In these days of ever-increasing pressure to reduce operational costs, companies are placing greater reliance on external providers of systems and software, outsourcing services and facilities management.
But while offering a variety of benefits, this approach generates new and sometimes unexpected challenges, which can have an impact across the organisation.
The days when suppliers could be kept at arm’s length are long gone. Automation, integration and outsourcing have all helped to create a commercial world where there is a myriad of business-to-business interconnections. With this complexity comes a realisation that strategic suppliers need to be treated differently.
Our recent survey on supplier management clearly showed there is reasonably good understanding of what supplier management means in a traditional sense – cutting costs and obtaining increased value for money.
But it also showed how deeply embedded the concept of strategic suppliers has become, with 97 per cent of respondents being able to identify their top three suppliers by value. This recognition warrants a new approach to strategic supplier management with the relationship not only expected to be long term, but also of maximum benefit to both parties.
As a result, strategic suppliers can expect to be involved in a regular dialogue with the business, with ownership of the relationship resting with the business unit most reliant on the service offered. In return for increased access and ongoing engagement, strategic suppliers are expected to go the extra mile, identifying ways to deliver services most cost effectively to help their clients achieve best value.
From a customer perspective, the issue is how to work out when a supplier is strategic to allocate management time appropriately. From a supplier perspective, it’s fast becoming apparent that if you are not strategic, you’re not anywhere.
The dependency on key suppliers is a big issue when it comes to business continuity planning (BCP). While organisations spend much time and effort ensuring that their own BCP plans are comprehensive, up-to-date and tested, it is much more difficult to form a view of the adequacy of the plans of key suppliers. Often a supplier will give little more than a statement of assurance that plans are in place.
Our survey identified this as the one area where organisations recognised there was more to do.
But the problem doesn’t stop with direct suppliers. Organisations need to remember their key suppliers will often outsource elements of their services or use third party suppliers themselves. It’s not surprising, therefore, supplier management is an increasing focus for the BCP team.
Reverse stress testing
In 2011, the Financial Services Authority introduced the requirement of Reverse Stress Testing (RST) as part of a bank’s capital adequacy submission (the ICAAP). Senior management now has to prove that it has adequately considered, understood and mitigated all key risks facing the business. This includes third party supplier agreements where the suppliers’ goods and services are deemed critical to a firm’s operations. Failure to satisfy the FSA in this respect can lead to considerably increased capital requirements, which has an obvious cost impact on the business.
Prior to ICAAP’s RST requirements, banks only had to look at risk from a financial perspective, that is, their capital at risk. Due to the financial crisis, the regulators saw the need to go further and look at all the potential critical risks to a firm’s operations. As a result, firms’ support operations and critical business functions are now all part of this assessment.
Clearly, it is important to assess the overall viability of suppliers in their own right for direct financial consequences of a failure. But as well as this, the impact a failure of the supplier or its product(s) could have on the overall operations of the customer’s firm must be assessed. For example, a direct loss of £100,000 where a supplier goes bust or withdraws a service at short notice might, on the face of it, appear an acceptable risk. But the direct loss could pale into insignificance if the services or goods that the company supplies are vital to firms’ operations, such as financial risk modelling systems or trading and settlement systems support.
One of the key elements of RST is the need for institutions to clearly identify and understand all the critical business components and functions vital to the wellbeing and survival of the business. It is therefore essential to recognise where and how external suppliers underpin these functions with goods or services. Equally, it is crucial to ensure key suppliers are adequately and regularly assessed and monitored in terms of capability to deliver and long-term viability.
For all the reasons above, supplier management is back on the agenda – and it’s not just procurement or finance that are setting the pace. As likely as not, BCP, risk and IT functions will also be looking at their strategic supplier relationships. Co-ordination is key and only an approach that cuts across departmental boundaries can hope to deliver.
☛ Graham Cooper is a consultant at CityIQ