Peter Smith, our fearless analyst in the UK, just penned an analysis of a recent announcement by UBS, a well-known financial services firm, to outsource a large portion of their procurement activities to an organization called Chain IQ.
Chain IQ? Who?
That’s what we said! Well, Chain IQ is a newly formed entity that is “privately funded and owned by a group of independent investors” and plans to open up shop as an “arms length entity” in Q2 2014 in Switzerland. It plans to take on 210 of UBS’s procurement employees and support UBS’s industrialization strategy to apply best practices from different industries to its back-office processes.
One set of practices that we highlighted in our direct procurement study was the combination of multi-tier and tax advantaged buying (i.e., “Buy-Sell”) using a trading company. This is fairly standard stuff for large advanced firms in CPG, High-Tech, Automotive, etc. HP is a well-known example, and Honda Trading is another transparent example, although these are not so much tax efficiency plays than are designed to offer up scale to their suppliers and take cost out of the system. Even other more traditional companies are starting to wade into newer business models. For example, E&C firm Fluor has quietly launched Acqyre, its newly formed supply chain services firm, in the Netherlands to offer a portfolio of arms-length business services to the industry.
Yet, the economics are clear for these entities. For a firm like UBS though, it’s less clear, especially relative to the risk (and given the backdrop of UBS paying $780M in fines to the US tax authorities in 2009). UBS holds no direct equity in the venture (although it’s unclear who the private investors actually ARE). And it’s also not clear whether Chain IQ will be establishing a trading-oriented service or just a traditional procurement BPO business. The latter would seem to make sense for UBS, since procurement is not a UBS core business competency, especially relative to the potential downside of utilizing a partner engaged in a tax-advantaged trading company type business model – and relative to UBS’s historical corporate brand woes from tax related issues.
But, is Chain IQ such a trading company or merely a new mild-mannered procurement BPO firm entering the market? Well, Chain IQ is led and funded by Italian entrepreneur Claudio Cisullo, who has some interesting ties to UBS, as well as a background in international trading. Peter gets into this story in greater detail, but I view it at least as a cautionary tale in the making. Why? According to Peter’s piece, UBS declined a traditional procurement BPO model “because of potential conflicts of interest, and there would be little chance of UBS leveraging their own volume to get additional returns." First, I’m not sure about the conflict of interest. Financial services firms outsource non-core processes all the time, especially since the client retains commercial relationships with its suppliers (i.e., the BPO doesn’t own the contract with the suppliers). Second, how exactly will UBS “leverage its volume” with Chain IQ beyond which it would with a traditional BPO? Will the entity hold the contracts? If so, it is a trading company.
Anyway, I’ll let you, the reader, come to your own conclusions about this particular situation, but let me just look beyond UBS and make a few points more generically:
- We applaud procurement organizations pushing the boundaries in new business models and ones that help build top line and growth.
- Procurement organizations must “do no harm” and mustn’t impair corporate brand and create business risk. They must also be transparent in their strategies to regulators, yet also be careful in what they communicate publicly.
- Procurement groups should not only take a hard look at what is core and non-core to negate “strategy risk," but also clinically evaluate “implementation risk." The market is littered with seemingly innovative business models by financial services firms that simply go nowhere when it comes down to the very hard business of implementation.
- Using third parties to commercialize spend aggregation – especially in a procurement BPO model – has consistently failed. Ask IBM, ICG Commerce (now Procurian), and all the various incarnations of various online consortia founded by the seemingly smartest service providers out there (I won’t name names – you know who you are) back in the late 1990s and early 2000s.
- Consider the opportunity cost of your solution. Is it the best use of your time and investment? Or is it just a way to work around another root cause rather than eradicating that root cause?
- Have you opened up your problem to the supply markets and seen what they can truly do versus assuming what they can/can’t do? Maybe a procurement BPO might truly get the aggregated buying model problems sorted out – especially if and when they come down market.
You can probably add your own recommendations, but it’s clear to us that there is still plenty of room in the market to innovate while not repeating the mistakes of the past. And we’ll keep our eye out for both.