Supply Networks: The Future of Procurement

No supply chain has been spared by the impact of the coronavirus. Some parts of the world are indeed seeing businesses slowly look toward recovery and a gradual move to a ‘new normal’. But we cannot ignore that small shops and multinational corporations alike will continue to face challenges with regard to their manufacturing, distribution, logistics, and demand functions, as well as their overall financial well-being and that of their business partners.

A contributing factor to this disruption is the traditional, linear supply chain model, where each step is dependent on the one before it. Inefficiencies at one stage result in a cascade of inefficiencies down the line. And when the buyer and supplier are located at either end of the chain, it’s easy to see how collaboration breaks down and end-to-end visibility is nearly impossible.

The resulting reactive and uncoordinated response makes it challenging for procurement teams to know exactly which suppliers, sites, parts and products are at risk, and therefore, extremely difficult to secure new sources of supply in a timely manner.

As businesses grapple with the ramifications of COVID-19, they must learn key lessons as they look to recovery. At the crux of this is rebuilding and restructuring resilient supply chains for a better future. This means moving beyond the traditional linear supply chain model to the implementation of a dynamic, collaborative supply network.

Unlike traditional supply chains, supply networks shift away from singular, point-to-point processes to a many-to-many structure that enables 360-degree visibility. Once an organisation is connected to a network, they become both a buyer and a supplier and gain broad visibility into the interconnected operations of their trading partners. Beyond allowing companies to identify emerging trends or issues more easily, access to a network also enables them to collaborate with new partners, improve cash flow, develop new products and accelerate sustainability.

Connecting to a network that includes producers, vendors, distribution centres, warehouses, transportation companies and retailers contributes to a businesses’ overall ability to move with agility, respond more quickly to demand and address unforeseen circumstances like those we’ve seen this year.

The global COVID-19 pandemic has suddenly accelerated the need for organisations to transform and respond to the unplanned and unprecedented. As a different world takes shape, longer term strategies for supply chains and operating models need to be re-assessed and prioritised in order for an organisation to advance in the following three key business pillars of the future: resiliency, profitability, and sustainability. Digital transformation will play a major role for an organisation to withstand future disruptions and help pivot them toward recovery when disruptions do occur. In turn then, supply networks offer a holistic approach that enables greater transparency between trading partners and help organisations make decisions in real-time. Unlike linear supply chains, supply networks optimise operations and break down functional silos to enable organisations to realise the untapped potential of existing capabilities and achieve higher performance as well as greater value. Indeed, this is demonstrated by recent data from Bain & Company, which reveals how companies with resilient supply chains grow faster because they’re able to move quickly when market demand shifts.

When it comes to an organisation maximising its profit margins, resiliency and profitability go hand in hand. Businesses that run reliable, automated supply chains generate increased revenue because digital supply networks can smooth over any friction, and in turn, maximise the output. With automation and transparency in place, the ROI handles itself and the network becomes a profitability-driving tool.

Finally, businesses should always consider their sustainability goals; not only across their organisation, but within their supply network too. Beyond the need for creating longterm value, sustainability can foster innovation and encourage new ways of thinking that can ultimately lead to increased revenues, stronger customer relationships and improved brand perception. One way this is often addressed is by looking to reduce carbon footprints as a result of operations. However, sustainability exists deep within supply chains, like modern slavery and single-use plastics;

these need to be addressed in equal measure too. The use of technology can help spot inefficiencies and risk so that today’s business leaders can instil long-lasting change and dig into the supply chains of their partners and suppliers, prioritising those who are also making sustainability a priority too.

Transforming from a supply chain to a supply network should support a business’ total digital transformation strategy. By taking advantage of the latest digital tools, businesses can remain resilient and scale at a rate that creates a competitive advantage.

An example of this done successfully is demonstrated by the Danish manufacturing company VELUX Group, which automated 64% of its 20,000 monthly order lines after digitally transforming supply chain operations and streamlining supplier collaboration. Now, the VELUX Group seamlessly conducts transactions with more than 200 vendors and enjoys improved processes, accelerated delivery dates and more time saved.

Digital supply networks are built to anticipate disruptions and mitigate risks. They leverage technology and data analytics to provide a continuous flow of information which allows business leaders to gain a holistic insight to all areas of the business. While moving to a supply network requires fundamental changes to many aspects of an organisation’s planning – from strategy, to business processes, to IT – the ability to keep up with fastmoving market dynamics is essential in today’s business environment more than ever.

