JANUARY 5, 2016: When it comes to third party management, cyber security and data protection get top billing. Yet there is another expectation that financial institutions know is just as important to keeping their institutions strong and safe: Vendor pricing and contract management.
Regulators expect that financial institutions will seek out reasonable contract terms and pricing comparable to what peer institutions pay. Institutions that don’t know their costs or understand the impact on efficiency, margins and performance ratios have seen significant regulatory commentary.
Despite straightforward expectations and a natural cost consciousness, too many financial institutions are falling short of the goal of competitive pricing, and some aren’t even aware of it. But there are steps financial institutions can take to turn expectations for vendor management into an opportunity to boost profits and contain costs. After all, overspending on products and services directly impacts the bottom line and cuts into an institution’s competitive advantage.
It begins with developing a process. Vendor price monitoring and cost analysis must become an ingrained and repeatable process built into the institution’s vendor management program, just like due diligence review
s of vendor performance and selection.
Contracts require continual monitoring to ensure cost structures and pricing models remain competitive. If market factors or bank volumes make existing pricing obsolete – or if an institution discovers it’s overpaying – the contract can often be renegotiated.
But even with solid processes in place, two common obstacles prevent institutions from obtaining the most appropriate pricing, especially those with limited resources and in-house expertise. These are:
1. Adverse pricing: Adverse pricing is pricing unfavorable to the institution. Sometimes it’s obvious, such as when quotes for a new system are much higher than other bids. But other times it’s not nearly as noticeable.
Consider core platform upgrades. Institutions often find themselves upgrading or converting core platforms when the existing system is no longer supported. The new platform may include new or add-on products, services and features that the institution might not require but add to the overall cost, adversely impacting the bottom line. A few examples include online bill pay, remote deposit capture and risk assessment software.
Other times institutions negotiate a contract while focused on one big-ticket item, such as the reissuance of new EMV cards. If they aren’t careful or get distracted by the high-profile expense, they may find that costs in ancillary sub-contracts have increased or contract terms have been extended.
2. Lack of information: In many ways, expense management is a lot of like preventing cyber attacks. An institution does its best to know all it can about current threats while following best practices, but in the end there are limitations to the intelligence an institution is able to collect.
Think about your institution’s experience with vendor pricing. You want to believe that your third party providers’ pricing structure is competitive with what other peer institutions pay, but it’s nearly impossible to be absolutely certain. Either you need a group of peers willing to share those insights, or you need to invest the time to request pricing from many vendors for every single contract. Then you need to decipher each vendor’s different terminology to compare offers and look for hidden opportunities to maximize bottom line performance.
It’s a time-consuming and complicated task — one that goes right to profitability and your competitive advantage (or lack thereof).
These obstacles can be overcome with research, resources, and analysis. Contracts can be renegotiated and designed to prevent overspending for current products and services, but only if the institution carefully reviews every detail of every contract and knows how to identify overlooked opportunities for improvement. Benchmarking data can save time and increase accuracy by revealing peer pricing. Regardless of how financial institutions choose to solve these problems, they must be addressed either going it alone or bringing in expert advisers.
It’s not just good compliance.
It’s good business.
Senior Vice President
Strategic Resource Management, Inc. (SRM)
5100 Poplar Ave., Suite 2500
Memphis, TN 38137