Gonzo bankers can take Inspector Holmes’ mantra to heart. With earnings and capital pressures abounding, it’s surprising to see how much theory and how little data banks have applied to their third party vendor relationships. The vast landscape of service providers has changed drastically over the last several years. As a result of accelerated consolidation, many of the 800-pound gorillas now need to increase (or retain) market share to pay for their investments.
This could be good news in Gonzo land – if banks lay out a few strategies for working through their vendor agreements to maximize revenue and reduce some of our highest expense items.
There are seven major areas where bank third-party service fees are concentrated today:
Annual outlays in these seven key areas are likely to constitute a bank’s second largest non-interest expense category after employee compensation. And these expenses are growing quickly as banks add new services such as online account creation and mobile banking to better support customers.
Now let’s look at the revenue side of the equation. Many financial institutions are seeing new or revitalized areas of increased revenue in these areas:
Too many banks have executed these major vendor agreements and simply tucked them in a drawer. With the shakeup in the vendor community and the continued industry “assistance” coming from Washington, it’s time for banks to dig into this stack of agreements and begin to manage vendors and costs more proactively.
Dusting Off Vendor Agreements“Eliminate all other factors, and the one which remains must be the truth.”
Any bank serious about 2010 earnings should conduct a review of all third party vendor agreements and develop a catalog containing vendor name, service, termination date, automatic renewal provisions, annual expense/revenue and other critical information. These days, allowing an agreement to auto renew without doing competitive pricing could mean needless expenses flowing out the door or missed revenue opportunities for years to come. In many cases, Cornerstone finds that agreements reviewed and negotiated holistically have much better cost savings opportunities with vendors.
Working with Your Major Vendors“Everything in this world is relative, my dear Watson.”
With a clear inventory of major vendor contracts in hand, banks can begin to size their renegotiation opportunity. Unless a de facto decision has been made to replace an incumbent vendor, revisiting an existing contract should be done prior to exhaustive new vendor due diligence efforts. Bankers that have agreements with auto renewals need to understand what their vendors are going to offer for a contract extension. In today’s heated vendor market, same terms, same price doesn’t cut it, and no agreement should ever be permitted to auto renew without a formal contract review.
In addition, it typically makes sense for banks to compare their incumbent vendors’ bids against competitive pricing options in the market. The thought of switching vendors is so painful that it wrongfully discourages many financial institutions from soliciting competitive pricing. Cornerstone suggests that competitive pricing reviews are key ingredients to healthy ongoing relationships with vendors and a clear obligation from a vendor management perspective.
Why is competitive pricing alive and well? Elementary, my dear readers:
Cornerstone finds banks today still lacking in the rigor they apply to analysis of vendor bids. Any bank working with its vendor to get a proposal for a new agreement should request a “pro forma” invoice that will simulate what the first monthly bill would be under the new agreement. It is not unreasonable to ask the vendor to walk through the invoice line by line until it has been explained to the bank’s satisfaction. Later, after the agreement has been signed, the mock invoice can be compared against the first bill. Any discrepancies should result in a quick call to the vendor account rep. Sounds simple, but it amazing how rare this ongoing discipline can be in our industry.
As a banker, when I completed a contract and put it in the drawer, I was 110 percent sure I had the best deal in the land. And it probably was, on the day I put it in the drawer. But as the wise Inspector Holmes would say, “The game’s afoot.”
Vendors are getting competitive out there. Don’t let those once good agreements sit around and get stale.
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Cornerstone Advisors can help you identify the cost savings and revenue opportunities inherent in your vendor contracts.
Our POSSE (Point Of Sale bullShtick Exposure) can outline an opportunity for your institution to offset the loss of OD fees by reducing expenses and increasing income.
Contact Cornerstone Advisors today to pinpoint those opportunities.
Great article Bob – Being in charge of vendor management at my company, I can vouch that it is one of the most overlooked and complex risk areas.
I had to make one comment though, as an avid Sherlock Holmes fan. Holmes never worked on the police force; he was an unofficial consultant and never held the title of Inspector.
Bob,
Great article, every banker has been bitten at least once by an auto renewal contract and whether it cost them a little or a lot, it’s a bite you never forget.
Every banker big or small should be embracing tech and automation as a great way to drive down costs and improve efficiency.