STRATEGIC PARTNERS
June 18, 2001
Bank of America: A New Model for Vendor Relations
As has been well chronicled, the banking industry has undergone dramatic transformation in recent years. Mergers, acquisitions and consolidations, fueled by the challenge to grow and the opportunity to leverage economies of scale, have changed the face of banking. True interstate banking, the proliferation of remote ATMs, and on-line and Internet banking, haveforever altered the ways financial institutions conduct business. The boundaries created by Glass-Steagal are being tested with the expansion of financial services offered through banks.
All of these factors impact their ongoing relationships with their customers. Goodbye passbook accounts; hello electronic checks.
However, while the industry continues to undergo spectacular development, certain practices have changed very little over the years. One is the selection process by which banks typically buy products and services. While other industries have moved forward in developing successful vendor relationship strategies, by and large banks have retained the Request for Proposal (RFP) method in choosing vendors. The RFP process, embraced today primarily by governmental bodies, focuses on price as a primary concern, often overlooking such factors as level of experience, specialty services, and historical success. This method contrasts sharply with the practice of many other industries that have aggressively sought and created strategic alliances with their vendors.
Of primary importance is an understanding of the goals that banks want to achieve in selecting vendors, and what is the best method for meeting those goals, the RFP process or a comprehensive vendor relations program.
In general, vendor relations entails the day-to-day dealings with the institutions' suppliers
of both products and services. Maintaining effective relationships with key vendors may be vital to the ongoing operations of the bank itself. Yet many institutions select and maintain their key vendors by pricing alone. While this practice may be acceptable for more generic products and services like office supplies, furniture, and cleaning companies, certain vendor functions are an integral part of the bank's operation and impact the customers' impression of the institution itself. Indeed, customers have come to associate these services with the overall effectiveness of the bank.
When customers visit a remote ATM, for example, they expect to be able to make cash withdrawals and assume that deposits will be picked up and processed in a timely manner. They typically associate the replenishment and general maintenance of the unit as a bank function, unaware that these services are generally provided by an armored transport company, and in the case of technical maintenance, with the manufacturer (or representative) of the ATM itself. Service failures may reflect directly on the bank, negatively impacting customer satisfaction and ultimately customer retention. Potentially a bank could lose customers simply because it awards its ATM service contract on the basis of price rather than assessing the total cost implications of choosing a less-than-qualified vendor.
Some RFPs do not contain sections that enable vendors to differentiate themselves from competition; some institutions do not even include formal meetings within the selection process, which would allow for personal interaction between the prospective vendors and their bank contacts. Even in cases where an opportunity may be presented within the RFP for the vendor to answer relevant questions at length, such sessions rarely provide the vendor the chance to suggest new business solutions that may create certain efficiencies and cost reductions. Often, key decision makers at the bank simply go directly to the "back of the book" to review pricing.
Ironically, the RFP process can be quite costly and time consuming. Numerous parties within the institutions get involved in vendor selections; legal, procurement, and possible field operations. The comprehensive questionnaire may be incredibly difficult to design and exhausting to review. And in the end, pricing is almost always the key decision factor.
Of course, this mindset is easy to understand. As a byproduct of the ongoing merger trend, many institutions have centralized their purchasing function to achieve certain volume discounts and maintain better control over the entire process. Vendors, accustomed to dealing with numerous local and regional managers within the same institution, now oftenestablish a lead person who oversees the relationship. Some managers within the bank have incentives built into their compensation packages based on operating within their budgets.
If they can run their departments at or below projected costs, they earn additional bonuses. Therefore, certain managers may have a built-in incentive to make decisions that ultimately are not in the best interests of the bank.
There are two essential drawbacks with this method. In the first place, the choice of the lowest priced vendor does not necessarily equate to the selection of the lowest cost approach. If, for example, an airfreight company has the highest overall rates among its competitors, but provides solutions for reducing total cost (bundling deliveries to same locations, for example), the financial institution may actually realize significant savings in selecting this vendor. Similarly, if an armored car carrier charges the most per route hour, but helps develop systems to reduce the total number of route hours while maintaining a high level of service, the actual total cost of cash distribution may decrease significantly.
Equally important, the lowest priced vendor may not be able to provide consistently good service, thereby creating dissatisfied bank customers who may choose to take their business elsewhere. After all, customers are not concerned with the bank's armored transportation company or the air freight delivery service. They are interested in whether the bank is meeting their overall needs.
"A lapse in service is a poor reflection on the financial institution, even more so than on the vendor. Unfortunately, with the cost-based RFP process, bank managers may overlook the longer term effects of lost business when the customer is not satisfied," explains Jim Curie, Vice President - Banking Services for Loomis, Fargo & Co., one of the nation's leading armored car and ATM service companies.
There are alternatives to the RFP process that have proven successful in establishing relationships with vendors who provide crucial products or services. Bank of America has instituted a vendor relationship program to promote a team approach, with the bank and its vendors working together to facilitate and encourage a true partnership between the two companies. Ultimately, the customer is the true benefactor in terms of better service. The Bank of America mission statement with regard to vendor relations says it best: "To assure Bank of America the highest standard of excellence in the performance of products and services received through strategic alliances with contracted vendors."
