I’ve seen this scenario play out many times in institutions that are purchasing telecommunications networks. A group of people, “unencumbered” by the insights and opinions of others, buys the biggest telecom network it can find. With no other stabilizing influencers involved in the decision-making process, that super-network’s purchase ends up costing the organization far more than it should have.
Voice and data circuits are among the top technology spend line items in most banks’ information technology budget. According to the latest data from the Cornerstone Performance Report for Banks, total full-time equivalent (FTE) employees supported by network management FTE ranges from 202 to 440, and data communications spending ranges from .017% to .037% of assets. This alarming span illustrates how some banks are spending twice what their peers are spending to overbuild their networks. It also paints a clear picture of an institution operating under the influence of fiefdom syndrome.
The following five best practices are aimed at helping banks thwart fiefdom syndrome in their technology departments to best optimize their telecom spending.
1. Apply a team-based approach to spending decisions
When evaluating technology and making spending decisions, invite input from a wider group of members within the IT department as well as from finance and other lines of business. This best practice ensures an educated and well-rounded result based on the needs of multiple end-users.
As bandwidth costs go up, costs per megabit (incremental costs) go down significantly. Pair that with an industry in a rapid state of price compression and an aptitude to continue to spend last year’s budget, and contract savings will depart quicker than a toupee in a tornado. An institution that sets its infrastructure budget based on an incremental increase to last year’s budget will quickly end up on top of the spending chart. FIs should set contract negotiation spending goals based on market activity, not last year’s budget.
When negotiating a new telecom contract term, financial institutions should first ask themselves how much telecom savings could be captured if they don’t make any bandwidth increases. Then they should measure against the opportunity cost, which is the amount of the contract savings the FI could have received but forfeited when it spent dollars on bandwidth and technology upgrades. FIs should then gather pricing for the updates truly needed based on business requirements. This exercise will provide the analytical data necessary to make educated go-forward decisions as well as set up a decision-making process that will enable a contract negotiation leader to shine and satisfy a CFO’s cost vs. benefit concerns.
The typical bank has a multitude of datacom/telecom vendors, and every acquisition adds more. This situation results in gross inefficiencies, including the potential for vastly increased points of failure in the numerous networks, intensified finger-pointing when things go wrong, and a huge number of invoices received by IT and accounting every month.
Best practice banks ease the operational and cost burden on IT, accounting and vendor management resources by consolidating their various voice solutions and networks – keeping in mind that the opportune time to visit this consolation is at contract renewal time.
Left to their own devices, vendors will create individual circuit contract terms and deconversion terms that are punitive to banks. Coterminous contract timelines on circuits and network/voice solutions are one way to level the playing field during pricing negotiations.
A best in class enterprise contract will be flexible enough to support changing circumstances, such as branch closures and acquisitions, and will be set up to renew on a month-to-month basis at then-current prices.
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Following these best practices will help banks make spending decisions built not on a foundation of fiefdom, but rather on consensus, camaraderie and data. It’s a winning strategy to move banks forward in their telecom spending goals.
I agree Ryan. All good advice. Yet few banks or executives do as you advise. I have asked many bank executives how many of those features do you actually use on your phone system? The most common answer is about 20%. That means 80% of the features are not being used. So if they paid $1,000 per handset, that means $800 of that $1,000 will never see a ROI! What a waste. There is a better way.