As vendor spend increases, take an ever-more strategic approach to sourcing.
As member expectations and competition increase, many credit unions are relying more on outside parties to help deliver the kinds of innovation and expertise needed to stay competitive. As consultants to the credit union industry, third-party spending is increasing more quickly than total employee expense.
To make our point about how to best manage third-party vendors at your credit union, we like to compare your strategic vendor management to how your HR department operates. The greatest expense for a financial institution is usually its employees, making them the organization’s most valuable asset. To manage this investment well, human resource departments have processes for attracting and screening the best potential employees, conducting onboarding and training, and providing employee oversight.
Annual performance reviews give a sense of how each employee is doing. While not often discussed, supporting employee satisfaction requires substantial spending and commitment from management. Credit unions are very good employers because they are service-oriented and have structures in place to ensure employees are performing well. But many don’t think the same way about how they manage third-party vendors.
As spending on third-party providers and software continues to increase, there is typically a monthly “per member” or “per account” fee—or an “annual license” fee—which can be very expensive. Historically credit unions don’t do a lot of proactive management of these fees. In fact, vendor costs are often not revisited until contract renewal time. What might happen if the organization took an intentional, measured approach to managing third-party relationships like they manage employees?
Depending on the size of the credit union, there may be dozens, hundreds or even thousands of vendor relationships in place. How many of those relationships are considered strategic and how are you managing them today?
Strategic Supplier Management Puts Credit Unions in Control
One of the challenges that you'll find is that many credit unions have lots of smaller vendors. The classic example is the vendors that provide ongoing maintenance for a credit union’s physical locations. Depending on the number of office buildings or branches owned or leased, a credit union may very well have 15-30 different vendors providing services for ongoing cleaning, landscaping, repairs and the like. In many cases we find inconsistent performance and different schedules for servicing a credit union’s various locations.
When you implement a strategic sourcing approach to managing the third parties, you can find ways to be more efficient and develop stronger and deeper relationships with your vendors. A strategic supplier management program means asking questions about how vendors can be consolidated and what services need to be eliminated or modified. Strategic sourcing is largely about managing third-party spend with the same strategic approach that you use for your employees—looking at the key factors driving efficiency. Once implemented, you will have:
- strengthened partnerships that do more for you
- reduced your total number of vendors, and
- lowered your overall cost of doing business.
Critical questions to ask about each vendor as you conduct your review include:
- Are we using what the contract says or do we use this vendor’s services less or more than what’s spelled out in writing? And over time, has that changed?
- Is this vendor’s services redundant with anything else within our organization? Can we consolidate vendors and lower our overall cost?
- What’s the growth potential of this vendor compared to others?
- Is this vendor really the right strategic partner?
What is the Difference between Strategic Supplier Management and Vendor Management?
Vendor management is typically focused on vendor agreements at the time they are executed or renewed. The practice also focuses more on the risk management regulatory requirements for third-party vendors.
Strategic supplier management is more intentional and constant, just like you manage your employees. It operates more like an HR department and provides oversight to vendors, just like you do for employees.
“Last year we implemented a new methodology for evaluating third-party vendor relationships and elevated the importance of the process,” said Jeff Joyce, EVP/chief financial officer of Elements Financial, $1.4 billion credit union in Indianapolis. “A vendor relationship is much more than the contract’s impact on the financial statements. The price may be right; but is the vendor a good steward of our data? Holistic, strategic vendor management is essential for healthy third-party relationships. Maximizing internal and external resources to scrutinize the provisions of the vendor documentation is integral to ensure that Elements is making the correct decision.”
Strategic sourcing can actually lead to taking better care of employees. If cuts in spending are needed, credit unions can likely make cuts in third-party spending before making any changes with employees.
Implementing a sustainable supplier management plan can have a significant impact on your overall costs and in turn enhance your ability to provide more benefits to your members and employees.
Gene Kirby and Stewart Davis are managing partners of CE Solutions. Together they have more than 60 years of combined experience working across the financial services industry and have strong relationships with executive level contacts at banks, credit unions, trade associations and solutions providers across the industry.
