The Vendor Breakdown…

Skills that make someone exemplary in one field often fail when applied to other fields. Sometimes this occurs in comical ways. Consider that successful CPAs and bankers are often horrible when it comes to their own checkbook management, or that great athletes make bumbling executives in the sports they once conquered.

Unfortunately, people can’t be great at everything, and guess what? Businesses, like people, can’t be great at everything either. My point? Don’t bother trying to be good at something that is not core to the relationship you want to develop with your credit union’s members – outsource it to a qualified partner.

The Purpose of Partners

The place to start in the exploration of vendors and partners is to first understand their purpose. Vendors and partners are part of what Harvard professor Michael Porter calls a value system. So, what is a value system? If, for example, what you propose to offer consumers is a one-stop-shop of financial services and delivery channel account access, the value system is the combination of all the pieces that go together to make that happen. This includes everything you do internally and everything any outside company does to help you, whether it be the ATM network you use or the statement processor that prints and mails your statements.

Vendors and partners then, are those companies that help you deliver your value proposition to consumers, and because they are component elements that help to make up your corporate brand identity, they should be chosen wisely,

There are two key elements that are required for the successful utilization of vendors and partners, and they are:

  1. Outsourcing functions that are not related to areas that represent core competencies.
  2. Monitoring the performance of vendors and partners.

Outsourcing Functions

The first element in proper vendor partner utilization and success is outsourcing those things that are not related to core competency, which means really you first have to know what you are competent at doing.

So, what is a competency? One example is an organization so good at workflow efficiency that it results in below-average operating expenses and a price advantage passed on to consumers. Another may be a staff so empathetic to members that deeply defined personal relationships materialize between consumer and staff leading to above-average cross-selling results and higher margins.

Now, organizations run into challenges when they outsource elements that undermine core competency. Consider a credit union that is similar to our second example. They are profitable, mainly because they are able to leverage personal trust with members to build new relationships. Now suppose they make the decision to engage in shared branching – and the economics make sense. On the surface, it wouldn’t seem that this is necessarily a bad idea. They gain extra branch coverage, increase the convenience to members. However, the way that members interact with the credit union has been changed in a way that the core strength of the institution cannot be fully leveraged. Now rather than members interacting with the empathetic, engaged staff of the credit union itself, members may perhaps be served by people for whom transaction efficiency and process time are more the motivator and definition of great service.

Let’s consider a similar scenario, but for a credit union whose core competency is workflow efficiency and cost control, and ultimately a lower cost of “product.” They make the same decision regarding shared branching, the economics make sense, etc. In this scenario the decision is an excellent one precisely because the core competency of the credit union isn’t the personal member relationship strength but the fact that efficiency drives better pricing. In other words, in this case the members gain greater coverage at a lower cost than if the credit union was to invest in its own new branch. In this example, the credit union is outsourcing a function and not the efficiency analytics and decision-making that define their strengths.

So again, the first step in effective use of vendors and partners is to outsource functions that are not inherent strengths you possess and that drive your competitive advantage.

Monitoring Performance

So, now we come to the second aspect of finding success in outsourcing non-core functions – monitoring the performance of vendors and partners. What I find very interesting here is how many institutions do not have a formal role tasked with managing vendor relationships. The responsibility is often spread out: IT manages the IT vendors, facilities manages the supply vendors, lending or operations manages the card processors, etc.

Institutions should have one person (or department) in charge of vendor quality control, and this person should be tasked with ensuring that vendors are living up to their role and responsibilities in the institution’s value system. If a vendor has a key role in the member experience (a core system processor comes to mind) then the stability of the system, enhancements that support the credit union’s long-term strategy, and similar investments need to be managed, communicated to, and discussed with counterparts from the vendor company.

It goes without saying that a vendor manager role becomes even more critical if you have a large outsourced footprint.

Not too long ago I was facilitating a credit union planning session at which the core system provider was presenting changes about their system to the board and management team. After their session, the vendor reps and I got to talking about their clients’ communicating features and updates to the company. They basically said that the feedback and suggestions were worthless, and that the company typically made note of suggestions to “show that they were listening” and then trashed them soon after.

Before you jump on the vendor, let me share that the reason they did this was because the suggestions they received were devoid of strategic significance. Much of what they heard were requests similar to “we want our screens to be pink.”

In monitoring the performance of vendors and partners, you are really looking at how they are performing relative to your own strategic goals. This means that your vendors have to be aware of your goals in the first place – which means you have to be able to communicate your goals to any given vendor in a clear and concise manner, essentially painting the picture of the future for the vendor so they can “see” where you are going. Once they know what you are trying to do, evaluating their performance in terms of their support of your objectives becomes easier, mainly because you at least share an understanding of the long term objectives. If you continuously find that your system cannot do something critical to strengthening or leveraging your core competency, then you need to move on – and yes – perhaps even buy yourself out of the contract.

This brings me to a interesting point with regard to vendors and partners. Too many credit unions fail to capitalize on opportunities because their partners are limited. One of the more successful credit unions I know of began designing their own software years ago because no available vendor could support their needs. They made a choice not to be limited by the capabilities of partners. The world has changed since then, and they are able to use more commercially available software because of the ease of development and availability of talented coders, but their decision years ago not to limit their competencies and strengths allowed them and their members to prosper in the long run.

Contrast that to a credit union I worked with recently that decided not to offer a service their members clearly wanted because their current core system didn’t support it. Then, they re-upped with the vendor soon after that service decision was made. My question? Why!! It blows my mind that an institution would let the limitations of a partner define the scope and scale of its efforts.

So, let me circle back to the dedicated vendor manager. As I mentioned, often IT managers manage the IT vendors, so on and so forth. Technically, this is the way to go, but from a quality standpoint, and the evaluation of the performance relative to goals, the person making the original vendor decision is not often the best person to monitor performance. I have personally seen poor vendor or partner performance defended by a manager, only because it was a defense of self. The person made the decision to select the vendor, and then felt the need to stand up in defense of the vendor even in the face of repeated disappointing performance. If you are reading this and know for a fact that this does not happen at your organization, consider yourself the exception.

Managing vendor performance is highly important, again because vendors – no matter whether their specific role is big or little – are part of your value system. Each contributes, in some way, to your ability (or inability) to deliver on the promises you make to your members.

The Wrap…

The successful deployment of an outsource or vendor/partner strategy isn’t all that complicated if you remember two things. First, that you should only outsource functions to partners that are not core competencies or strengths you possess, and second that the performance of your vendors and partners must be monitored, specifically with regard to their ability to support your long-term objectives and supplement your own strengths.

Vendors and partners are key, perhaps more so now than ever, and successful credit unions will be the ones that realize that vendors and partners are not a place to dump unwanted activities, but a means to strengthen competitive advantage and better leverage core institutional strengths.

1 comment

  1. Tom,

    Great insights and you are spot on. I would suggest that credit unions must also avoid the vendor complacency trap. It’s too easy to continue using the same vendors for the same services over and over again. Credit unions that routinely monitor those relationships are far more successful. Every year or six months credit unions should conduct an analysis of those relationships to make sure they are still working.


Leave a Reply

%d bloggers like this: