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THE JOURNEY TO PROCUREMENT TRANSFORMATION: AFTER LAYING YOUR PLAN, THE NEXT STOP IS BUY-IN

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By Alex Klein, COO at Efficio

 

In part one of this series, I made the case for a solid, well conceptualised procurement transformation plan – the importance of which cannot be understated in any attempt to reduce cost. But, it’s equally important to note that this is only step one. After all, a plan without action is just a speech, and you can have the most revolutionary idea for your organisation, but without buy-in to facilitate that plan, nothing will happen.

For this reason, the Chief Procurement Officer (CPO) must pitch transformation to the board as a business proposition – something along the lines of, “If you give me X, I will bring you Y in savings.” And that begins with a baseline savings plan.

The hardest part is deciding where to start – which part of third party spend to attack first, with so many enticing options on offer. For example, you could approach it by business unit, or you might do it supplier-by-supplier. With the first option, you’ll forgo any scale opportunity and the advantage of leveraging spend across the business; but with the second, you’ll have no competition in play. The best, most effective way to go, however, is to implement it by category. Travel expenses could be one; and devices, laptops and desktops could be another.

This method of plotting out spend into categories – that include the annual spend, an estimate of addressability and a potential savings range, divided into “sourcing waves,” – paves the way for a clear, direct, and focused and savings plan. This plan can then be used as a skeleton to flesh out your approach to spend, addressing five to 15 categories at a time.

By addressing spend in this way, you are provided with a natural portfolio effect that works by spreading risk across categories, since you are attacking many different categories with different budget-holders and suppliers at once. Some of these categories may not generate the outcome you’d hoped for, but another couple could provide a hefty 25% saving, which would counterbalance the shortfall of another. Whilst this is certainly a simple enough logic, in order to make it a success, there are a number of factors that must be taken into account first:

  • Measuring spend on the addressability scale

First on the agenda is addressability. Failing to factor this in and declaring that “we can deliver 10% savings across 100% of the spend” is a classic mistake. The problem is not the 10%, it’s the erroneous assumption that 100% of the spend will be addressable. Not only will you never include the various one-off purchases in your tail spend, but spend will also ‘disappear’ on you as you progress down the sourcing process. We jokingly call this Shrinking Spend Syndrome (SSS).

For example, you have a big outsourcing contract with IBM for 10 years that can’t really be touched, business unit X has pulled out of the effort, and it turns out that about 30% of the purchases in your category are bought on behalf of customers on a pass-through basis, therefore lowering savings. These situations will creep up on you, and you still end up saving the projected 5-10% – but on a hopelessly smaller base. To account for addressability, this risk should be anticipated at the start by discounting each category by at least 25%.

  • Category prioritisation

There will be as many as 40-50 categories for most businesses, so where do you start?

Enter the “category bubble chart”. By plotting categories on a chart based on savings potential and implementation difficulty, CPOs can have a clear view of the categories easiest to pursue, while also providing the biggest rewards. These rewards – or rather ‘savings potential’ – should be based on several factors, including the addressable spend, the current state of procurement sophistication, the competitiveness of the supply market, and the existence of concrete supply and demand-side improvement opportunities. For the other axis of the chart, to determine the implementation complexity, the CPO must consider the following:

Are there credible supplier alternatives?

How complex and costly is it to switch suppliers?

Are there any internal obstacles that must be overcome to push this through?

In addition to picking high-value, quick-win categories in the first instance, it is also important to consider the categories that have strong budget-holder buy-in and iterate your chart depending on business priorities.

  • Managing expectations

Finally, timing is a crucial consideration when building a sourcing savings plan. Often, the time it takes to execute such a plan is vastly underestimated. On average, it takes six months to strategically source a category, two months for developing the baseline and agreeing the strategy, and four months to issue the RFP, conduct negotiations, and select suppliers. There is no denying it is a lengthy process, and it needs to be thorough – cutting corners or rushing simply isn’t an option. Yes, you will have push-back from the wider business during this time, and yes, you will have to fight your corner. But if a transformation doesn’t feel uncomfortable, then is it really transformation?

