August 27, 2010

In a recent interview with Lamar Chesney, chief procurement officer at SunTrust, the seventh-largest bank in the U.S., we started out talking about using technology to manage spending, then got into an interesting discussion about interdependencies in vendor relationships and how banks can create leverage.

BS&T: Do you have a mandate or a spend management goal, such as you must cut X% from your budget this year?

Chesney: Yes. I don't know of a CPO out there who doesn't have some kind of economic per-year goal.

BS&T: Can you say what yours is?

Chesney: It's between 1.5% and 1.75% of spend.

BS&T: That doesn't sound too horrendous.

Chesney: No, it's not. But it's coming off of 4% savings delivery in the past two years.

BS&T: So things are easing up slightly.

Chesney: I wouldn't say they're easing up. They're shifting. Spend management and enforcing contract conditions and terms are not counted in that and still really important. I read recently that companies lose anywhere from 35% to 65% on their supplier contracts through noncompliance.

BS&T: Do you use software to keep track of terms and conditions and make sure each supplier is meeting them?

Chesney: Yes, we use software from Ariba.

BS&T: What would the software do if a vendor has violated a term or condition — send you an alert?

Chesney: It kicks it out. If I contract with you to deliver X at $1 and and you bill me X at $10, it will kick out the X. So it does a validation and verification. It also has the ability to do enforce caps — say our contract says we won't spend more than $10 million in a year, it will see to that.

BS&T: Does that cover outsourcing agreements too?

Chesney: Yes, it tracks that as well. That's particularly important because outside processing or outsourcing for a bank is mostly process derived. These agreements are complex animals, they're not tangible items like paper clips.

BS&T: If you're about to sign a new contract with a new vendor or outsourcing provider, do you need to structure the contract in a way that will work well with the software, make sure you're including the metrics they track and avoiding those they can't track?

Chesney: Ours is a good, robust tool. No matter how complex we make it, Ariba has the functionality and flexibility to allow us to extract the needed elements and put them into their system, we call it contract management.

BS&T: What are some examples of ways this has helped you save money, find efficiencies or avoid costs?

Chesney: When we first started rolling this out in March 2009, we got an influx of calls from business owners who said their suppliers were complaining that they hadn't been paid. We looked into each of those and found that their contracts said the vendors would be paid within 60 days. Think about the cost savings that comes out of that due to the time value of money. If you're spending $2.5 billion a year and you save 10%, that's a quarter of a billion dollars, if you save 1%, it's $25 million. So when they started calling and saying the sales rep wants his check, I said, tell him to wait 59 more days.

There's a concept in supply chain management called total cost of ownership. If you negotiated a price that was 3% less for materials than another provider, but you made me hold it and I had to have 90 days of supply inventory on average, whereas the other vendor billed me just in time, I'd pick the second vendor in spite of the higher initial price.

BS&T: Who uses the software, is it mostly people in the procurement organization?

Chesney: Everyone in the business who buys technology or office supplies. Our sourcing people use it extensively to gather data on historical pricing and prepare RFPs and comparative studies. Supply relationship management people use it to monitor compliance with SLAs and the like.

BS&T: Does it cut their job down, if the software is monitoring compliance for them?

Chesney: It does. The first year, it's more work because you have to enter in all the contract data. The next year it's a lot easier.

BS&T: Is there a way of letting the supplier enter the data?

Chesney: No, you don't want to do that. That's a fox in the henhouse. The supplier does get notices of orders electronically, submits bills electronically and can get paid automatically by ACH or some other means.

BS&T: So it's integrated with your payments system?

Chesney: It's integrated with our Oracle AP system. The Ariba software sends an "ok to pay" file to the Oracle software.

BS&T: Have there been cases where you were being drastically overcharged and you didn't realize it and the software pointed it out?

Chesney: Let me see how to answer that. In all instances where you don't have a control mechanism, the chances are extremely high that the pricing will migrate up.