Bank of America has implemented a comprehensive training program that includes mandatory classes for vendor managers to learn about the development and maintenance of effective relationships. The program is consistently updated as the curriculum is enhanced and new techniques are established. This vendor relations training program was adopted by Bank of America from NationsBank following the merger of these institutions.
"Most financial institutions do not have structured vendor relations programs and their managers are not accustomed to this 'team' concept," explains Frank Jones, Sr. Vice President of Bank of America who had responsibility for development of the vendor management program. "Our training provides managers with an awareness of this new philosophy and the skills and tools to work with our vendors in a fair and equitable manner."
A True Partnership
Vendor relations managers become arbiters, communicators, educators, and diplomats to ensure that the two companies work together toward common goals and understanding. They generate and communicate realistic expectations to their respective vendors on an ongoing basis. Bank of America believes that its managers should not have to micromanage their vendors' respective businesses. Bankers have their own job responsibilities and should not be forced to worry about every tedious detail. Instead, all communications related to such issues are directed to the on-site company representatives who can handle any and all situations in a more efficient manner, and merely report the results to the bank vendor relations manager.
Bank of America has identified four distinct vendor relationships: supplier, preferred supplier, alliance, and strategic alliance. At one end of the spectrum are suppliers. There is very little differentiation in their products and services and, thus, relationships are established primarily based on pricing. On the other hand, strategic alliances are formed with vendors who provide products and services that are crucial to the ongoing operations of the bank.
Such relationships are dependent on mutual trust, an ability to enhance business opportunities, and delivery of more effective customer service. Vendor qualifications and experiences are far more important than pricing factors in establishing strategic alliances.
As part of the selection process, prospective vendors who have met minimum standards are given the opportunity to communicate their areas of expertise and the specific ideas they have to improve customer service. Current vendors must maintain certain performance measurements based on the bank's expectations. They are monitored for timeliness, accuracy responsiveness, completeness, and problem resolutions. Those vendors who continue to meet or exceed such performance expectations are typically rewarded with additional business own the road.
"At Bank of America, we define our expectations for the vendors' performance based on acarefully established set of criteria," explains Frank Jones. "As real contributions are made to our business successes, rewards and recognition are considered for the individual company representatives as well as the vendor company as a whole."
While an RFP may be included as one aspect of the vendor selection process, pricing is not the primary consideration, particularly for strategic alliances. From past experiences, Bank of America has learned that the "cheapest" vendor may not necessarily be the "least expensive" vendor. Institutions that constantly change vendors to save money, may find themselves dissatisfied with the level of the new service.
Bank of America realizes that hard dollars up-front must be measured against the potential long term impact should business be lost because of poor execution and dissatisfied customers. By and large, as long as strategic alliance vendors continue performing their services in efficient and effective manners, they will not be replaced as a result of a bidding war. Thus, quality incumbent vendors definitely maintain a certain home court advantage for Bank of America vendors. It simply costs too much in the long run to constantly hire and train new vendors.
However, occasionally vendors may be changed in certain regions because another company offers a competitive advantage in terms of a particular service. These situations have periodically arisen as a result of bank mergers. When NationsBank bought Barnett Bank, they were faced with competent vendors serving the Florida market. At the time, it was easier to move the entire business to one of the competing companies. In a gesture of fairness, NationsBank awarded other future contracts to the competitor to make up for the lost Florida business.
This "team approach" becomes readily apparent when considering the ongoing interaction between Bank of America and many of its strategic alliances. These vendors are treated as though they were associates of the bank itself. They participate in planning meetings and quarterly reviews and are involved in brainstorming sessions about improving customer service and reducing costs.
In several instances, vendor representatives, who are participants in the strategic alliance network, actually work within Bank of America facilities in order to communicate more efficiently and effectively with bank management. They are an integral part of the day to day operations and are able to respond quickly to issues before they can impact customer service. "We undoubtedly value the imput we receive from our vendors and fully capitalize on the expertise of their particular service areas," Jones states.
Many banks still do not approach vendor relations in the same manner as Bank of America. They continue to handle their vendor relations strictly through the RFP process. While the RFP undoubtedly has a place in the vendor process, pricing should not be the sole yardstick for measuring prospective vendors.
As concluded by Mr. Jones, "The Bank of America is judged by our customers based on the quality and value of our services and products. In turn, we rely on our strategic vendor partners to provide many of these services and products. It just makes good business sense to include them as members of the Bank of America Team."
Yes, passbook accounts are virtually a thing of the past. Banks have evolved because of technological advancements and are now able to offer more products and services to their customers faster and better than ever before. In some cases, they enjoy stronger customer relationships because of their ability to change with the times. Perhaps it's time to consider a new paradigm in their relationships with their strategic vendors. Bank of America offers a model for the future.
