SRM (Strategic Resource Management) has been selected by more than 700 financial institutions to advise in areas such as payments, digital banking, core processing, and operational efficiencies. The company has unlocked billions of dollars in value and improved the competitive advantage of its clients with a reputation for industry-leading subject matter expertise, a proprietary benchmark database, and proven negotiating skills.
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Best Practices: Vendor & Contract Management Expert Brent Lapp
I'm excited because I'm here with Brent Lapp, the Regional Vice President of Strategic Resources Management. Brent, how are you doing?
Mark, I'm doing great. Thanks for having me.
I'm excited to chat with you. I met Brent at the New York Credit Union Association Annual Convention and we struck up a conversation. I found out he is a musician, among other things, and he has a pretty good taste in music. When I saw his business card, I googled what he did and it sounded real exciting to me. That led to a conversation and it led to this recording of what's going on at Strategic Resource Management.
SRM for short.
I'm going to go with SRM. I'm still used to acronyms NCUA and things like that. I'll go with SRM. A little bit of background on SRM. SRM has been selected by more than 700 financial institutions to advise in areas such as payments, digital banking, core processing and operational efficiencies. The company has unlocked billions of dollars in value and improved the competitive advantage of its clients with a reputation for industry-leading subject matter expertise, a proprietary benchmark database and proven negotiating skills.
That's a lot of achievements there at SRM, Brent. I know, when we chatted, that's what led me to wanting to have you on. I know we're going to chat about some best practices and vendor management and contract management, but before we jump into that, is there anything you'd like to add on the front end?
No, I think that setup is good. Anybody who looks at our website will see a couple of different threads of consulting that we provide. They could be fodder for another day, another episode, but the thing that we are best known for is helping our clients get the best outcomes with their major vendors. A lot of times, that's price and cost reduction. A lot of times, that's improvements to the structure of the contract to protect the credit union’s business interests. Fundamentally, that's what I was hoping to talk about.
Price and contract structure. I'm sure as credit unions are reading this, they can probably think of some more stories of some contracts and some vendors that they've had in their careers that they might've been able to utilize some of these skillsets. Let's start with vendor management. Let's jump into best practices. I think you mentioned there are some basic truths related to these things.
The lessons learned or common mistakes, basic truths, however you want to position it, but there's a reality. That reality is that the vendor has more leverage than the credit unions do. They negotiate hundreds of agreements every year with all of their clients. They have resources dedicated to negotiating contracts. They know that there's a limited threat of attrition and that it's unlikely. It's painful to do a conversion and they have a broad view of the market terms. It's interesting. We talk with clients all the time.
One quote from one of our clients was, “I've always been a competent negotiator. I saved my organization hundreds of thousands. Later, I found out it could have been millions.” The vendors have a lot more leverage than the credit unions do. Part of our role is helping to level the playing field. I'll tick off a couple of key problems or realities.
One thing that a lot of credit unions don't do before entering a negotiation is make sure that they prioritize their objectives. Pricing is one spoke on the wheel, but there are other critical areas to think about, such as governance, flexibility, capability and functionality. The development roadmap of the vendor. Are they meeting their hurdles in terms of developing their products going forward, their service delivery model, SLAs and things of that nature? The less item to think about, number one, is to prioritize what's important to you before you begin negotiating.
In terms of the second piece, a common mistake is not starting your evaluation until it's too late. If you think about a continuum, the client leverage is at its highest point when you're well in advance of contract expiration. It’s 2 or 3 years before contract expiration on a major category and you're doing a competitive bid. That is where the credit union's leverage is highest. The credit union's leverage is lowest when they've reached inside of an auto-renew window or they're three months from expiration and it's too late. They could never do a conversion and the vendor knows that.
Think about where you are along that continuum and make sure that you're starting the cycle well in advance. We like to talk about two years being a good point to do that for a major vendor category, a core or online banking. In some cases, given conversion windows, it might even be longer than two years.