 

Building a procurement investment business case

Once your sourcing savings plan is in place, you need to estimate the level of investment required in the procurement function to achieve those desired outcomes. When building such a business case, you must consider the various costs associated with hiring additional strategic procurement resources, upskilling, or training existing employees, new IT systems or tools – and, finally, any external consultancy support that might be needed.

The procurement transformation business case then consists of pledging to deliver a specific savings target in return for these investments. If your spend is of reasonable magnitude, then the return on investment (ROI) should make for an attractive proposition.

 

Ensuring program structure and governance

Delivering on a procurement transformation plan is a cross-functional effort – it requires engagement at all levels, and this is where a solid programme structure is essential. The transformation programme is typically divided into several workstreams. On one side, there are the sourcing teams responsible for executing the new strategic sourcing process. On the other side, there are the functional improvement workstreams – organisation and operating model redesign, recruitment, sourcing, supplier management and P2P process design, roll out and training, as well as IT system partner selection and implementation. The sourcing teams, in particular, should be well resourced and truly cross-functional in nature. The most successful transformation projects are co-driven by the business, rather than just procurement driven.

 

Turning a plan into action

If you’ve followed the above steps, then congratulations – you’re ready to embark on your procurement transformation journey. All the aspects should now be lined up, ready to pull into an 18-month programme timeline. Most crucial to its success, however, will be executive sponsorship – not only with  regards to financial sponsorship, but in C-suite time and effort.

Making sure that every player is in agreement – the CEO, CFO, COO, CIO, and the various business unit heads – you can proceed with a united front towards your goal, ensuring the necessary approval en route. This is what facilitates true engagement.

But you can’t relax just yet. Once your plan has received sign off, you’ll need to act quickly – it’s not enough for your plan to be revolutionary, it must be detailed in the extreme so that you can get off the start line without hesitation. Delivering the plan to any success will rest upon buy-in and visibility across the business, which, ultimately, will depend on cross-functional alignment. Once this is in place, the true profit potential of procurement and can reached.

 

Business

CBDCs: the key to transform cross-border payments

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Dr. Ruth Wandhöfer, Board Director at RTGS.global

 

If you work in finance, you’ll have been hearing a lot about central bank digital currencies (CBDCs) and the moves different markets are making towards using, regulating and evaluating the viability of moving to an economy based on digital currency.

We are already seeing progress in the research, piloting and introduction of CBDCs into the financial system. The Banque de France for example, recently launched its second phase of CBDC experiments in line with the “triple digital revolution” unfolding in the financial sector. The infrastructures of financial markets and fintechs, however, are not prepared to accommodate their security, stability, and viability.

This could be an issue in the not too distant future. Each year, global corporates move nearly $23.5 trillion between countries, equivalent to about 25% of global GDP. This requires them to use wholesale cross-border payment processes, which remain suboptimal from a cost, speed, and transparency perspective. In fact, the G20 cross-border payments programme considers improving access to domestic payment systems that settle in central bank money, as one of the key components in facilitating increased speed and reducing the costs of cross-border payments.

The current state of cross-border payments

International transactions based on fiat are currently slow, expensive, and highly risky due to today’s disconnected financial infrastructure, messaging, and liquidity. Wholesale cross-border payment settlement can take 48 hours or longer, which is not practical in today’s digital world. Even if not every market moves to CBDCs, in an increasingly digital era, cross-border settlements between central banks will unavoidably involve dealing with CBDCs. So, not only will we have different currencies, we’ll have different technical forms of currency being exchanged – digital and fiat – as markets adopt CBDCs at different rates, adding another layer of complexity to cross-border settlements.