BS&T: Even my Verizon bill seems to tick up all the time.

Chesney: I'm not saying suppliers are out there to get you, but you have to have checks and balances. Trust but verify.

BS&T: There seems to be a trend toward large and regional banks narrowing down their lists of suppliers, to make procurement more manageable, is that true for you?

Chesney: Yes. Most CPOs will tell you that you need to focus on fewer not more. It's not just because of the leverage you get by aggregating your spend, that's one reason. The other is, in our case, our top 600 suppliers cost us 80% of our spend. We probably have 9,000 suppliers. I've been bringing that number down. We ought to have around 5,000 suppliers for the amount of spend and disbursement we have. Most financial institutions are going through that. In financial institutions, it's easy for client/supplier relationships to emerge, especially if you're in a branch and you're lending money to a local lawn service that offers to cut your grass.

BS&T: It seems like it's a tough challenge. One New York bank CPO has over 10,000 suppliers and would like to bring that number down, but in one little example just going from four to two Manhattan car services would take two weeks of analysis. He wonders if it's worth it when there are 9,999 more to deal with.

Chesney: You have to set priorities. If in that case it was 1,000 suppliers doing the same thing, you'd spend time to try to get it down to three from 1,000, that would be beneficial. We stratify our suppliers into four tiers: the top tier is partner, the second tier is critical, the third tier is collaborative, and the last tier is transactional. At the bottom tier, you might have lawn maintenance or flower deliverers. The top two tiers are where you need to focus on optimizing that relationship.

BS&T: Say you build a really strong relationship with IBM, Oracle or somebody like that. Can they get complacent, thinking they have their $10 million contract so they don't have to work too hard?

Chesney: Somebody once asked me, can you have a healthy commercial relationship when there's only one side of dependency, as opposed to interdependency? In a business relationship, leverage is need. If I need you and you need me, that's interdependence. If you don't need me and I don't need you, that's independence. If I need you and you don't need me, that's a hellhole. And if I don't need you and you need me, that's Nirvana. When I was the CPO at Delta, Jack Smith, the former CEO of General Motors, asked me why I didn't go out and beat up suppliers. I told him that at GM, 68% - 70% of his suppliers were in that Nirvana state. At airlines, that number is 8%. If you don't need engines, fuel or an airport, you could probably do a pretty good job running an airline, those things are all run by oligopolies and monopolies.

Companies must seek interdependency. When I was at Delta, GE Aircraft Engines was a provider for our engines. In my needs model, I needed GE, GE didn't need me.

BS&T: But you were paying them, right?

Chesney: That was not a blip on their screen. It would be a big blip on Delta's screen if they turned their back on us. So I looked at my relationship with GE and found that I was the world's largest owner of CF34 engines. There was no way they wanted me to have any bad feelings about that engine, especially when I kept touting it. I created, as best I could, peer parity and interdependency.

BS&T: What do you think you might do with spend management in the future?

Chesney: We are in an atypical setting. We're two years into this rollout and we've probably got another couple years of intense software implementation to finally cover all spend. I'm just going to keep trucking, although I don't see it as technology driven. Where my value is going to be focused as a CPO at SunTrust is going to be in the value that comes from supplier relationship management. I'm getting our select strategic suppliers to be more innovative. If you want someone to be innovative, they're going to have to have some latitude to make mistakes, hopefully they're not catastrophic mistakes. I want good quality thinking from my top providers, and to do that I've got to create a reasonable enough risk-free framework for that experimentation to exist.

BS&T: Like a lab?

Chesney: It would have to be not so much in product but in services they would offer. The service providers have got to be more innovative in the way they work with us rather than adhering to processes and practices historically in place.

BS&T: Can you think of an example of that?

Chesney: In loan origination, the borrower fills out a form, and that information could be extracted and used for auto loans, commercial loans, and other products. Why fill out a form two or three times? They form you to death.