Schatteman, O., Woodhouse, D., & Terino, J. (2020, April 27). Supply Chain Lessons from Covid-19: Time to Refocus on Resilience. Retrieved October 23, 2020, from https://www.bain.com/insights/ supply-chain-lessons-from-covid-19/

VELUX Group: How Can Digitalizing Spend Processes Facilitate and Optimize Supplier Collaboration? (n.d.). Retrieved October 23, 2020, from https://www.sap.com/documents/2019/09/f481b367-647d0010-87a3-c30de2ffd8ff.html Sean Thompson EVP of Network and Ecosystem SAP Procurement Solutions

Sean Thompson is executive vice president of Network and Ecosystem, SAP Procurement Solutions. In this role, Sean leads the procurement solution supplier strategy for network and payments, including Ariba Network, and oversees the growth of the application extension ecosystem. Previously, Sean served as the chief revenue officer of SAP’s SMB cloud ERP business.

Before joining SAP, Sean was CEO and co-founder of Nuiku, a leading-edge, natural language processing and artificial intelligence company that brought voicedriven user interfaces to enterprise applications and home automation domains. Nuiku was sold to Nortek (NASDAQ: NRTK) in 2016.

Prior to heading up Nuiku, Sean spent 10 years at Microsoft, where he worked in a variety of roles including director of product management within the Server and Tools division and managing director of strategic partnerships (Accenture and SAP) in the Enterprise Group. He also served as a member of Microsoft’s senior leader bench program. Previously, Sean worked at several technology startups, including drugstore.com, where he was part of the preIPO team and director of venture integration, and Nimble Technology, where he was vice president of sales and services.

Sean spent the first decade of his career at Deloitte Consulting, where he managed service line delivery in areas such as ERP (SAP), business intelligence, process reengineering, risk analysis (audit), and M&A advisory (tax). He was also a member of Deloitte’s Senior Management Advisory Committee.

Sean received his Master of Business Administration from Harvard University and his Bachelor of Business Administration with high honors from Gonzaga University. Sean is also a CPA in the State of Washington.

Digital transformation is accelerating in many areas of business, but with people forced to stay at home and social distancing likely to become a long-term feature of daily life, it is the interaction between services and people that is accelerating fastest.

In the first few months of the pandemic, use of online and mobile banking channels skyrocketed and this level is expected to continue far after it subsides. In fact, up to 45% of consumers are expecting to cut back on branch visits following the end of the crisis.

As consumers use digital banking services more, they also expect more. In many ways, digitisation is creating an expectation economy – brands who meet or pass expectations in the delivery of digital services will perform well. The benchmark for service delivery and communication expectations is rising – pushed up by digital native brands free to innovate fast. It is entirely natural that people will expect more, better, and faster interactions and will compare performance and delivery across different sectors. We’ve seen this already in the financial services space. Digital challenger banks such as Monzo and Starling have disrupted the landscape, bringing these services to market quickly.

Deploying technology that uses artificial intelligence to enhance performance and innovation is an increasingly important aspect of service delivery. It is already an important ingredient in digital transformation - optimising the performance of people, processes, and data.

But the AI space is complex and often misunderstood. AI technology is not close to delivering a unified intelligence capable of thinking or solving multiple challenges, rather it is fragmented and focussed on learning how to improve performance in specific areas. Broadly speaking we can think about the evolution of AI in three overlapping phases.

We are in the first one now which is the use of off-the shelf technologies that can be used across business to optimise simple processes. We are also plunging into the second phase which is

investment in bespoke AI to tackle specific challenges within a business to enhance performance and gain competitive advantage.

Beyond this, we might look to a third phase which could deliver gamechanging innovation. A hint of what this might mean can be seen in the OpenAI project work to explore and create intelligences that can outperform humans for example in the creation and understanding of written content. The implications are not yet clear – but they could have profound socio-economic consequences.

In the meantime, what will AI change in the financial services space?

A challenge for institutions is how to consistently offer high-quality advice at scale. That means providing personalised recommendations to clients that are relevant, suitable, timely and actionable. Achieving this in an impactful way requires an understanding of each consumer’s individual needs to offer an experience that supports both digital and integrated human interactions.

