We’re going to set the big picture Gonzo thinking aside this week and focus on something that may not be on your radar screen. Trust me, you won’t find NO stinkin’ Bank Transparency mumbo jumbo here, bro (no offense to strategy wonk Steve Williams). That’s right sports fans, it’s technology number crunching time!
My goal today is to provide you the tools to better understand and possibly clean up those multi-page technology vendor invoices you love so much and maybe even save your institution some money along the way.
As the chief number cruncher here at Gonzo’s Flagship (Cornerstone Advisors, Inc.), I’ve spent countless hours deep in the trenches reconciling invoices and modeling bank core processing costs. Routinely, I find large billing errors that equate to thousands of dollars. Vendors claim it’s the responsibility of their clients to let them know, and I somewhat agree. The problem I have is with the multi-page incomprehensible invoices. My guess is that the vendors themselves don’t fully understand all the charges. I take that back. Otis, who set up the format over 30 years ago and is not allowed direct customer contact for obvious reasons, can rattle off more than 50 different reasons for the detailed cost structure.
Are you leaving money on the table? Take a look at the following list to see if you may fit into this camp:
Do any of these sound familiar? If so, I have provided some helpful tips to help reduce some of your core spending costs including ways to monitor your vendor and some useful financial modeling techniques. Our most recent 2005 Cornerstone Report results indicate that the average bank spends about 6 basis points (.06%) on core processing technology. The obvious question here is; what goes into core spending? Cornerstone defines core as all systems and personnel related to running the core deposit, loan, general ledger and CIF systems at your bank. For the in-house folks, hardware, software and internal staff costs typically dominate core spending. Outsourced shop core costs tend to be mainly monthly processing costs charged by the vendor.
Benchmarking your core technology costs is a great starting point, but only the beginning of this arduous task. With measurements in place, banks should delve further into the “why” of their cost variances vs. peers. Now it’s time to get your fingernails dirty.
Follow these steps to ensure your “Strategic Partner” has your best interests in mind:
Step 1: Review your contract.
Start by reviewing your current contract. Duh! The idea here is to get your arms around specific, agreed upon pricing and functionality. For those who have been with your provider for a number of years, you may not have all your contract documentation, especially subsequent addendums. Make a request to your vendor as it will typically have the documentation on file. Make a thorough review, paying particular attention to Schedule A (this is the functionality you agreed to purchase), the Contract Terms and any COLA provisions (see Carl Faulkner’s article COLA Exposed). Also, get your vendor actively involved in the reconciliation process and make sure it is aware of your concerns upfront.
Step 2: Gain a complete understanding of your payment history.
Divide your invoice into core and non-core costs and input these into a spreadsheet. I recommend inputting the invoices (as detailed as possible) for the last 12 months. This will give you a pretty good idea of your annualized costs. Note: Some vendors have started providing fewer details to make their invoices “less complicated.” You need to demand a detailed statement from the vendor and input that into the spreadsheet. Most of the errors I find are not as obvious. For instance, your provider probably combines several items into the “Base Services.” The details associated with these charges are where the errors typically exist.
Here is a two-month example of what I’m talking about:
|
JANUARY |
FEBRUARY |
||||
| Description | Item Cost | Quantity | Price | Quantity | Price |
| BASE CORE |
|
|
|
|
|
| Open Dep. Accts. |
$.60 |
203,056 |
$121,833.60 |
203,056 |
$121,833.60 |
| Closed Dep. Accts. |
.05 |
24,323 |
1,211.60 |
24,323 |
1,211.60 |
| Open Loan Accts. |
.60 |
103,056 |
61,833.60 |
103,056 |
61,833.60 |
| Closed Loan Accts. |
.05 |
1,065 |
53.25 |
1,065 |
53.25 |
| OFAC Check |
70.00 |
1 |
70.00 |
1 |
70.00 |
| NON-CORE |
|
|
|
|
|
| Platform |
840.00 |
1 |
840.00 |
1 |
840.00 |
| Interface to IVR |
250.00 |
1 |
250.00 |
1 |
250.00 |
|
… and so on. You get the idea. |
|||||
Step 3: Reconcile, man.
Now that you understand the functionality and price agreed upon in the contract as well as your payment history, you will need to reconcile the differences. Typically, you will find several mismatches both in price and functionality. It’s amazing how things mysteriously appear on your invoice over time, eh? Here’s where you’ll need assistance from the business lines. The key is to make sure all the business lines involved in the core world are well represented. This team will be critical in identifying functionality, volumes and services being billed that are no longer needed or inaccurate.
Step 4: Identify low-hanging fruit.
The biggest cost saving opportunities I run into are centered around volume counts. If you are in an outsourced arrangement, you are most likely being charged for the thousands of closed accounts you have sitting out on your system (sometimes at the same rate as open accounts). I make it a practice to be sure my clients purge those records as often as possible. Other volumes such as the number of network devices and seat licenses also should be reviewed by the business line folks. Beyond volumes, I typically find some savings around unneeded functionality as well. Even if it’s just maintenance associated with a license, it can add up over time.
Step 5: Meet with the vendor.
Make sure your vendor commits competent resources including people who will be able to answer questions on the spot. Review your annualized spreadsheet with the vendor and make sure you gain a complete understanding of each line item including whether charges are required or optional. These meetings typically generate some very useful conversations and weed out any functionality not being used. Wrap up the meeting by reviewing the list of items that need to be removed and confirm them with the vendor.
At Gonzo’s Flagship, we’ve saved financial institutions millions of dollars in unwarranted fees by following a similar methodology. The key is to be proactive and challenge your vendor often.
Hopefully, your next invoice proves to be a big payoff. As your organization grows, make sure your institution’s core costs are in line with industry benchmarks. Remember, the latest Cornerstone report confirms an ongoing trend of declining core spending.
-ew