While there is much anticipation about the opportunities CBDCs can bring, the adoption of this technology will only be widespread if payment and settlement capabilities are overhauled to allow for new innovations in currencies.  This need for transformation represents an opportunity to redesign existing infrastructure to support cross-border CBDC transactions.

The current cross-border payments system involves correspondent banks in different jurisdictions using commercial bank money. Uncommitted credit lines used in cross-border transactions are a potential risk for any bank that relies on credit provided by a foreign correspondent bank. Interestingly, there is no single global payment and settlement system, only a complicated network of interbank relationships operating on mutual trust. While trust has allowed financial systems to function smoothly, when it begins to fail, as it did during the 2008 financial crisis, the result can be catastrophic.

Following the crisis, the Bank for International Settlements (BIS) implemented the Basel III agreement, which required banks to maintain additional capital against correspondent banking account exposures. These risk-weighted assets impose a costly capital charge on positions held by banks at other banks under correspondent arrangements. While this framework helps combat risk, it neglects to address the inherent problems in traditional correspondent banking that contribute to these risks.

Making the case for CBDCs

CBDCs can offer an improvement in settlement risks and are certainly thought to have potential benefits by the BIS. If implemented correctly, wholesale CBDCs can indeed accelerate interbank transactions while eliminating settlement risk. They can also encourage a more efficient and straightforward method of executing cross-border payments by reducing the number of intermediaries.

It is likely the evolution towards CBDCs will initially see the financial market supplement rather than replace existing payment instruments with new types of digital currency. CBDCs will coexist with current forms of money in a wholesale context, and their payment rails will also work alongside the existing payment systems. In simple terms, CBDCs will need to be linked to the broader capital markets ecosystem and applications such as securities settlement, funding, and liquidity.

If built with an innovation-first mindset, the future of banking infrastructure should provide full interoperability and convertibility between fiat, CBDCs, and any other type of digital money used in wholesale payments.

The future of CBDCs

To unlock the full potential of CBDCs, a ‘corridor network’ will need to be formed. This involves combining multiple wholesale CDBCs into a single, interoperable network under common governance agreed upon by all central banks involved. The legal framework of this platform would then allow for payment versus payment (PvP) or, where applicable, delivery versus payment settlement.

Practical wholesale CBDCs appear to be on the horizon, either as a supplement to existing financial systems or as part of a transition to a digital, cashless world. Looking ahead, central banks would benefit from collaborating with fintechs that provide innovative cloud native technology to enable seamless wholesale cross-border payments without interfering with the flow of funds. If wholesale CBDCs are to become a reality, fintechs must be prepared to accommodate them.

 

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Green growth: The unstoppable rise of climate technology investment

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With the investment community focusing more and more on renewable technologies, investor interest is at an all-time high. Ian Thomas, managing director, Turquoise, reviews the current investment landscape and highlights the opportunities for investors keen to capitalise on this growing trend.

Green, or climate, finance is a label for providers of finance who are supporting investments seeking positive environmental impact. The label covers investments in green infrastructure, venture capital investment in clean technologies and renewable energy. Green finance has grown by leaps and bounds in recent years, supporting public wellbeing and social equity while reducing environmental risks and improving ecological integrity.

Worldwide, energy investment is forecast to increase by 8% in 2022 to $2.4 trillion, according to a new report by the International Energy Agency, with the expected rise coming mostly from clean energy – $1.4 trillion in total. To put this rocketing figure into some perspective, clean energy investment only rose by 2% annually in the five years following the signing of the Paris Agreement in 2015. Energy transition investment has some way to go, however – between 2022 and 2025, to get on track for global net zero, it must rise by three times the current amount to average $2,063 billion. [1]

Turquoise has been active for almost 20 years as a venture capital investor and adviser to companies in the climate technology space that are raising capital and/or selling their business to a strategic acquirer. Reviewing current industry investment news, as well as drawing on examples from the portfolio of Low Carbon Innovation Fund 2 (LCIF2), managed by Turquoise, I have commented below the latest on the renewable energy trends most piquing investor interest.

