In the financial services industry, the procurement professional plays a particularly important role. All organizations benefit from the knowledge and skills of procurement to find the best goods and services at the best price. Those who work in the FSI must at the same time help manage regulation, competition and risk for one of the most highly regulated industries on earth. Supplier evaluation and performance are crucial, since supply risk events put a damper on profits and may draw unwanted attention from regulators.
Smart procurement choices can lead to a higher profit margin and competitive advantage. Consequently, as organizations create procurement policies, they need to be sensitive to that expertise. Otherwise, blind enforcement of generic policies may result in people finding ways to go under the radar. Purchasers sitting within their silos make isolated purchasing decisions based on their experience alone rather than the collective experience of the enterprise. In addition, there are always bad actors who try to game the system. (Just ask the U.S. Navy, which recently fell victim to a $2.7 million procurement scam.)
Financial services organizations also need to consider business agility when creating procurement policies. Tighter controls may restrict agility even as they yield greater efficiency. To accelerate procurement without compromising efficiency, enterprises need to empower people to make quick purchasing decisions without losing control over how the money is spent.
Overcoming Analysis Paralysis with Artificial Intelligence
Procurement has a variety of challenges, but chief among them is the quality of intelligence available on purchase transactions. It is dated by the time it is received, leaving little or no time for any kind of interception or guidance. Part of this intelligence is derived through traditional analytics, which employ a slice-and-dice approach to analyze data. They help understand the spend distribution over a period of time and identify opportunities for optimization.
The problem is that these analytics aren’t able to dive down further to reveal specific patterns of buying behavior that may need to be probed, encouraged or stopped. While intelligence is also derived from subject matter experts or consultants who analyze the spend distribution and provide advice based on industry benchmarks and best practices. However, that doesn’t always drill down to the transaction level to provide specific recommendations.
Because there is so much procurement data being generated non-stop, analysis at a granular level that provides a true understanding of what’s happening is essentially impossible. Purchase transactions have patterns hidden deep within them, some of them good and some bad. These patterns reveal the nuances of buying behavior, and they constantly evolve. The problem is that you don’t know what they are upfront. Hence, you cannot define any rules to detect their occurrence. That is why traditional slice-and-dice approaches fail – and why artificial intelligence (AI) is so helpful.
AI has the capacity to find those patterns, increasing the transparency in procurement. It can auto-discover patterns in purchase transactions that look odd using algorithms and then highlight them to humans. It can observe and learn which of those patterns are accepted by humans as worth monitoring through feedback loops. It can then use this knowledge to detect and predict anomalies in live transactions, allowing humans to intercept and take timely action. That’s when the procurement function starts to become cognitive.
AI and Exceptions
Exceptions take on several forms within procurement. Some adversely impact spending because of avoidable price variance, some impact the cost of operations because of avoidable delays and some are non-compliant with procurement policies. Exceptions can be positive as well, such as transaction sets that are always compliant and never result in price variance or delays.
How do exceptions occur? Finding that out involves finding an exception and then identifying influencing factors that could influence its occurrence. The outcome could be price variance, which is the difference between the price quoted in an invoice and a standard price at which the item might be bought. There could be any number of influencing factors behind such an exception: business unit, plant, buyer, supplier, item, time of the year etc.
Leveraging AI can help you find an outcome like this, in addition to any number of influencing factors. It can also help predict likely exceptions ahead of time. Sophisticated algorithms then take over to crunch a purchase transaction data set and discover patterns that require inspection and are presented to humans with transactional evidence. Such a virtual procurement expert would be able to compute and present a financial impact of every identified pattern. Then human procurement experts can validate these patterns.
Using a combined approach of humans and AI, you can move on to learn what drives other types of exceptions such as transaction fallouts, mavericks, anomalies or the unavailability of a purchase order against an invoice.
Additional Wins from Using AI
The procurement department of FSIs will be able, aided by AI, to work at the speed required for rapid business growth and do so with greater efficiency. When a layer of intelligence is always at work, organizations can continuously monitor and guide people to make the right decisions based on the organization’s collective experience. Exploiting hidden opportunities to optimize spend by identifying and eliminating maverick transactions produces an efficiency boost. Similarly, working with AI helps to eliminate different types of exceptions that would otherwise cause a drag in the process and increase the cost of operations.
Using AI brings with it the additional benefit of better compliance. Instead of forcing people to comply with a generic set of policies, the application of AI allows procurement teams to become more sensitive to real business needs. It enables them to continuously engage with people on the ground and help them make the best choices within their constraints while staying compliant. For those trying to game the system, AI acts as a deterrent and reduces instances of non-compliance.
Adding AI for Better Procurement
Financial services firms know how important it is to have a well-functioning procurement team, as it helps lower costs, maximize profits and protect against risk. In all these ways, they add value – but they can be stymied by overly strict policies and ineffective analytics. AI helps by taking on the redundant activities of procurement while providing helpful insights that provide added value. To achieve this, FSI companies need to switch from focusing on process to focusing on data so the procurement team can become even more agile and efficient.