With the financial services industry – and retail banking in particular – facing tough economic times following the COVID-19 pandemic and resulting change in customer behavior, the budget cycle is never over. critical to support a difficult year ahead. Asking five simple questions about contracts with third-party vendors could make all the difference.
A strong supporter of the power of negotiating contracts with suppliers 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, Cap Gemini and 10 years at To agree Thornton, as a leading digital transformation partner for the financial services industry, Royle has a long history of advising companies on how best to work with third-party solutions and service providers. He is a strong believer in evidence-based transformation, where data-centric benchmarks and insights help clients drive fundamental change.
Optimizing contracts is an immature business practice in the UK and across mainland Europe which Royle says is a large-scale missed opportunity that could represent up to £ 6bn in savings alone. UK. Here he explains more:
During budget season, it’s too easy for retail banks and building societies to simply carry over multi-year vendor costs from year to year, assuming those costs remain static. This is done without a second thought, resulting in excessive costs year after year.
Many UK banks and building societies continue to focus on downsizing and exhausting their branches as a means of balancing accounts – indeed, just recently it was reported that another 267 bank branches have closed definitively between April and June, which is equivalent to 5% reduction of the entire network of agencies. This leaves too much of the UK population with no branch nearby, but it doesn’t have to be that way.
Contracts with third-party providers for payments to operations and, significantly, to technology present enormous opportunities for cost reduction. Indeed, IT costs alone for basic processing, payment providers, automation and digital platforms have increased by 80% since 2015. This situation is further exacerbated by the impact that the pandemic has had on consumer banking behaviors where reliance on digital and online banking has increased dramatically. Mastercard’s own figures suggest that 35% of customers have increased their use of online banking services since the start of the pandemic, and that there has been a 40% global increase in contactless transactions.
Thinking only about technology contracts, these changes in behavior mean that countless volume-based trade deals, with contract caps and performance benchmarks, will lead to significant price increases and contract anomalies, simply because ‘they have not been expertly revised and renegotiated.
Too often, procurement and business management teams simply enter historical supplier costs into their annual budgets and forecasts without challenge or questioning from the market until contract renewal looms. This leads to a glaring knowledge imbalance between suppliers, banks and building societies. Indeed, third-party suppliers will generally have dedicated teams singularly focused on negotiating and renegotiating their contracts with banks in order to maximize revenues. Conversely, UK banks typically revise their contracts just six to twelve months before expiration without benchmarking data from which to negotiate better deals – this is data SRM has been collecting and analyzing for nearly 30 years.
Based on global experience, SRM identified that retail banks and building societies here in the UK could collectively enjoy savings of around £ 6bn just by taking a similar approach. for the regular review and renegotiation of contracts. It does, however, require these financial institutions to take action, and it starts with five simple questions banks need to ask themselves during the budget cycle.
- Are we getting the best deals from suppliers on the market? A contract that was competitive at the time of signing is no longer necessarily competitive since prices and market conditions will have changed, as will the specific needs of an institution.
- Can we renegotiate existing contracts? Too often it is assumed that a long-term contract is frozen until its renewal date, but that is simply not the case, and many vendors will renegotiate early to keep their customers for the long term.
- Which contracts expire in the next 12 to 36 months? Switching providers can take a long time, and they know it. To be in the best negotiating position, renegotiations must begin two or more years in advance.
- Do we have a reliable view of the market price? Do you know what price other organizations are charged for a comparable product or service?
- When was the last time we checked our invoices? Complex invoices and invoices are often not fully understood or disputed by the bank and, associated with errors, significant savings and optimization of services remain unrealized.
Asking these simple questions is a first step in helping UK retail banks and building societies identify existing contracts which may no longer be suitable for their purpose and which their review can reveal significant savings and efficiencies. – this is an opportunity not to be missed!