This article originally appeared on the Spend Matters blog.
By: Nancy Clinton
A bank is a supplier, albeit a highly strategic one. The recent Silicon Valley Bank (SVB) events have conspired to show organizations just how important it is to manage them strategically, in a manner no different from that of any other critical supplier, employing supplier risk, supplier relationship and supplier performance management processes to do so effectively.
With its forte in supplier management and a propensity for detecting potential third-party failures that can put the organization at unnecessary or increased risk, Procurement has a vantage point from which it has much to offer the c-suite, particularly the CFO. When something like a run on a bank or instability in financial institutions becomes apparent, it is the organizations with the foresight and the agility to act that emerge unscathed.
But you can only act quickly in the face of supplier failure if you have the right set-up in place, including alternative suppliers, that allows you to be agile.
CPO turned CEO Anders Lillevik (founder of procurement solutions, Focal Point) talked in a recent LinkedIn post about how his organization’s procurement roots helped them to manage the tricky SVB situation. He also talked to CFO about the need for good communication during a transitionary time and the need for CFO leadership with a panoramic view of AP/AR and suppliers courtesy of the CPO.
As he stated, when the situation with SVB became apparent, he followed his procurement instincts, quickly carried out a supplier failure risk assessment and settled on the best outcome: move his funds. He did this by splitting the transfers into smaller chunks and wiring them piecemeal. But of course, in order to do this, you have to be prepared. You have to have multiple bank accounts setup. In other words, you need supplier diversity.
No single point of failure
“My reflection on this,” he told us, “is that good procurement practice pays off. By design, we have multiple banks set up, not necessarily for this reason, but because we, like all organizations, have capital. And being a procurement nerd, I understood the importance of shopping around the many banks with liquidity options for the best rates. So, we ended up with a variety of banks that we could transfer our money to. What’s interesting is that, at the time, we did not have this scenario in mind. We simply knew it was the natural thing to do: not to have a single point of failure — and it turned out to be a fortuitous move. If you have only one supplier relationship, in this case one bank, you have nowhere to transfer your money to.”
Being prepared upfront, having done the risk assessments and having alternative suppliers in place meant that “the rest was just execution.” And that execution took 90 minutes.
Procurement category strategy as a failsafe
So, Finance and Treasury can profit from a procurement way of thinking, one that can be applied to any part of the organization. Having a failsafe strategy like this is a relatively easy thing to do, even if you don’t necessarily need it; it’s always good to have options (whether that be in an in-house system or external providers).
“Being nimble helps you to optimize your return,” he explains, “and I think it comes down to what we do in procurement all the time: we create a leader/follower model to optimize our decisions in a particular category.
“We pick three providers in one category, with one ‘leader’ and two ‘followers.’ Sooner or later, you move your business around as it suits your strategic purpose. It’s another example of why you should have a category strategy that aligns with the risk profile and the position in the marketplace. In this case, the category is your money, so why wouldn’t you make it as easy as possible to move it around.”
Treat your bank like any other supplier
We don’t necessarily think of banks as our suppliers. But, according to Anders, we should treat them that way.
“The chances of a bank failure are fairly small, especially for banks of a certain size, but it can happen. So, you need to diversify your portfolio. That does two things:
- It creates competition, while mitigating your risk.
- It allows you to maximize return on your capital.”
And as Spend Matters CEO Jason Busch pointed out, all firms should consider investing in a treasury management system (alongside AP and AR) with access to a “portal of portals” across their accounts to help manage real-time cash positioning and visibility.
Nurture the CFO/CPO relationship
Ultimately, money movement sits with Treasury. In a centralized facility, Treasury (or Finance for that matter) probably wouldn’t appreciate Procurement telling it how to maximize return on capital.
“However,” says Anders, “there are two things that it could appreciate: procurement’s ability to move assets quickly, because you’ve set up the supplier ecosystem, and the relationships that you have worked hard to put in place. So, fostering mutually beneficial working relationships between the CPO and CFO is absolutely the right thing to do.
“The CFO has always had a laser focus on accounts receivable and making sure that the revenue gets recognized when it comes thru the door. But more and more the CFO is now focusing on accounts payable, extending payment terms and holding onto the business’s cash for longer.
“But, how you maximize return on the capital sitting on your balance sheet and how you make sure it stays secure is another complexity for Treasury. It would take a very sophisticated procurement person to know how to extend payment terms and how to manage working capital. But then, very few treasurers would be able to act quickly in the face of supplier failure, conduct risk assessments, scope for alternatives, or look at termination options. The key is the coordination of both.
“Procurement will have a set up that allows the business to respond with speed and agility. Without this, by the time you’ve jumped though all the hoops you have to jump through internally to make a decision like changing banks or moving money, it could well be too late.
“Luckily for me, being the CEO, I could just make that call and avoid all the red tape. But for some organizations, especially the larger ones, that’s not possible. So, a good working relationship between Procurement and Finance is the best strategy for mitigating liquidity risk.”
Many thanks to Anders Lillevik for his insight.