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Make or Buy: Could smart procurement offer member value creation in superannuation?

Australia remains one of a relatively small number of countries with compulsory superannuation; the measures put in place by the Australian Government, backed by tax benefits, to ensure citizens save to provide an income stream in retirement.

It’s a hyper competitive landscape, with funds seeking a competitive advantage, both in terms of their bottom line, and the value or experience they offer their members. The industry is also under scrutiny as  a Royal Commission and regulators keep a close eye on how funds are using citizen’s money.  

As a result, it has been clear for some time that superfunds across Australia are insourcing more and more of their services. The era of superfunds operating outsourcing models for all, but their core services, has come to an end. Transformation, efficiency and value creation are widespread and encouraged, as demonstrated by several announcements in the industry over the last few years, where make or buy decisions have been transforming the superannuation value chain. Cbus Superfund’s ongoing Procurement and Accounts Payable transformation being a recent example.  

Fund functions and services that can be turned into a differentiator for prospective members are being insourced; whilst many back-office operations are also being brought in-house. As part of the growth of superfunds, and the growing insourcing trend, many of the activities that used to sit with third party administrators or TPA’s -two of most dominant in Australia being Link Group and Mercer - are being insourced.

This means many funds are building new capabilities in areas such as technology, member experience and marketing, which is challenging from several aspects:

  • Every project and initiative must be connected and communicated to return benefits to fund members
  • Transformation initiatives, and any new partners involved in delivering those initiatives, must be low risk, and provide high commercial value to help the fund excel on areas they have no internal capabilities for

Smarter procurement

There is no doubt that procurement is changing that way many funds operate. A function that used to be about acquiring products and services for the best price is now defined by information management and the ability to give executives the analytics, and guidance, they need to make better business decisions.

The industry is experiencing a wave of digital disruption, picking up where process automation began two decades ago and continuing with end-to-end digitization and transformation.

Procurement professionals now play a strategic role in their funds beyond simply controlling expenses. They are now also expected to manage legal and regulatory exposure, while providing valuable intelligence to key stakeholders.

Procurement spend analysis is a key health indicator of the organisation. The problem is most super funds in Australia do not have efficient means of understanding their own spend data, therefore not having the data available to make informed decisions. This is primarily due to either Procurement not existing as an end to end function in their business, a lack of agile systems, or both.

Procurement is all about increasing the value of the enterprise by sourcing innovative suppliers and increasing compliance with these suppliers. For superannuation, it is about sourcing for goods and services with the lowest risk and highest value, ensuring the fund is spending for the best interests of members. However, building procurement value in superannuation looks significantly different to other industries. The first real differentiator to a ‘generic’ procurement unit is that a superfund buys very few goods, and a significant amount of services.

Service procurement and Procure to Pay

With services procurement comes a challenge: whilst buying a product from a supplier might be easy to measure in quality, a professional service, or an outsourcing agreement with a matrix of services falling underneath, requires a far more complex and intelligent way of assessing in terms of cost efficiency, value and on-going risk to the fund. This is where efficient supplier relationship management comes into play. An efficient supplier relationship function can set the right benchmarks for the fund to assess the ongoing mutual value of the relationship by surveying the internal, such as the stakeholder managing and dealing with the supplier on a day to day basis, and external stakeholders, ie. the supplier themselves. Procurement operating both in the sell and buy side of the relationship ensure that these key relationships are continuously assessed for value and efficiency to understand where they fall short on or excel at. This ensures that both the large strategic relationships as well as smaller, more tactical relationships, receive the attention they require from the fund to continue adding value.

In addition to on-going services procurement value, funds in Australia require an efficient, transparent Procure to Pay process.  Procure to Pay technologies can support service procurement in three ways:

  • Procure to Pay can be setup with indicators, processes and governance which will assist the procurement department to channel the organisational spend to preferred suppliers, which in turn would be lower risk and bring out the ultimate value for the organisation.
  • Well established Procure to Pay processes also will ensure the spend and supplier to be used, when preparing for a large project or capital investment, are vetted according to the regulator guidelines. Tax in superannuation also requires special attention, as not all purchase can have the full 10% tax recovered. This is based on a rather complex assessment of tax recovery codes, which only few Procure to Pay technologies available in the Australian market can handle.

 

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Jussi Karjalainen

Jussi Karjalainen

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Valtatech

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Melbourne

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This community aims to provide links, resources, book suggestions, tips and insights to facilitate learning and development of IT professionals in financial services, and to develop a forum for IT professionals to exchange views on various related items.


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