Maybe even longer. Did COVID and the pandemic impact that cycle?
It did. We've seen the vendors do a good job with remote conversions, but there's so much thirst for conversion, particularly in the member-facing technologies like online banking, that the vendor community has gotten very busy. Those windows there can be a long runway to get yourself on the schedule.
Two years out, what is the average? Let's say a major mainframe system. Is the average five years? Is the average seven years?
It's 5 and 6 and 7 years on core contracts. It's between 5 and 10 years on payments contracts on the major card networks. We'll talk about those two specific areas after we go through the broad-brush outline. Another problem or a common mistake would be sole-sourcing your business arrangements, not using a competitive process.
One of the things we hear is, “I know my core rep. They know my kids. We've been to a baseball game together. I think I'm getting a good deal.” Tens of years, decades can go by without ever testing the market and that's not to your best interest. It takes time and energy to run an RFP, but you learn a lot and you help optimize your contract structure when you're willing to look at the market.
When you give that example, I read a lot of different books and a lot of different things online, but I remember reading a study about the fact that people like their doctors with a good bedside manner, better than they like good doctors. Whether or not the person is the best doctor is a little bit less relevant than whether or not they ask them about their kids and different things. When I think about, “I've had this data processor forever. I know their kids' names. They know my kids' names,” there's a comfort in that, but that doesn't mean it's necessarily in the best interest of the members or the best interest of the credit union.
I don't want to make it an SRM commercial, but when we get involved or when another consultant gets involved, for that matter, you can remove some of the emotion from it. It becomes a conversation about business terms and math. At no point do we ever pound the table. We find that we do not need to get nasty with anybody in order to achieve a market deal. You just have to have information. Benchmarks.
I'm talking through common problems and mistakes, credit unions extending agreements without negotiating incremental value. What does that mean? If you think about it, when a vendor comes in on the first pass and they're initiating a new relationship, they have costs associated. There's a cost of sales, a cost of acquisition. In the renewal, that cost is not there. That needs to be known by the credit union. Onboarding costs are not going to be there in the renewal scenario.
There are signing bonuses often offered when a vendor is coming to win new business that might be overlooked in the context of a renewal. There are operating efficiencies for the vendor that they get more efficiencies over time from a data and technology standpoint. That benefit should be shared with the client. Be mindful about the vendor’s costs at the time of renewal and bring those negotiating positions to the table.
The signing bonus is a discount the credit union gets or it's a bonus that the salesman gets or both?
No, it's a discount that the credit union gets. We see them commonly in core and online banking scenarios. We see them commonly in card networks. They offset other costs and that's a whole other discussion. Another common mistake in dealing with major vendors is not performing a detailed reconciliation of vendor invoices. Paying vendor invoices and not reconciling. There will be discrepancies in invoicing on any of these complicated vendor categories. That could be a full-time job at the credit union. Somebody to reconcile invoices and you can save yourself a lot of money by doing it.
Vendors have a lot more leverage than the credit unions do. Part of the role of Strategic Resource Management is helping to level the playing field.
I have another story that popped into my head. I knew someone who did audits of people who contracted at airline hubs. They would get the bills and the bills would identify employee numbers. They would sort it by employee numbers and find that the same employee had been billed for Saturday at 10:00 and then that would lead to a flaw. It wasn't that there was anything intentional being done. It was that there was raw data. They put it together and it was wrong. Having someone at the organization audit, it led them to discover that there were some savings there and they were being over billed.
If you've got a long, complicated lineup of many line items in your invoice, it's a signal that you need to be paying closer attention to it if you're the credit union. The last general overarching statement about this is these items is folks treating vendor selection as a single event as opposed to an iterative process. We would encourage credit union decision-makers to be thinking about a wheel that continually goes around. You negotiate an agreement. You create governance, structures around that. You have committees that keep an eye on things. You're monitoring performance, checking up on SLAs, etc., addressing issues and seeking updated proposals.
