Budgeting and planning season is usually a routine time for evaluating your business priorities and associated costs. However, while some banks and credit unions have already set their 2022 budgets, others are still calculating forecasts or waiting for more data.
Too often, management teams and boards plug vendor costs into their annual budgets and forecasts without questioning whether those contracts can be improved. This is undoubtedly a more complex task than ever as we face the coming winter months and the uncertainties surrounding the lingering impact of COVID-19.
There is, however, one area that is a sure opportunity for cost savings in your budgeting cycle – vendor contracts.
Banks and credit unions tend to plug vendor costs into their budgets and forecasts without questioning whether those contracts can be improved. This is often a mistake.
The truth is, no matter what the economic conditions, it is possible to reduce vendor costs without switching vendors or impacting service levels.
Here are 5 questions to ask when it comes to vendor contracts during this critical budget season:
1. Are we getting the best vendor deals in the market?
Maybe your contract was competitive when you signed it. Perhaps it wasn’t. Regardless, market pricing has likely changed since then.
Your institution may have different needs or qualify for volume-based incentives and better pricing. Market factors, including increased competition, economies of scale, or technology innovations, may have pushed down costs. Possibly the automatic price increases you agreed to years ago resulted in overpayment.
Find out by reviewing current vendor pricing, asking peers, or utilizing third-party industry benchmarking data.
2. Can we renegotiate existing contracts?
You signed a long-term contract with a vendor, and that’s the end of it, right?
Many vendors are willing to renegotiate to keep you as a customer in the future – especially if you are paying above-market rates. Even long-term contracts can be renegotiated for near-immediate savings.
For example, an SRM client asked us to review a year-old card processing contract. We found a seven-figure gap between our benchmarks and what the client was paying. With the right approach, the client renegotiated a contract that had seven years left on it – at a price much closer to the market rate.
If, however, you want to change vendors before the end of your term, the new vendor will likely have to buy out your existing contract.
3. What is the actual cost of generating revenue?
When it comes to revenue generators like credit and debit cards, institutions typically focus on one specific line item – net income – and how to grow it.
Yet, there are costs associated with that revenue, everything from fraud to marketing. These costs can strain revenue models, but opportunity is there, especially in card network agreements. Card network providers enjoy close to 40% profit margins on average, and the market is very competitive. Since the Durbin amendment went into effect, we have helped clients renegotiate contracts with additional funding for card replacements and reissues, amongst other things.
To unlock additional savings in this space, know – or find someone who knows – the right questions to ask.
4. What contracts are expiring in the next 12-36 months?
It can be time-consuming to switch vendors, and they know it. If you want to be in the best negotiating position, begin your renegotiations two or more years in advance.
For example, debit and credit card processors require discussions to begin at least 12-18 months in advance. Still, they might be open for renegotiation (and thus potential savings for you) 24-36 months before expiration.
Starting the contract renewal process gives you more time to evaluate the pricing and offerings of other vendors. If you wait until your contract is about to expire, the incumbent vendor gains the advantage by having time on their side.
5. When was the last time we audited vendor bills?
It is not a regulatory requirement, but it is a helpful exercise for saving money and optimizing services.
Vendor management is a hot-button issue for regulators, meaning your institution has risk-assessed and identified critical vendors. You’ve looked at contracts to see how the vendor would handle breaches and other problems. But have you audited your vendor bills?
Consider contract invoices for core banking systems. They are complicated, not consistently accurate, and can contain line items the bank or credit union did not anticipate.
Not only can you get a refund when errors are found but auditing vendor bills forces an institution to review all the services it currently has and eliminates the ones that are not needed. This process adds up in an environment where margins are compressed.
The Bottom Line
Asking the right questions when renewing vendor contracts can yield cost savings that last for years. While financial institutions seek ways to adapt revenue streams for changing consumer behaviors, renegotiating vendor costs can help widen narrowing margins and relax budget tensions.
As you navigate through budget season, these five questions can be a catalyst for new efficiencies in 2022. Taking time to examine vendor contracts could lead to savings you can reinvest into other areas of your budget. It helps to have an experienced negotiator on your side in the process – ideally, one with decades of benchmark data to make sure you’re receiving the best in market pricing from the vendors. SRM’s consultants and analysts come from leading card networks, payments, and core system vendors – we understand the motivators and leverage points.
Could you use a hand with assessing vendor contracts for savings opportunities this budget season? We would welcome the opportunity to speak with you. Contact Ben Mrva, EVP of Business Development, at bmrva@srmcorp.com if your institution could benefit from SRM’s knowledge and expertise.