Engaging with a sourcing partner can be an effective means to improve your institution’s bottom line and protect your operations from the distractions that can be created when management must handle such duties themselves. However, it is important to note that not all sourcing management firms are created equal. As with all partners you select, some of these firms will be a better fit with your culture and objectives than others. We suggest asking the following questions before selecting a strategic sourcing partner.
Do they have a good working relationship with industry providers?
Part of the benefit of having a robust sourcing process comes from gaining a 360-degree view of the marketplace, including the competitive dynamics, strategic direction and the unique capabilities of various players. It can be a red flag if vendors refuse to participate in a process coordinated by certain firms. This may be a sign that the strategic sourcing firm you are using is playing favorites. The vendors not on the firm’s list of preferred suppliers see no value in participating in a process they’re pre-destined to lose. Explore whether the firm channels a disproportionate share of business to a short list of suppliers. A firm that uses this approach limits the choices your bank or credit union has. In addition, your organization may not receive appropriate, impartial advice or the most competitive offers.
How do they manage the vendor communication process?
Be wary of firms whose Request for Proposal (RFP) model imposes a “no contact” rule, cutting off all direct communication between your institution, the existing and prospective suppliers. From a pragmatic standpoint, your ability to establish effective lines of communication with prospective partners should be a key factor in your vendor selection. After all, the relationship you have with the vendor you select may last several years.
How do they quantify cost savings?
Most strategic sourcing partners earn their fee by retaining a percentage of savings generated. This is a win-win model when, and only when, the correct baseline is used to measure the savings. Unfortunately, some resourcing firms manipulate this measurement by asking vendors to make bids well above market and then negotiate from that point to inflate the savings delivered. Cost savings should never be calculated using the current prices being paid or a vendor’s benchmark. The baseline should only be set by the the bank or credit union. A sound methodology provides for a realistic starting point that fairly reflects the firm’s contribution and should be easily explained and understood.
Are their interests fully aligned with yours?
There are two critical areas to consider when evaluating whether a strategic resourcing firm’s interest aligns with the interest of your financial institution.
First, be sure your strategic sourcing partner’s revenue model does not create disconnects with your institution’s objectives. For instance, front-loaded proposals – including signing bonuses and/or “teaser” one year rates – can obscure Total Cost of Ownership (TCO) and cause the bank or credit union to miss out on savings. Clearly, TCO should be a primary decision factor; however, we believe the market should dictate a contract’s structure. If special circumstances lead a bank or credit union to prefer savings in certain periods, these nuances can be addressed after ongoing costs are first managed down.
Second, although such situations are rare, ensure there are no “pay-to-play” provisions attached to the RFP for participation. There should never be any revenue exchange or financial relationship between the sourcing firm and the vendors. This is an ethically questionable practice that can have a material impact on the deal you receive. Not only is an unprofessional bias created by the exchange of money, but the numbers of vendors you have to chose from is also limited. This lowers a financial institution’s chance of signing the contract that gives them the best value.
As with most fields, the approach taken by a strategic sourcing management firm may vary depending on the financial institution and the circumstances of the particular situation. Nonetheless, these are basic guidelines that will help ensure their approach is serving the best interest of your bank or credit union.
