The Bottom Line

Vendor Cost Benchmarking —How to Simplify a Grueling Task

Posted by Michael Carter on Feb 13, 2018 9:00:00 AM
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While negotiating a new vendor agreement may be the most visible part of the vendor contract management process, it’s the tedious attention to detail after the ink is dry that ensures the hard-fought cost savings materialize as promised.

This isn’t to say that service providers are looking to pull a fast one. Honest errors can (and do) occur on both ends of the agreement, probably more often than most of us would like to think. Circumstances, both internal and those dictated by market forces, also change over the life of a multi-year contract, leading to results that differ from expectations when the agreement was struck. That’s why ongoing auditing and benchmarking are essential components of any vendor contract management program.

Small Dollars—and Small Tasks — Add Up Quickly

Vendor invoices are often formatted in complicated ways and it can be tempting to simply pay the balance due and move on, especially when the amount owed is within a range of recent months’ results. Bear in mind, however, that errors like an extra line item or a faulty volume calculation often become baked into future cycles, and grow along with volumes. Even a single $100 error can easily add up to a number that will make your eyes water. 

Many times these additions aren’t really errors, but rather “miscommunications.” Perhaps an operational request made by a technician unfamiliar with the contract terms could have been accomplished in a more efficient manner. Or a one-time request was miscommunicated or misunderstood and found its way into the run rate. Many vendor contracts have so many moving parts that a pull on Lever A can easily have an unanticipated impact on Meter C. In a recent blog we discussed how contract addenda can have unintended, downstream consequences and why a routine invoice audit can serve as the last line of defense against such surprises.

So why don’t institutions take the necessary steps to either prevent these errors or, at least catch them early on when the impact to the FI’s bottom line is typically smaller? Because, invoice auditing is tedious and time consuming work. Although a single invoice may require only 1-3 hours of an informed analyst’s time, this can quickly add up to several days of monthly effort, and the number of vendor invoices demanding such attention continues to grow. Fortunately, automated tools exist to perform these tasks at a fraction of the cost. 

It’s About More Than Price

Banks and credit unions understand that the fine-tuning of operational metrics can generate significant savings, but this process requires specific expertise, including an understanding of industry standards against which to establish vendor cost benchmarks. For many institutions, acquiring that type of expertise is difficult.

A vendor cost benchmarking tool with access to a current database of the terms and conditions vendors are negotiating in the market can provide straightforward color-coded dashboard guidance (like the proverbial traffic signal), highlighting the areas in greatest need of attention.

These benchmarking tools will continue to evolve—in the not-too-distant future some may even deliver real-time data. However, the real value resides in the depth and quality of the data that populates the tool—and the actions that can be taken as a result.

Unlocking that type of value by using tools such as these can be accomplished at a very reasonable price, allowing FI resources to be focused on many other priorities. In addition, automating the process with software may decrease the number of times an error is passed over in the manual review process.

Topics: Vendor Contract Management