SCOTTSDALE, Ariz.—Low-performing CUs are spending twice what their high-performing peers are spending on the same technology services, according to The Cornerstone Performance Report.
Not surprisingly, that lack of efficiency in the budget is limiting the ability to invest in new technology and grow, points out Cornerstone Advisors, which produces The Cornerstone Performance Report of benchmarks and best practices for mid-size banks and credit unions.
Why are the low performers forking over double the amount of money on technology as peer credit unions? Poor management of their vendors and their contracts, explained Sam Kilmer, Cornerstone senior director.
“Vendor management at a strategic level is critically important to the credit union, because doing it wrong carries a huge business risk,” said Kilmer, noting there are also compliance and regulatory concerns. “Do it wrong and the credit union will spend too much money—above market rate—on existing contracts and won’t have the money to invest in innovation to not only serve members but fend off big banks who are winning market share.”
The most frequent culprit in overspending on technology is responsibility for tech purchases and management expanding beyond one central control point, such as IT, according to Kilmer. For example, loan origination systems are often managed by lending, while e-commerce is handled by marketing.
No Centralized Oversight
Lack of centralized technology contract oversight at a senior level, such as with the CIO or CTO, can lead to a great deal of waste, with decisions left in hands of staff not often skilled in determining the current market prices for technology contracts, especially for those areas that have become commoditized, such as ATMs.
Sam Kilmer
Kilmer pointed out that costs for core processing have been declining, while tech expenditures in other areas, such as payments, have been increasing.
“Payments, remote delivery, analytics, loan origination and MCIF systems, these are technologies spread across the credit union and whose prices—when you add them all up—now come to as much as core expenditures,” said Kilmer. “Payments and delivery technology is where the action increasingly is. And unlike IT and core contracts, these contracts more often than not aren’t even managed centrally, let alone overseen strategically.”
What Cornerstone has seen in low-performing credit unions is that management of technology spend being placed on “autopilot. Here are major expenses and the credit union has them on cruise control, without anyone managing these contracts aggressively,” said Ryan Rackley, director at Cornerstone.
Contracts On Autopilot
What happens to CUs with tech contracts on autopilot, asserted Rackley, is that they also automatically renew contracts those contracts, and overpay and overcommit. “You need to have a plan in place as to the timing of the agreements and the amounts. You have to determine whether you are paying the appropriate prices, which takes work, as this market’s pricing is not transparent,” said Rackley.
Kilmer pointed to the importance of knowing the “lifecycle” of any technology the CU is investing in—knowing when it is time to spend less on a solution that has become more commonplace, commoditized, and faces a great deal of competition as a result. He added that vendors are not quick to proactively pass on savings to clients as a product matures.
“Back in the ’60s when we bought a car we had to pay for a seat belt—that was new, an option. Now the seatbelt comes with the car,” said Kilmer.
Rackley gave an example of what might happen at a low-performing CU that is not effectively managing its technology contracts.
“Take ATMs. You have to be aware of the changes in market prices here for this legacy technology,” said Rackley. “Say you bought a fleet of ATMs
Ryan Rackley, Cornerstone
in 2005, implemented them and then set up a contract with a service provider to keep them running. Come 2015, the same vendor contract exists while this product has matured, nothing has been touched. This is an extreme example, but in concept this is what is happening across many technology contracts.”
Aggressive Contract Management
Rackley said managing technology vendor contracts aggressively creates spending reductions for the existing service sets that can not only offset the costs of enhancements to existing technology but also create additional savings to redirect into high-growth areas, such as payments and mobile.
“Look at that contract and renegotiate that service set,” recommended Rackley. “For ATMs that would be the first- and second-line maintenance services contract. Spend some time and effort on it to understand where the market is at and take advantage of a product that has become mature. That kind of information is very powerful.”
Both Rackley and Kilmer re-emphasized that over-spending on certain categories of technology vendors leads to under-investing in critical new technology areas.
“Again, what you don’t want to be paying is innovative or mainstream pricing for something that has become commoditized,” said Kilmer. “When we hear a CEO say, ‘I don’t have enough money to invest in mobile or new technology,’ one of the first things we find when we look is that the CU has too much money tied up in contracts for mature things. These contracts cannot run passively on autopilot. They must be actively and aggressively managed.”