It's not something that happens and is forgotten about and you come back around to it five years from now. It is something that is iterative in nature. Those are some high-level best practices, things to be aware of and things to be thinking about. In terms of putting a little bit more specificity to it, a couple of the areas where we find a big opportunity for improvement are in the core and everything connected to the core, online banking, etc., statement printing, what have you.
Everything that rolls up under that umbrella and into the payments area. When we talk about payments, we're talking about the front of card network for debit or credit. We're talking about the card processing relationship and the pin networks that are on the back of cards. When we're talking about the core, we're talking about the primary data processing relationship and all of the amendments that typically roll up under that.
The principles that I outlined at the top apply. We want our clients to be thinking about these things two years in advance, two years ahead of expiration, if not more. How do we help our clients? I want to again keep this from being coming a commercial, but to a degree, I have to outline the process. What do we bring to the table? We bring pricing benchmarks. We have hundreds of credit union clients, from the very large ones down to the smaller ones.
We work with all of the common vendors. You'll note that I've been keeping the names of the vendor community out of the discussion because we're not here to pick on anybody in particular. We work with all of them all the time. We have a good understanding of what a good contract looks like. We also have specific expertise. People, many of whom we've hired from the vendor community, know what the tendencies of the vendors are. You bring that information into a credit union and it takes many different shapes and forms.
Sometimes, we come in and we help with a competitive selection, documenting user functional technical requirements and going out to market with a formal RFP. Sometimes, we are a final check before somebody puts pen to paper on renewal, but those two areas tend to be ones where we can drive a lot of incremental value. There have been the same vendors that have been out there for many years. There's a lot of complexity in those contracts. When you have a specific set of expertise or a set of experts that can get under the covers, they can find value there.
I presume you can find value in the pricing. When you're talking about the contract, the clauses may have indemnification clauses or we'll go to arbitration clauses or limit our liability clauses. You can help credit unions get language in that regard.
Even SLAs. What do appropriate SLAs look like? The vendors are always going to be trying to structure it in a way that is advantageous to them but based on a broad view of the market, we understand what good SLAs look like or tiered pricing structures. When you hit certain hurdles and from a volume perspective, there should be discounts from a pricing perspective associated with that.
What does SLA stand for?
Service Level Agreements. The commitments for uptime by way of example. Our response times for our problems. Also, we mentioned that one of the common complaints we get is that not all vendors always meet their product development roadmaps. If they are purporting to have something that will be available in Q2, that may or may not be the case. We want to try to put some teeth in that to the best extent possible.
I'm going through conversion and I'm picking this vendor because they know that their next release is going to have some new-fangled thing that is exciting. As part of the sales pitch, they're saying that this is targeted to be available in a year, that type of situation?
There are specific examples where if you have specific expertise, you couldn't possibly get the best economics and I'll give you an example of that. In the pin network area, so on the back of a debit card, you're going to have your affiliated network, which is one provided by either Visa or MasterCard and that's mandated that you participate with one of theirs. You have to have an unaffiliated network, Starpulse, NicePlus, all of those folks.
To any of your audience who are interested, the Fed puts out a study on interchange that you could quickly google it and find it. That outlines the discrepancy in the economic impact for the issuer. The credit union is the issuer, depending on which network where networks are on the back of the card. If you don't have in your credit union somebody who's capable of assessing the merchant mix in your geography and forecasting or extrapolating what the economic impact to your interchange will depend on which network you pick, you could be losing out on a lot of interchange revenue. Outside of the general comments about vendor contracts, there are very specific levers that can be pulled on something like a pin network selection and negotiation to optimize interchange.
It's a fascinating area to work in. I love it. I often say that we get to deliver pleasant surprises on a regular basis. There are stones that if you don't know what you're looking for, even if you think you're turning over the stones, to my quote at the top, the guy who thought he was a great negotiator and he saved hundreds of thousands then realized it could have been millions. Those are the types of surprises that we get to uncover for our clients.
