Financial institutions spend a fortune on vendors and expect a return on their investment – yet it’s not always easy to calculate ROI. How do you know which vendors are delivering value and which ones are underperforming?
Here are the five steps you need to follow to effectively measure the ROI of third-party vendor relationships at your institution.
1. Understand the goal
Every vendor relationship starts with a goal. Before you can measure ROI, you need to understand that goal.
Begin by asking: why does your institution want to outsource? What are the broad objectives? Is it to quickly offer new products or services to consumers? Increase efficiency? Access expertise you don’t have in-house? Resolve a compliance issue?
Understanding your goal and identifying the resources you need to achieve them sets the stage for assessing the value a vendor brings. If the price is too high, it means the problem the vendor is solving isn’t recognized. Recognizing the value of a vendor may require you to do a better job defining and explaining the benefits of the vendor relationship – or maybe the relationship isn’t worth it.
2. Weigh the cost of inaction
When assessing the value a vendor brings, most institutions focus on the added cost of the new product or service. But it’s just as important to consider the cost of doing nothing.
For example, when considering the cost of a new loan origination platform, think about the cost of leaving your program just as it is. Is your current loan processing timeframe longer than your peers? Is that a competitive disadvantage? To what degree? Are manual processes leading to mistakes that are adding to compliance risk? Do inefficiencies mean that you spent more on staffing than you’d like?
Compare those costs and challenges with the cost of the new vendor and you’ll quickly discover that maintaining the status quo isn’t free – and using a vendor doesn’t always cost you more.
3. Define metrics
You can’t monetize what you can’t measure. To measure vendor ROI, you need specific, measurable, achievable, relevant, and time-bound (SMART) goals for your vendor relationship.
It’s not enough to have a general idea of what you want to accomplish. It’s okay to want to increase margins, lower your cost of funds, or improve your efficiency ratio – but you need to define how much and when.
Examples include:
- Opening 100 new accounts per month
- Adding 1,500 new users a month for the next 6 months
- Increasing fee income by 5% over the next 12 months
- 95% customer retention rate for the year
- Reducing loan processing time by one day
- Save 40 staff hours a month
- Decreasing consumer complaints by 50% this year
- Decreasing expenses by 10% over the next 3 quarters
- Adding $25 million in new assets by year-end
- Decreasing loan exceptions by 25% over the next 12 months
- Improve customer/member service response times by 25% by Q2
Having specific goals will help you decide if the product or service is performing as expected – or if it’s under or overperforming – so you can measure ROI.
This data is most useful when you can look at it closely. You might find the vendor relationship is meeting fee income expectations, but consumer complaints are higher than expected. That might be a sign that the vendor isn’t great, but your customer service team does an excellent job making up for it.
4. Monitor vendor performance
Vendor expectations should be documented in your service level agreement (SLA). These include service availability (i.e., uptime), data confidentiality, help desk support and complaint management, business continuity planning (i.e., recovery time objectives (RTOs) and recovery point objectives (RPOs)), change control, compliance, and security standards.
It’s important to assess whether vendors are meeting these objectives or falling short. Staff should document vendor incidents and complaints for review. Vendor documentation, such as audit reports and security test results, need to be collected and reviewed.
Vendors that aren’t fulfilling the SLA aren’t delivering the full value promised and that hurts ROI.
5. Vendor alignment with institutional goals
Your vendor might be doing everything you ask at a fair price, but if its product or service no longer aligns with your strategic plan and objectives, the vendor is no longer delivering value.
When strategic goals change or contracts come up for renewal, it’s important to reassess the vendor relationship to see if it still supports your goals. As your goals, needs, and technology evolve, it’s possible to outgrow a vendor. Just like many homeowners cut the cord for cable television and landlines, your institution may find it can do without older technologies – or that there are new technologies that your existing vendor can’t provide. From fax lines to online banking providers, you may find you need something different than what your current vendor offers.
Leveraging TPRM to Measure Vendor ROI
While measuring vendor ROI requires some work, the good news is that it aligns well with the third-party risk management (TPRM) lifecycle:
- Planning: Define the goal and consider the costs of inaction while considering the big picture.
- Due diligence and third-party selection: Define SMART metrics while researching and risk assessing a vendor. Not meeting goals is a strategic risk.
- Contract negotiation: Ensure the vendor SLA includes all necessary requirements and that you have access to vendor information needed for monitoring performance. A vendor contract review can help you decide if the contract is up to snuff.
- Ongoing monitoring: Follow up on the SLA and SMART metrics to determine if the vendor is delivering ROI. This works especially well if your vendor management program has an incident reporting function where employees can document any issues with a vendor.
- Termination: Deciding to end the contract.
Your vendor and risk management programs should provide insights to inform your analysis of vendors and the value they create.
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