The Bottom Line

Does Experience Matter in Vendor Cost Benchmarking?

Posted by Michael Carter on Aug 18, 2019 9:00:00 AM
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Does Experience Matter in Vendor Cost Benchmarking

Sports are one of America’s greatest pastimes, and anyone spending even half an hour watching them will likely exclaim, “How did that player do that?” Indeed, with the help of science, today’s athletes are dieted and trained to have bodies “made” for their sportModern athletes can achieve heights not previously seen. However, science alone does not guarantee the modern athletesuccess. 

Malcolm Gladwell’s proposed 10,000 hour rule in his book Outliers is straightforward – to be a true expert at anything requires 10,000 hours of commitment. Various sources have challenged Gladwell’s assertion, but it is hard to debate the facts. When we watch college and professional athletes, what we see them do is possible because of the thousands of hours they have committed to their sport.  

Along the same lines, benchmarking in the financial services industry is a vital area of expertise required by banks and credit unions, especially when evaluating vendor offers in substantial investment areas, such as payments, digital banking and core replacements. As with athletes, there are differences between the various benchmarking methodologies available:  

  • High-level comparative metrics or paid analytics services are available, but the measures provided – like an efficiency ratio – do little beyond helping financial institutions assess relative standing.  
  • Cross referencing macro data with peer data is another option, but there’s only so much detail a bank or credit union can share without violating the terms of its vendor agreement.  
  • Anonymized benchmarks, another alternative that offers a layer of removal from these protected details, is possibly the best of these three options, but the “market rate” benchmarking is tough to rely on since, for banking services, this figure is always evolving. 

Changes in financial services are non-trivial, and innovations in technology – and the vendors to support them – will keep spawning. Market pricing and terms are constantly changing, and the burden of researching them remains on the buyer. Meanwhile, the choices facing institutions in vendor selection (and their proposed pricing approaches) will continue to proliferate. 

As noted above, most options to build vendor benchmark comparisons are limited to a fixed point in time. For this reason, contracts are often mistaken as fixed costs, and benchmarking is done as the term of the contract with the vendor nears a close. Things change almost constantly – and certainly in weeks and months, not years. Regularly benchmarking vendor costs usually result in cost savings or new revenue for the institution. Continuous benchmarking is now a requirement to ensure a bank or credit union is optimizing its vendor relationships for the benefit of stakeholders and members.  

As with other firms, among the many ways we help our clients add value to their bottom line is through vendor evaluation and contract negotiation. Unlike other firms, we utilize automation – intelligent workflow, optical character recognition, robotic process automation and machine learning – embedded in our tracking, auditing and benchmarking (TAB) software platform to go beyond the limitation of methodologies used elsewhere. 

Within TAB, proprietary benchmarking processes continuously compare contract terms to what the market is seeing in that area, at that time. For its users, this continuous benchmarking is applied to the contract in question for the full term of that contract. From our more than 10,000 hours of efforts, we have built into TAB the ability to track the cost and savings of major contracts, as well as programming to audit the vendor invoices associated with them, done through the life of the contract.  

Here again, lessons learned over years and years have revealed the error rate of manually entering of contract details (5%) and the error rate in vendor invoices (10%).  Considering the amount of data entry still done by humans in financial institutions’ back office and the number of complex vendor invoices with hundreds of line items, the value can absolutely be quantified monetarily. 

The Bottom Line: When the manager of a major league baseball team approaches the pitching mound in the bottom of the ninth with the game tied, he will bring in a relief pitcher, one that has been in similar situations. Relief pitchers have to be exceptional athletes, but their mental strength and composure must also be tried and tested. This is also true in business, often discussed under the label “fit for purpose.” Given the rate of change driven by consumer demands, make sure you choose partners and software tools made for the “game situation” your bank or credit unions faces.   

Topics: Vendor Contract Management, Vendor Cost Benchmarking, Contract Negotiation

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