With AI, banks can automatically extract previously unknown insights from structured and unstructured data based on predictive patterns and connections. For example, it could give the workforce critical insight into the social styles and preferences of the consumer using natural language processing and tone analysis before they’re even introduced

This enables banks to identify and act on recommended actions for improved competitive advantage. As such, AI is providing valuable resources as well as intelligence throughout to improve the entire customer journey.

One of the more valuable applications of AI is its ability to remove inefficiency. Historically, banks have been hindered by poor data quality, evolving regulations and legacy IT structures which contribute to making many processes more complex and time-consuming.

As a result, institutions are redesigning the workplace environment for employees and customers by automating the simplest tasks. Using AI to eradicate repetitive, monotonous work opens opportunities for skilled and experienced staff to focus on higher-value, creative pursuits. In the long-term, this means more personalised services for customers.

Broadly speaking, AI will create a more seamless customer experience. Through dynamic analytics, banks can ensure more processes are revolutionised by intelligent automation. For instance, voice recognition can assess if a customer is becoming frustrated with a robot and connect them with a human to guarantee frictionless interaction across products and applications.

Banking providers harbour huge amounts of data. While ethically, they have a responsibility not to abuse this information or their customer trust, customer sentiment is leaning towards a willingness to let banks use their data. If it means a better service and experience.

It provides a unique advantage. It can offer insights into the more individual aspects of customers lives such as their wants, needs and desires. Most importantly, this data can feed the analytics which guide the development of ever more bespoke services for customers.

Take credit applications, for example. With Open Banking and cloud data storage, machine learning algorithms could instantly draw on multiple sources such as utility companies and electoral registers to decide based on a customer’s real time data. It could then direct the customer towards the appropriate product for their requirements.

Breaking down data siloes and accessing data in a more dynamic and creative way will help make banks the standout financial services providers in an increasingly fragmented industry.

For many banks, ensuring adoption of AI technologies is no longer a choice, but a strategic imperative. If they don’t keep pace with technology, they risk being left behind in this competitive landscape.

AI provides an opportunity for financial services to transform the way they organise, run, and grow the business. Using AI to push digital transformation will enable a more agile proposition that provides improved experiences for customers and employees alike.

James Hobbs Head of Development Great State

Biswas, Suparna, et al. “AI-Bank of the Future: Can Banks Meet the AI Challenge?” McKinsey & Company, McKinsey & Company, 28 Sept. 2020, www.mckinsey.com/industries/ financial-services/our-insights/ai-bank-of-the-future-canbanks-meet-the-ai-challenge.

OpenAI. OpenAI, OpenAI, 1 Sept. 2020, openai.com/.

The ISO 20022 standard is a catalyst for change in digitalisation and payments. The current edition of the standard was published in May 2013, and it’s been clear since then that the standard represents the future of payments messaging. This is due to the rich information, process automation and interoperability it enables. What started off in the Automated Clearing House world with the Single European Payments Area is increasingly becoming the de-facto standard for instant payments and for high-value payments worldwide. In fact, we estimate that all major payment systems and currencies will have moved over to ISO 20022 by the end of 2023.

Banks, meanwhile, will be able to get closer to their customers and offer better services. As this happens, the nature of the entire payments supply chain will change: there will be no one owner. Instead, consumers, corporates, banks, software vendors, fintechs and other stakeholders will all play a part. Migration to ISO 20022 is moving at pace with one of two adoption models being taken. In the first approach, a ‘like-for-like’ migration occurs, which means data fields and messages are gradually moved over in compliance with the new ISO 20022 standard. However, the bank and client aren’t reaping the potential of the new standard as no further action has been taken. ‘Going native’ is the second approach. This allows extensive data sharing between banks and corporates unlocking a range of benefits including deeper insights into customers and partners, better accounting and financial data and more efficient payment processing. Datarich messages can provide corporates with all the information they need to automatically reconcile transactions the moment they happen.

Banks deciding which way to move forward must remember that corporates have been waiting eight years for this new ISO 20022 functionality and if their bank is not able to deliver the promised benefits, they could decide to take their business elsewhere.

Deciding which approach to take is the first step in the migration process for banks. The main transition models being deployed to the market are: the ‘like-for-like’ translation model, or; for an ‘ISO-Native’ approach – either the complete overhaul model, or the hybrid model.

