Vendor Management: Another Regulatory Pressure Point

Vendor management has been a topic this blog has been gassing about since its earliest days. You'd think that by now, the subject would be "old hat." Unfortunately for bankers who fell asleep at the vendor management wheel, it's an evergreen source of regulatory sanctions. Bank Safety and Soundness Advisor's Aaron Steinberg (sorry, a paid subscription is required) recently pointed out that regulatory interest in vendor management is on the rise because "you can outsource a process – but you cannot outsource the risk." The immediate cause of this rising concern might be the loan servicing debacle that's made so many bad headlines for bumbling loan servicers, many of them the nation's largest too-big-to-fail banks. Unfortunately, it's raised a red flag with bank regulators, a flag that's likely to have examiners parsing the nuances of the vendor management programs of banks both large and small. As consultant Eric Holmquist warns, the topic is likely to be "one of the top items of focus this year when it comes to risk governance." Just what overburdened community bankers needed to hear, eh? Other observers offer up the idea that community banks ought to take this increased scrutiny as an opportunity to save themselves some money. Third party costs, separate from payroll, are among the heaviest for community banks, averaging 30% to 40% of non-interest expense. That presents opportunities for cost-cutting and improved efficiencies. With the economy still struggling, vendors may be willing to negotiate with you on price to hang on to your business as tough times continue. "This is about taking the opportunity, which has been created by some regulatory requirements, to get back to some sound business practices," says Paroon Chadha, co-founder and vice president of Passageways, an Indiana firm that provides vendor management and other services to credit unions and community banks. "If you can improve performance for 40% of your spending, that is easily the most underutilized opportunity you have in your playbook." "Most institutions are focused on ensuring that they meet regulatory guidelines. It boils down to a compliance activity," says Rock Carter, chief executive of Credit Union Vendor Management, a Colorado-based firm that provides vendor management services to credit unions. "There is a hard dollar advantage to managing vendor relationships in a way that goes beyond the minimum to meet regulatory guidelines." "When you manage that vendor … you will often see these results in terms of enhanced service levels," Carter says. "If you are on auto pilot, you are not going to see that the commitments made at sales time have gone unfulfilled." One of our clients is currently employing the services of a consulting firm to scour all of its third party vendor arrangements for cost savings and other areas of "improvement." Such consultants retain a percentage of the cost savings, so they're incentivized to maximize the reduction of expenses. Vendors hate to see those guys walking in the door, but life is tough all over these days, so they learn to live with it. If you've got to live with the lemon of more regulatory scrutiny, you might as well use the occasion to try to make some lemonade.

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