can make a big difference:

1. Sell the program to senior managers. The purchasing function isn’t al­ways regarded highly within financial services companies. Many high executives in finance do not understand the role purchasing plays in the company and don’t recognize the planning and preparation it takes to execute a successful indirect cost savings program. Succ­essful strategies often have to cross boundaries between departments or locations. Purchasing managers alone may not have the clout to push new ideas across “turf” lines. In those situations it becomes paramount to set up a leadership or steering committee to steward, support and validate purchasing strategies throughout the entire organization.
2. Recruit cross-functional teams. Mid-level managers and professional staff are going to be implementing new practices that will require better communication, so facilitate that by setting up working groups from departments within the central location or larger branches. Stake­holders who participate need to be selected on their purchasing knowledge and their influence over suppliers in the market. These teams can set goals and stra­tegies while assessing risks that might derail efforts. Within categories of indirect spending there are likely to be “sacred cow” vendors. Cross-functional teams often can identify those situations and address them because they have the strength of a group and a set of fresh perspectives. However, they can only do so if senior management is sold on the purchasing initiative and have communicated clear­ly that in­­cumbent suppliers must be able to compete with other suppliers in the market on price, service and performance. Capable incumbents will be able to respond because of their experience. 
3. Agree on metrics. The leadership team must agree on how it will measure the cost savings and their impact to the bottom line. Whatever measures are used should be reviewed on a quarterly basis and tied directly to category goals for items such as IT hardware and software, office supplies, telecommunications, travel, fleet cars and temporary labor. 
4. Organize and use data. If the data you expect to use for metrics are not available, then the metrics will fail. You may need a specific team or an outside vendor to create a process for pulling data you need from gen­eral ledger ac­counts and more importantly, making sense of the data itself. There are data management companies capable of cleaning sup­plier spend databases, giving purchasing a more detailed, organized view of spend categories.
5. Monitor and manage contracts. Once deals have been negotiated with selected suppliers for cost savings, contract management is key to assuring that suppliers will not raise prices over a specified period and that performance stays high. A contract manage­ment soft­ware pro­gram can be used to keep tabs on the terms of the contract as well as when the contract expires. That gives your team time to plan for competitive bidding.
   

Although the significant trend in manufacturing industries is to outsource more activities, service companies in times such as these ought to look at spending categories from both directions.

Outsourcing often cuts overhead as well as operating expenses, but it pays to analyze outsourced functions to verify they can’t be done better in-house.

Finally, in the process of analyzing other business functions, it’s not uncommon to find ways to streamline the purchasing process itself. The best manufacturing and retailing companies in the world have recognized how skilled buyers working strategically have delivered great value to their bottom lines. Finan­cial services companies and others with significant indirect spends can learn a lesson from their experience.