With the financial services sector in the middle of budgeting season, retail banks and building societies need to take a fresh look at all of their vendor costs – especially those they input without a second thought. With a possible £6bn in savings up for grabs, time is of the essence to secure budgetary success not only for the year ahead, but beyond.

David Royle, Managing Director of Financial Services Consulting at SRM Europe, comments: “There are tough economic times ahead for the financial services sector, as we collectively adjust and recover from the effects of the Covid pandemic and accommodate an irreversible shift in customer behaviours. Whilst many UK banks and building societies continue to focus on reduced headcounts and smaller branch estates as a means of balancing the books, they miss a major opportunity. 

“Too often, management teams and boards simply plug vendor costs into their annual budgets and forecasts without a second thought, not questioning whether they can improve the contract until the renewal looms. Our experience suggests that in most cases, they can.”

Whilst a common business practice in the United States, vendor contract optimisation is infrequently adopted in the UK and as a result, there is a gross knowledge imbalance between provider and most banks and building societies. Third-party vendors in technology, payments, and operations typically have dedicated teams singularly focused on negotiating and renegotiating their contracts with banks to maximise revenue. Conversely, UK banks typically review their contracts only 6-12 months before expiry, resulting in the associated costs being taken as given and transferred to the following year’s budget with barely a second thought.

Royle continues: “Such infrequent challenge to existing vendor contracts leaves banks with little comparative data from which to negotiate better deals. Internationally we have been optimising vendor contracts for clients for nearly 30 years, and that knowledge (and data) is power. Over the years we have utilised the amassed contract data to realise savings in excess of $5bn for thousands of clients.

“We’ve assessed that retail banks and building societies here in the UK could collectively enjoy savings in the region of £6bn simply by adopting a similar approach to regular contract review and renegotiation. This does, however, require those financial institutions to take action and we believe that simply asking five questions at this critical budgeting time could make all the difference.”

The five simple questions that SRM Europe recommends banks and building societies ask themselves during their budgeting and forecasting process are as follows:

1. Are we getting the best vendor deals in the market? A contract that was competitive when signed isn’t necessarily any more given that market pricing and conditions will have changed, as will an institution’s own needs.

2. Can we renegotiate existing contracts? Too often, it is assumed that a long-term contract is set in stone until its renewal date, but this simply isn’t the case, and many vendors will renegotiate early to keep customers over the longer term.

3. What contracts are expiring in the next 12-36 months? It can be time-consuming to switch vendors, and they know it. To be in the best negotiating position, renegotiations should start two or more years in advance.

4. Do we have a reliable view of the market price?  Do you know what price is being charged to other organisations for a comparable product or service? 

5. When was the last time our bills were audited? Unlike the regulatory requirement to carry out risk assessments on how vendors would handle breaches and the like, there is limited regulatory requirement to audit vendor bills and costs charged. Many are error strewn and savings and service optimisations consequently remain unrealised.

Royle concludes: “Asking these questions will help UK retail banks and building societies identify existing contracts that may no longer be fit for purpose and that reviewing them may reveal significant savings and efficiencies.

“Renegotiating vendor costs can widen narrowing margins and relax budget tensions. That’s surely an opportunity not to be missed!”