 

Solar PV

Renewable power is leading the charge when it comes to investment, with wind energy and solar PV emerging as the cheapest option for new power generation across many countries, and now accounting for more than 80% of total power sector investment. Solar power is responsible for half of new investment in renewable power, with spending divided roughly equally between utility scale projects and distributed solar PV systems.

This huge increase in solar spending, which continues in spite of supply chain issues affecting raw material delivery, has been driven by Asia, largely China (BloombergNEF, 2022). Meanwhile, Europe is re-doubling its efforts to achieve an energy transition away from Russian gas and other fossil fuels, building on investment that was already rising steadily prior to the outbreak of war in Ukraine. Germany, the UK, France and Spain all exceeded $10 billion on low-carbon spending in 2021.[2]

 

Wind

Last year was a record year for offshore wind deployment with more than 20GW commissioned, accounting for approximately $40 billion in investment. The first half of 2022 saw $32 billion invested in offshore wind, 52% more than in the same period in 2021 (BloombergNEF, 2022). Taking into account also onshore wind, in 2021 investment was spearheaded by China, followed by the US and Brazil.[3]

In the UK, suggested targets include plans to host 50GW of offshore wind capacity, as well as 10GW of green and blue hydrogen production, by 2030. Investors will naturally be encouraged by proposals to simplify the planning process across the board for renewable projects.[4] France and Germany have also increased their offshore wind targets, signalling further support for investment.

 

Decarbonising housing: the business opportunity

The need to decarbonise residential housing, made all the more urgent by current energy prices, also offers substantial scope for investment. The gas price spike is naturally increasing interest in technology such as electric heat pumps, which had already enjoyed 15% growth in 2021 albeit from a very low base.

Recently, Turquoise announced an investment by Low Carbon Innovation Fund 2 (LCIF2) in Switchd, which operates MakeMyHouseGreen, a data-driven platform that allows homeowners to source and install domestic renewable energy generation, including solar panels and battery storage with other energy saving products in the pipeline. The investment will enable Switchd to roll out the MakeMyHouseGreen platform to a much larger number of customers. The latest episode of the Talks with Turquoise podcast series saw us interview Switchd co-founder Llewellyn Kinch about the UK energy market and national transition to decarbonisation, covering the rise of residential renewable energy and energy efficiency.

 

Adapting to the low-carbon economy

Meanwhile, investors should not forget opportunities on the other side of the energy market. Renewables are undoubtedly exciting investors, but there are also opportunities for fossil fuel companies to adapt their business models to the low-carbon economy. Turquoise advised GT Energy, a portfolio company from our first fund that develops deep geothermal heat projects, on its sale to IGas Energy, a leading UK onshore oil & gas producer. Under IGas ownership, GT Energy will progress its flagship 14MW project to supply zero-carbon heat to the city of Stoke-on-Trent through a council-owned district heating network.

 

A broad investment landscape

Forecasts show that renewables will increase to 60% of power generation in Europe by 2030, and 40% in the US and China by the same date.[5] As demand rises for climate technology, the investment opportunities in green finance are far broader than they ever have been. Undoubtedly, as the energy crisis continues, investor interest will continue to soar to even greater heights.

[1] https://www.iea.org/news/record-clean-energy-spending-is-set-to-help-global-energy-investment-grow-by-8-in-2022
[2] https://ihsmarkit.com/research-analysis/global-power-and-renewables-research-highlights-july-2022.html
[3] https://dialogochino.net/en/uncategorised/56938-global-wind-energy-council-vice-chair-brazil-offshore-wind-accelerating-2/
[4] https://www.edie.net/uks-clean-energy-investment-ranking-rises-after-government-sets-95-low-carbon-electricity-target-for-2030/
[5] https://www.spglobal.com/en/research-insights/featured/energy-transition-renewables-remain-the-cornerstone-of-future-power-generation

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