Third Party Vendor Costs Are Causing UK Banks To Spend £6m in Excess Finds SRM
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SRM Europe: Banks Miss Out on Billions in Savings by Failing To Ask 5 Simple Questions

With the financial services sector – and retail banking in particular – facing tough economic times in the wake of the COVID-19 pandemic and the consequential shift in customer behaviours, the budgetary cycle is never more critical to support a tough year ahead. Asking five simple questions relating to the contracts held with third-party vendors could make all the difference.

A firm believer in the power of vendor contract negotiation is David Royle, Managing Director of Financial Services Consulting at SRM Europe. With a career in financial services consulting spanning over 25 years in roles at Merrill Lynch, CapGemini and 10 years at Grant Thornton, as a Partner leading digital transformation for the financial services sector, Royle has long advised firms how to best work with third-party solutions and service providers. He is a passionate supporter of evidence-based transformation where data-centred benchmarks and insights help clients drive fundamental change.

Contract optimisation is an immature business practice in the UK and across Continental Europe which, Royle believes, is a missed opportunity on a huge scale that could add up to £6billion in savings in the UK alone. Here he explains more:

David Royle, Managing Director of Financial Services Consulting at SRM Europe
David Royle, Managing Director of Financial Services Consulting at SRM Europe

During budgeting season, it is all too easy for retail banks and building societies to simply roll-over multi-year vendor costs from one year to the next where it is assumed that those costs remain static.  It is done without a second thought, baking in excessive costs year upon year.

Many UK banks and building societies continue to focus on reduced headcounts and depletions in their branch estates as a means of balancing the books – indeed, just recently it was reported that another 267 bank branches closed permanently between April and June, equating to a 5% reduction of the overall branch network.  This leaves far too many of the UK population without a nearby branch to access, but it doesn’t have to be this way.

Contracts with third-party vendors across payments to operations and, significantly, technology present enormous cost-saving opportunities. Indeed, IT costs alone across core processing, payment providers, automation, and digital platforms have increased a staggering 80% since 2015.  This situation is further exacerbated by the impact that the pandemic has had on consumer banking behaviours where reliance on digital and online banking has increased significantly.  Mastercard’s own figures suggest that 35% of customers have increased their online banking usage since the start of the pandemic, and that there had been a 40% global increase in contactless transactions.

Thinking about technology contracts alone, these behavioural shifts mean that countless volume-based commercial agreements, with contract caps and performance criteria, will be causing significant price hikes and contract anomalies – simply because they’ve not been expertly reviewed and renegotiated.

Too often procurement and business management teams simply plug historic vendor costs into their annual budgets and forecasts without market challenge or question until the contract renewal looms. This leads to a gross knowledge imbalance between providers and banks and building societies. Indeed, third-party vendors will typically have dedicated teams singularly focused on negotiating and renegotiating their contracts with banks to maximise revenue. Conversely, UK banks typically review their contracts just six-12 months before expiry without comparative data from which to negotiate better deals – this is data which SRM has been collating and analysing for nearly 30 years.

Based on global experience SRM has identified that retail banks and building societies here in the UK could collectively enjoy savings in the region of £6billion simply by adopting a similar approach to regular contract review and renegotiation. This does, however, require those financial institutions to take action and this begins with five simple questions for banks to ask themselves during the budgetary cycle.

  1. Are we getting the best vendor deals in the market? A contract that was competitive when signed isn’t necessarily any more given that market pricing and conditions will have changed, as will an institution’s own needs.
  2. Can we renegotiate existing contracts? Too often, it is assumed that a long-term contract is set in stone until its renewal date, but this simply isn’t the case, and many vendors will renegotiate early to keep customers over the longer term.
  3. What contracts are expiring in the next 12-36 months? It can be time-consuming to switch vendors, and they know it. To be in the best negotiating position, renegotiations should start two or more years in advance.
  4. Do we have a reliable view of the market price? Do you know what price is being charged to other organisations for a comparable product or service?
  5. When was the last time our bills were audited? Complex invoices and bills are often not really understood nor challenged by the bank and coupled with errors, major savings and service optimisation remains unrealised.

Asking these simple questions are a first step to help UK retail banks and building societies identify existing contracts that may no longer be fit for purpose and that reviewing them may reveal significant savings and efficiencies – that’s an opportunity not to be missed!

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