That's a good day as opposed to needing to fund the provision for low loss because delinquencies are going up. Credit unions are always looking at ways to improve the bottom line and if that's something you can deliver on a routine basis, you're going to become good friends with those folks during these negotiations.
When I first looked at your website, what dawned on me was back in my examiner days when I was a problem case officer and a director of special actions, which meant that I was dealing with credit unions that either had low capital or low earnings or some challenges. One of those first conversations, particularly if they were smaller institutions, was, “You need to go start negotiating with your vendors because your operating expenses are at this percentage and your earnings are this.” We're telling you that you need to make money or the next step is you need to start considering a merger.
The first step is to go back to these folks and say, “If you want me as a customer and you want me to be around, you're going to have to work with me in the short term.” That was what clicked when I first saw what SRM did because, on occasion, NCUA will tiptoe into those conversations. It was easier to tiptoe into those conversations many years ago. Maybe, at the time, there were resources like your organization that could help people.
I'm glad you raised that point and I suspect that in many or most instances, the vendor community would come to the table in those scenarios. It's important to note in this discussion that it's not an adversarial thing with the vendor community. That's why I'm not naming any names because they're good folks. These companies are good companies that provide valuable services to their credit union partners.
We play a role in that ecosystem and we play a role in leveling the playing field, but it's not an adversarial situation. We have a lot of folks on staff who used to work for the vendors. We have a lot of friendships in the vendor community as well. A lot of times, people say, “The vendors might be upset when they see our SRM comment.”
Maybe they give up some margin here and there, which can be incredibly meaningful for the credit union, but we also play an important role in that ecosystem. When we're running an RFP, we might be bringing them to the table or an opportunity. We might be introducing them to an opportunity as well. It's not an adversarial thing. We want to protect the long-term relationship for our client with their vendor partner as well.
Anything else you want to bring up on the payment side of operations? I'll also throw another follow-up question on that. If you sit on the payment side, the contracts can tend to be longer?
They do. They tend to be for our card networks. Five is the low end and ten being the high end there. In many cases, folks are comfortable with that because these are products they've always offered and intend to offer going forward. The economic structure of those contracts gets better with longer-term. We are seeing that in the core space 3, 5, 6, 7 years. Not typically longer that. There are obviously instances where that is the case. In the core space, we are seeing a lot of activity in digital banking.
A lot of credit union’s looking at competitors for digital banking services, as everybody's trying to compete on member experience. We are seeing some activity in terms of new cores. Not necessarily the traditional big three but they do have by far the lion's share of the market there, but there are some good competent competitors coming into that space as well.
If you, the credit union executive, is not curious about the state of your major vendor contracts, you probably should be. The only reason Strategic Resource Management has existed for 30 years is because not everybody is getting the best pricing.
On digital banking, is it ten-fold or five-fold? Doing your banking on your phone is where it's at. From five years ago, is what you do ten times more tied to the digital banking side of things when you're helping someone or is it less than that? Is it more than that? What are you seeing?
I don't know that I would necessarily put a percentage on it that way. I happened to hear the CEO of Bank of America years ago talking and he described Bank of America as a technology company wrapped around a bank. That might not have been his words. If you think about the amount of investment that the big players are putting into customer experience and digital channels, it's breathtaking. The credit unions are operating in that. They're swimming in that lake and they have to keep up.
On most credit union’s strategic plan, you would see somewhere a nod toward improving member experience, with digital channels being a huge part of that. That could be online banking players provided by any of the big three or any of the other competitor digital banking providers that could be bringing other technologies like a chatbot, voice automation into the call center, things like that as well. Digital touchpoints, Omni Channel experiences, those are all buzzwords that you're hearing in virtually every credit union strategic plan.
