In existence for more than 175 years, the Bank of Montreal, a large, complex organization with a branch network of approximately 1,000 locations, had determined by the mid 1990s that it needed to reinvent the way it did business. “The financial services landscape evolves very quickly,” explains Linda Tuck Chapman, director of services in Strategic Sourcing. “Our merger with another Canadian bank was refused by the Minister of Finance. So basically we were trying to compete in the global marketplace, but we just didn’ t have the scope and scale that we once did. We used to rank among the top 50 banks in North America, but none of the Canadian banks are there now.” Tuck Chapman says that, although the banks used to provide most of the financial services available in the Canadian marketplace, virtual banking and capital markets moving down into the corporate mid-market world have adversely affected the banks. “We are being disintermediated almost faster than we can stay ahead of it,” she says.
Like most companies these days, the Bank of Montreal underwent reengineering and downsizing in efforts to make it leaner. “Competence exists within all kinds of business units within the organization,” she says. “But we found that it took too much time and effort in starting to outsource departments and creating strategic alliances. It was ineffective.” So the bank decided to build a center of competence to help it through the outsourcing process, and Strategic Sourcing came to be.
How to Get the Ball Rolling
The Bank of Montreal has 30 affiliated companies under its corporate umbrella, each operating quite autonomously. Although the bank had been successful at cutting costs, it recognized that it had never leveraged its spending power by behaving like one organization. Strategic Sourcing spent most of its first year determining the best approach for a financial services business to take in the global marketplace. The bank had a prior commitment in its local marketplaces to deal with local corporate suppliers. Besides acquiring skills and knowledge, the group had to determine the effect of the new corporate strategy upon those local commitments.
The first step in the venture into new sourcing competence, Tuck Chapman explains, was to “consolidate the enterprise-wide spend and see what we had. But it is very easy to underestimate the amount of work and time that this takes, she says. “It sounds simple. But in most companies the technology platforms don’t speak to each other. So getting the information to know what you are dealing with takes months.”
“When we started slicing and dicing the numbers in new ways, people were surprised at how much money we actually spent on fairly commonplace goods and services,” says Tuck Chapman. “We were looking at sourceable spend of over $1.7 billion.” The second step toward sourcing competence was to figure out how the organization was spending that amount. In the process of doing that, she says, a lot of opportunity presented itself.
Building the Competence
Tuck Chapman says that Strategic Sourcing began with a handful of really motivated people from inside the organization, along with a fair number of industry experts. But trial and error is not the best way to build competence, so they hired the consulting firm of A. T. Kearney to help them develop the necessary skills. Kearney worked side by side with the bank’s group, helping them to understand what was possible, how to implement methodology, and what was really required for them to be successful internally. When the Kearney team completed its engagement in the first year, the bank recruited the remainder of the sourcing group.
Tuck Chapman states that the bank understood the increasing use of e-commerce and the bank’s necessity for technology. However, after a study to see what technology the bank would need, it decided to play the wait-and-see game. “Two years ago, that marketplace was in such a state of flux that it looked as though it was possible to invest a tremendous amount of money in the wrong solution,” she explains. “To tell you the truth, we’re glad we waited.” Now the Strategic Sourcing group recommends that the bank outsource its e-procurement, rather than attempt to build a robust technology platform
Tuck Chapman explains that the Bank of Montreal recognized the professionalism, as well as the professional interests, of its people who were in the purchasing business. She admits that “Strategic Sourcing didn’t know everything there is to know about putting a deal in place. People involved in procurement for a number of years have a wealth and depth of knowledge that we didn’t need to duplicate. The bank avoided the scorched earth approach, where an organization basically comes in and tells the people who are performing tasks to step aside so they can take charge of it.” She says that taking a general, more collaborative approach is far more effective.
Creating the Strategic Sourcing group indicates the Bank of Montreal’s understanding that there is more to creating value for an organization than just reducing costs. It also involves quality improvement along with creating useful management information so that managers can better manage their business units. It involves taking advantage of marketplace trends that a manager may not have time to focus on. “It’s not rocket science by any stretch of the imagination, but it requires a disciplined, yet creative, approach to problem solving,” she explains. “You limit your strategies by narrowing them down to a cost-reduction business. The problem may not even be costs. It might be some of the organization’s practices that drive costs.”
Competence Achieved But Not Finished
The sourcing competence group achieved the bank’s first three-year mandate to reduce the bank’s expenses through sourcing activities by $150 million. Often, where outsourcing reduces cost structure, an organization extrapolates the savings from its budget. The Bank, however, decided not to let the business unit managers decide how to invest the savings achieved through outsourcing.
The bank’s next three-year mandate for Strategic Sourcing is to create new value. The group plans to create services that would add value to the bank’s customers (or potential customers), rather than selling its expertise in service to buyers outside the bank. Advancing that strategy is the organization’s new challenge. How to redesign the sourcing group for a changing environment–where sourcing activities are still core but are only one of multiple services offered–is its new focus.