The translation model approach translates incoming MX messages to the SWIFT MT format and vice-versa for outgoing messages. This model is less disruptive and has a lower upfront cost. However, it involves high dependence on third parties resulting in less interoperability with fintechs and no new customer insight. The complete overhaul model allows organisations to execute a wholesale architecture transformation. This approach gives access to leverage rich data across the business including new insights on the market and customers. One negative aspect of this approach is the fact it is disruptive and requires a large upfront investment. Finally, the hybrid model works well for global

banks where translation is needed across the board. This approach offers flexibility and the ability to localise strategic response, however it adds a level of complexity to users. The leading model is unclear, but banks must remember to align their payments operations with their chosen model.

That’s not to say that the adoption of ISO 20022 will be plain sailing. One challenge is that the standard describes an asynchronous messaging process. For banks which currently rely on return messages to confirm the successful completion of a payment transaction, this will cause significant upheaval, and is a change that underscores the need for everyone in the payments ecosystem to get ISO 20022 migration right. Banks will need to overhaul their business processes and operations to adapt to asynchronous messaging. This will in turn require new systems, such as Confirmation of Payee and Request to Pay.

The new format requires a fundamental change to the payments world, so the decision on which transition model best suits their needs isn’t to be taken lightly. Internal and external considerations will help banks determine next steps to successfully implementing ISO 20022. Internally, banks must ensure they have the right people to deliver this transformation, have processes in place to easily review and adapt back office functions and have the correct technology required for the migration. Our approach at Finastra has been to build a payments hub that is ISO 20022 native from the start – ready for widespread adoption across the industry. Banks must also look at external factors like customer impact, market share, competitors and regulatory constraints.

The adoption of ISO 20022 allows for additional, enriched data to be transferred within the payment instruction. The new format has more granular and better organised data elements as well as a consistent data dictionary across the payments chain to speed processing and improve compliance. This prevents misinterpretation and expensive manual interventions. All of this will facilitate improved processing and allow all agents in the payment to make more informed compliance decisions.

In the short term, including additional party and remittance information will help reconcile transactions. For example, QR codes are being used more widely on invoices, clearly identifying the beneficiary and facilitating automation in the back office. Looking at the medium term, institutions will be able to limit the resources they have to dedicate to exception handling and one-off investigations due to missing information or unstructured input that cannot be easily integrated into automated workflows. And finally, the benefits of ISO 20022 in the long term mean data that is properly structured and adhered to will support better regulatory compliance practices and financial crime monitoring.

The rewards of ISO 20022 make any temporary disruption more than worth it. We’re excited to enter a new era of payments messaging that will drive collaboration, innovation and efficiency through interlinked partner ecosystems. Paul Thomalla Global Head Payments at Finastra

At the start of lockdown, many businesses went into panic mode, wondering whether they had enough cash in the bank to meet their obligations in the unpredictable future. Thankfully, the raft of government support helped to ease much of the immediate cashflow woes, however, this exercise alerted many CFOs to the need for a more robust way of managing their working capital — both now and in the future.

Prior to the beginning of 2019, I wonder how many businesses had “potential global pandemic” as an immediate threat to be prepared for and managed in the latest iteration of their business plan.

With poor working capital management being the number-one reason cited as cause of business failure around the globe, managing risk via robust working capital facilities should be high on the agenda of any business hoping to ride the current economic storm. Thankfully, UK Finance may have found the answer to the question: “How do businesses bolster their working capital facilities post-pandemic?”

UK Finance conducted a study throughout the lockdown period that reviewed the facilities of 20,000 businesses (accounting for 5% of the UK GDP) in the UK using Asset Based Lending (ABL) and Invoice Finance (IF) as a way to manage their working capital. In the context of the lockdown period, much of the focus was on the availability of vital funds, with the government were under pressure to provide quick access to finance to keep the economy afloat.

The results of the study were surprising, stating: “At the end of March, IFABL clients were using 70 per cent of their available funds to support their cashflow, three months later this had dropped to just 45 per cent. In real terms, this indicated the ‘average’ IF/ ABL client had headroom of over £250k within existing facilities.”1 This shows that government grants, the Job Retention Scheme, and Government Backed Loans (CBILs and BBLs) provided the working capital breathing space that businesses needed. But more importantly, it shows that the businesses that had working capital facilities in place prior to the pandemic had more headroom in their facilities and were less likely to be in desperate need for cash.