Now the other one I'll bring up to your comment on payments. This would be a great episode for another day. Cryptocurrency is one of the hotter topics here at SRM. One of our consultants, understanding that we need to be on top of what's happening in payments, has developed a nice consulting practice in crypto and digital assets for credit unions that are interested in offering those products and services to their members. I would encourage you to have Larry Presson at some point potentially. It’s a fascinating space moving superfast and a ton of interest. We have credit unions now that we're consulting with on rolling out digital asset programs for their members.
There's a lot of chatter on that. I read about it a lot in the trades. NCUA has come out with some guidance indicating that they're supportive of it.
Mark, you keep me honest on this but was it a, “Let us know what you're planning to do?”
They went out with a Request for Comment, “We want to be supportive of this. What's going on?” It wasn't a letter to credit unions, but they came out with a board-sanctioned communication essentially saying, “We're supportive of this. In many instances, it's within the confines of what the federal credit union act allows. We encourage credit unions to look into it.” They don't want credit unions to be left behind in the FinTech arena.
They know that blockchain is going to be a big part of that, so they came out with communications relative to that. During the board meeting where they talked about it, Kyle Hauptman, the vice-chairman, is a big champion of this. He mentioned the fact that there was another similar letter to credit unions that had come out clarifying some things and how he got so much positive feedback from credit unions. They were saying, “When you clarified that, you made me realize that the examiners were going to be reasonable when they came in.”
It like serves as a beacon that the credit union can point to as, “Look at your board of directors at the agency is supportive of this,” which gives them some solace that they know there might not be an overreaction at the exam level. I also know that the board talks about having a new FinTech rule, where they come out with some more opportunities, whatever that might be, relative to the federal credit union act.
What happens at the board level is they will come in and they'll want to give freedom and flexibilities that are allowed under the federal credit union act without creating unsafe and unsound operations. Staff will push back in one of two ways saying, “We've thought of that before, but we can't do it because the Federal credit union act says X,” or staff will say, “If we're going to do it, we have to do it in a safe and sound way.”
The board members will come in and they'll listen to trade groups. They'll listen to two vendors who've come in and say, “There are these opportunities out here. The banking world is shifting. Either you figure out a way for us to do it or we get left in the dust.” Sometimes, that type of conversation will lead to either a different interpretation, a new interpretation of the federal credit union act. When the federal credit union act was written, there weren't iPhones. There wasn't digital banking.
One of the discussions along those lines, under some of the field membership rules, you have to have a branch office in an area to open up to serve a membership. If you want it to add Philadelphia, you'd have to have a branch in Philadelphia but when people don't even go into branches anymore, at some point in time, that loses its relevance. It's a beacon that the credit unions can use to show that NCUA is supportive of this. I think that support is going to continue to come from some of the things that the board has been saying publicly.
Thank you. That's helpful for me to understand your comments there.
Brent, before we wrap up, if there was a question I should've asked, what would that have been and what would the answer be? Is there anything else you want to share with the audience here before we wrap up?
No. My parting comment would be, if you, the credit union executive, is not curious about the state of your major vendor contracts, you probably should be. If you think about it, SRM is a great successful company. We've been in the business for many years. The only reason we exist is because everybody's not getting the best pricing. In many cases, we come in and we do work on a pay-for-performance basis where we only get paid if we produce an impact. It's obvious that that service is needed because we've been around for many years. We've put a lot of money to our client's bottom line. If the credit union executives aren't curious, they probably should be curious about what their contracts look like.
You are only getting paid if you deliver them some profits that sounds like a pretty good deal. Lastly, Brent, if someone wanted to get in touch with you or want to get in touch with SRM, what would be the best way to do that?
Brent, this was great. I want to thank you for your time.
With that, I am going to sign off. I want to thank the audience for reading this episode.
About Brent Lapp
With 20 years of consulting and business development experience in the financial sector, I have dedicated my career to providing premier service.
I seek to form close, long-term relationships with clients and bring a service-oriented mindset to my role as Regional Vice President at Strategic Resource Management, Inc.