We are seeing a very fundamental shift in the focus and importance of vendor management. To a large extent, this is the result of the confluence of events that, taken together, point to the need to change the entire approach to vendor management at banks.
First, we have become an industry that has outsourced. This is not a 100% done deal, of course. There are certainly internal development skills around, for example, in Web, social media, and information management at most financial institutions. However, the development of the systems that do the heavy lifting of delivery and processing – core, Internet banking, mobile, payment processing and loan origination – have been almost 100% outsourced to third-party vendors.
And, while there used to be a very diverse and competitive community to whom we could outsource, the bank vendor market has seen a degree of mergers and consolidations that make banking look tame by comparison. If banks had merged at the rate of their vendors, we’d have about 500 left.
Second, very fundamental challenges are emerging from non-traditional disruptors in the delivery of products and payments. A banker does not need to look far to see it. PayPal and MCX in payments, Lending Club and Quicken in lending, and Internet-only banks for deposits are just a few examples of many new entrants delivering banking services.
This has brought about a new reality. When most banks outsourced in the past, it was usually for one of three reasons: cost, risk mitigation, or the difficulty in finding sustainable internal talent. These have all been entirely valid reasons to outsource. However, with rapid changes in consumer behavior and delivery disruption, banks are now facing the fact that when they outsource these systems, they also became much more dependent on them for the innovation that will be required to compete in the new banking marketplace. In other words, we outsourced a lot of the innovation that will be required to compete in the future.
Let’s put it more bluntly. If non-traditional innovators develop better tools and processes that deliver a better consumer experience, and your current vendors cannot provide you with solutions to match, you face a serious competitive disadvantage. That is the vendor management challenge in 2016.
So, does anybody want to argue about why vendor management is now strategic and requires “C” level attention? Here are three things banks can do right now to get their vendor management discipline focused on these issues:
Make sure that accountability is clear for key areas for vendor management, such as compliance, cost and performance. The person who manages the compliance/regulatory aspects of vendor management (contract renewals, financial statements, audit reports) may not be the person you need to manage outsourcing costs or vendor performance. Performance management focuses on vendors as innovation partners and asks whether your vendors are looking forward to changes in the marketplace and answering new innovators with solutions of their own. Here are some questions to ask:
- Are they meeting product development deadlines?
- Are they sharing best practices?
- Are they doing all of the things necessary to be the partner they all say they want to be?
Do you know who has this vendor management responsibility at your bank? Is it really the same person who managed compliance aspects of vendor management?
Make vendor management a C-level focus when the stakes are high enough. Clearly, all vendor relationships don’t belong at a senior level. For example, your plastics vendor or your statement processor may not have enough strategic impact or cost to warrant such focus. On the other hand, the performance of your mobile banking or online lending vendor has a huge impact and a much bigger price tag. A decision to sign or renew with such vendors, and the importance of maximizing the benefits of these relationships, absolutely warrants senior management focus.
Start developing a vendor performance scorecard that management sees and uses. At a recent event, one of my partners, Steve Williams, asked 150 CEOs how many of them get any formal update on how their major vendors are performing in key areas. Not one raised his or her hand. That is an issue.
Vendor management has to become a more formal and transparent management conversation. There is no need to build an empire to get this information to management. A simple scorecard that shows where results are high and where focus is needed can be created and maintained fairly easily.
Vendor management has quickly evolved and has become a strategic issue. Banks have a long history of strong relationship management as a provider to customers. We now need to be strong customers and manage the other side of crucial relationships with our providers.
Mr. Roche is a principal with Cornerstone Advisors, a Scottsdale, Ariz.-based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at firstname.lastname@example.org.