The next core systems decision your bank makes may very well be its last.
The reason is simple, and it is based on one of the most basic tenets of bank sales-a customer with multiple products and services is far easier to retain than a single-service relationship.
Banks today no longer make core system decisions in isolation. They also evaluate ancillary vendor offerings such as retail delivery systems, ATM processing, data warehouses, and imaging systems. Vendors bundle systems in their pricing proposals, either alone or in tandem with other system vendors.
This bundling is done under the auspices of providing solutions and building a partnership between bank and vendor. As banks struggle to expand delivery channels and drastically improve efficiency, the need to define the partnership has never been greater.
Though the average bank today devotes 8% to 10% of noninterest expense to technology, certain innovators will move during the next five years to levels as high as 15% to 20%. Getting the right payoff from these investments will require the right blend of new systems, process redesign, and meaningful measurement tools that management can use to determine the payoff.
By its very definition, the word partnership implies mutual ownership, shared responsibilities, shared accountability, joint risk, and joint reward. Very few outsourcers and banks have such a relationship now. Banks do not share legal or financial risk if a new system created by their vendor fails, any more than a vendor has legal or financial liability if a bank technology project is completed late and over budget. The perceived partnership, therefore, is one more of spirit than legality. Each "partner" values and treats the other as though they are one company with a single set of goals.
This lack of a specific partnership definition leads to problems. Vendor statements such as "we listen" and "we recognize what is unique in each bank" are very important but have as little specific meaning as banks' saying "we are nice to customers." Broad, vague definitions of partnership lead to differing opinions about performance and often create conflict. Until each side gets more specific in its definition, the gap between bank and outsourcer perceptions of the relationship will persist.
Looking forward, let's examine specific differences between a vendor and a true partner in the future:
Core applications. Vendors will sell multiple systems. Partners will proactively work with banks to change their technology spending mix to better support bank goals. How many core systems vendors know the total amount spent on technology by their clients? How many have discussed reducing the amount spent on core processing in order to free up dollars to invest in key electronic delivery and information systems that the vendor can provide? Bankers do this with their customers all the time-it's called cross-selling and relationship pricing.
Information management. Vendors will sell data warehouse systems. Partners will work with the bank to redesign the entire process of information management. Data warehouse is a tool, not a solution. Most banks that invest in data warehouses need help with several issues. When should data unique to the bank or a bank system be integrated into the warehouse? Which employees in what departments need to develop report- writing skills? How many existing positions can be eliminated or re- deployed due to the process redesign? How does the bank measure successful deployment? These are the types of questions a partner must help answer.
Project management. Vendors will complete projects when asked. Partners will help banks develop a stronger project management discipline. Increasingly, small and midsize banks are being forced to complete projects with which they have little experience. They include bank and nonbank acquisitions, deployment of nontraditional systems, and entering new, nontraditional lines of business. One of the great strengths vendors have built over the years is project management methodology and discipline. The ability to brand this discipline and share it with clients could add tremendous value in the eyes of banks and strongly differentiate the vendor.
Best practice information. Vendors will hold annual meetings with lots of speeches and system demonstrations. Partners will actively promote the sharing of best practice information among clients. Every vendor will tell banks that their existing users are the best source for learning how to use systems well. It is surprising how little of this information is shared among banks. Bankers want to know which user has the most loans serviced per employee? Which financial department is the most-efficient? Which user has the highest cross-sell ratio? In the future, vendors that can create the channel to capture benchmarking data and share success stories will add tremendous value to a relationship.
Managing relationships. Banks that wait for change will see little improvement to their vendor relationship. Banks that want a partner will actively and aggressively manage the relationship. One element that is consistently found in successful bank/vendor relationships is a bank manager who has accountability for creating a dialogue with the vendor and ensuring that the bank gets maximum benefit from its investment. If a bank does not feel it is important enough to assign a manager to this effort, it really has no cause to complain about the relationship.
Outsourcing costs. Sellers and buyers negotiate price. Partners negotiate the mutual payoff from the investment. In our experience, price rarely counts for more than 25% of a decision. Banks and vendors both agree that the higher price of a particular system can be dwarfed by the benefits it can bring to sales and productivity. However, this idea is the hardest one to incorporate into a contract. How will joint accountability for payoff work in a vendor/bank relationship? Vendors and banks will need to quantify the answer to make the partnership work. Mr. Roche is managing director, systems and operations, at M One Inc. in Phoenix.
