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The annual budget process is usually an exercise in planning for uncertainty. Add to that, it’s challenging, time consuming, and complicated. Then, when finalized, all you know for sure, is that it is at best a pro forma. That’s because financial institutions (along with everyone else) operate in an environment with multiple variables they do not control…and that has become even more evident in 2020.

Disruptive tech providers, new banking regulations, obscure deadlines and thresholds – these are challenges we face with clients every day. What many others still fail to see though, is that in an age of accelerating change, having a clear vendor negotiation strategy - and executing it well - is becoming more critical to bank and credit union executives than ever before.

To help spare others from costly lessons learned, here is a list of our best and most often given advice for preparing for a negotiation - or renegotiation. With our experts’ combined experience in the field, and $3.6 billion proof points behind us, these are SRM’s eight rules of engagement for effective vendor management.

Buckle up: we’re in for a ride. Regardless of your political persuasion, all signs point to an extended stretch of market volatility as we head into the 2020 election cycle, which by many measures is already hitting its stride. The 2020 budget season is playing out against this backdrop, with budget-setters up against even greater uncertainty than usual. The question looms, as the political barrage reaches new heights in 2020, how can banks and credit unions remain flexible to the economic variables? 

As more financial institutions get serious about modernizing their core systems and revisiting opportunities surrounding contactless cards, our firm has noticed an uptick in the volume of requests for proposals (RFPs) issued as part of the vendor management process. SRM sees this as a positive development. In fact, we generally recommend that financial institutions regularly subject all their supplier relationships to an RFP process. 

Every institution wants its various processes and practices to be best of breed. Most, at minimum, want to know how they stack up against the best in their business. Typically, peer groups are established for this purpose, usually based on a bank or credit union’s asset base.

However, there are countless reasons why the performance of two financial institutions of identical size may not warrant side-by-side comparison. For example, one institution using a service bureau for core processing will have a lower efficiency ratio than one of its peers that does not use one. The retail/corporate mix within loan portfolios will also give rise to operational differences.

Ever had the experience of money coming into your life that you had not counted on from a source you did not anticipate? Some call it “found money” and others might describe it as a windfall. Whatever word is used to describe it, there is one question that always arises after such good fortune happens to someone: What should be done with the money? A shopping spree? Deposit it to savings? Maybe give it to a less fortunate person or a charity that is active in the community?

Vendor contract management is something that every financial institution (FI) undertakes as part of the cost of doing business. The average number of contracts a bank or credit union may have varies, but it is not unusual to see the number fall in a range of between 100 to 500 contracts on average. 

While every FI is looking for ways to trim costs, many treat vendor contract management as a responsibility that can be simply added to the list of duties held by an employee that probably already has a full plate. The ever-increasing complexity of contracts and the growing number of vendors can make this approach very expensive for an institution. 

While the vendor contract negotiation exercise does not need to be an adversarial one, the chances for a happy outcome are increased when both parties feel they are being treated fairly. In fact, that is the goal of most vendors and financial institutions (FIs) we have worked with. After all, vendors have no future without FIs and FIs have not future without vendors. It is in everyone’s best interest to work toward a deal that meets the needs of all the parties around the table.

The spiraling cost of complying with an ever increasing regulatory burden is possibly the greatest challenge facing US banks and credit unions – it’s not an exaggeration to label it an existential threat for some institutions. However, this threat can be mitigated by utilizing expertise available from compliance and strategic sourcing firms as well as via software automation. It won’t make the regulations go away, but it makes the process more efficient and helps make it less likely that something is overlooked.

Vendor contract amendments can seem pretty straight forward – a few paragraphs over a couple of pages that offers some modifications to the master contract that probably represent some improvement to current terms and conditions. The amendment may be perfectly innocuous or it may suggest some material changes. Either way, it is important not to treat this as a "no brainer."