If this isn’t enough of an incentive for every CFO to review the current facilities — and consider the benefits of — Asset Based Lending (ABL), here are some other reasons why it should be considered as a working capital management tool:

With ABL, you get a higher availability of cash compared to traditional lending facilities

ABL provides revolving working capital on a constant basis, meaning the availability of working capital will increase inline with the growth of your business

Alex Beardsley Director ABL Business

Usually, ABL facilities carry a lower cost of capital from lenders due to the high amount of security they have over the business assets, and therefore can be a more costeffective way of borrowing

The facility provides more than just an injection of cash at a specific point in time that is then to be repaid out of working capital, further hitting access to cash.

A better way of managing working capital lies in both knowledge of what is available in the market for businesses, and also the particular attitudes towards using finance within a business.

A study in 2014 by Lloyds Bank Commercial Banking highlighted that there was £770bn of untapped assets nationally — which at the time equated to 48% of GDP. Could it be that working capital management is suffering because UK businesses are unaware of the options available to them when it comes to structured finance, or is it that they are reluctant to use finance at all? Many businesses refer to the bank for support when it comes to providing working capital facilities — or any finance at all — but in the last few years the alternative finance market has proliferated. There are now a range of specific ABL providers that are more commercial and open to risk than the high street banks, meaning that there is now more choice available to businesses seeking support for working capital management facilities.

Following the pandemic there is going to be an increased amount of debt on the balance sheets of UK businesses and a reluctance from the banking and financial institutions to lend without significant security.

No one can deny that the risks to lenders have increased. Before Covid-19, the likelihood of a 'pandemic' was not on anyone’s radar — now it will be the first thing lenders and businesses think of going forward when it comes to making decisions. Now more than ever, it is imperative that businesses and CFOs assess all of the options available to them when it comes to using finance within the busines to help with working capital management.

Having the right finance facilities in place before the business runs into working capital issues is a sure fire way to ensure that a business always has the cash on hand to meet their financial obligations — minimising the risk of insolvency by being able to meet current liabilities.

https://www.ukfinance.org.uk/data-and-research/data/ business-finance/invoice-finance-and-asset-based-lending

Digital transformation in finance is not new or a nice-to-have – it’s table stakes for growth. But the question now is how fast banks should transform and how digital they should be to best serve their audiences.

Banks must understand that it’s no longer about ‘traditional’ or ‘digital’, but ultimately what the needs and wants of their audiences are. This should dictate the transformation strategy rather than the legacy mentality of ‘how do we keep our original business model as a bank and continue to try and cross sell products?’, which is the business model today.

Those with a clear understanding of changing consumer behavior will find ways to create products around the new needs of the customer rather than pushing a more traditional model based on minimizing risk and maximizing returns to the benefit of the bank – and this should be done through a combination of traditional and digital channels. With COVID resulting in a massive 50% surge in mobile bankingi - now 6% of US adults consider a digital bank to be their primary bank which is a 67% jump from January 2020ii - traditional banks could finally catch up with the convenience and ease of the challengers but with the added bonus of reputation and loyalty, if they’re smart.

Challenger banks have accelerated transformation of the banking sector over recent years. The disruption the digital-first banks created was immediate yet fairly simplistic as it concentrated on reimagining customer experience – the teams looked at an industry standard customer journey that hadn’t changed fundamentally in decades, identified the obvious pain points and customer barriers and thus created an attractive digital experience that saved customers time, effort and energy. This, often combined with either market leading interest rates or savings, a modern technical stack with little if any legacy and debt, and exploiting the lack of trust in traditional banks, appealed to a whole new digitally-literate audience with high expectations and gave traditional financial businesses a much needed wake-up call.

Yet, challenger banks have also faced problems and continue to do so. Research we conducted at Somo outlined in our white paper ‘Are digitalonly brands the future of financial services’ iiishowed that only 1 in 5 consumers were getting salaries paid into their digital account and so challengers need to find a way of becoming the primary account rather than the secondary one.

Although research shows that digitalonly banks are expected to grow exponentially over the next four years - 19.8% in the US according to an October 2020 forecasting report by Business Insider - simply holding a large number of savings or current accounts is not hugely profitable for these challengers. Therefore, it’s no surprise we are already seeing challenger banks seizing COVIDrelated opportunitiesiv owing to the larger institutions offering fewer new business accounts because of the huge backlogs. Additionally, according to the Bureau of Labor projectionsv, the portion of gig economy workers will increase to 43% in 2020 in the US. A gap is emerging that needs to be filled with banks that can evolve and cope with income volatility in customers and hold a completely different customer-first offering. Chime in the US, for example, currently has 9.5m account holders and this is expected to increase to