The sole vendor model will never work in banking
Managing multiple suppliers is a difficult task that comes with a set of unique issues. For this reason, banks and other financial institutions, inspired by other industries, show interest in the sole vendor model. Unfortunately, despite some advantages, this approach will never work for them. We’ve seen enough attempts to embrace the model in question resulting only in slowing down the business growth to confidently say that it’s not going to work in finance, at least in the foreseeable future.
In this article, you will learn about the pros and cons of the sole vendor model in the banking industry and the conditions needed for succeeding with this approach.
When you can rely on one technology vendor
Having a single vendor means that only one company is responsible for the maintenance of the ongoing projects as well as the delivery of any new services. It means you have one partner that takes care of all your technology-related needs, so you don’t have to manage various suppliers. This approach can work great - under a few conditions.
- You work for a small organization. While it’s relatively easy to work with just one vendor on a singular project (or a few smaller ones), it’s almost impossible that one company will be able to fulfill all needs of a big business (which most financial institutions obviously are). There is no clear indicator you can use to know a company is too big for a sole vendor, so the best thing you can do is to create a list of all projects and business needs. Work with Project Managers to list all needed technologies, specialists, resources, etc., as it’s easier to do when you have a single source of reliable information.
- The vendor is an expert in your field. Big vendors usually support many industries in many countries. They have resources all across the globe and the know-how needed to adapt to various local laws and regulations. If your organization operates in the US, consider working with a US-based company that has expanded into other regions. This way, you’ll benefit from access to the global workforce, your vendor’s knowledge of trends emerging outside the US, and their overall experience gained when expanding to other countries.
- The partner company is well-matched with yours. Doing business with people you like and respect is crucial in any long-term partnership. Your vendor shouldn’t just provide excellent services, but the culture of both companies should be very much alike as well. This will drastically reduce the chances of communication issues and ensure good understanding and cooperation between your employees and vendor-side consultants. A cultural fit also has an underestimated impact on knowledge sharing and training.
- You can always depend on your vendor. If you’re willing to commit to one partnership, you better be sure you can count on the chosen partner. All the time, in every unexpected situation. If a company has experienced a lot of failures in its history, there’s a chance it’ll make a mistake again. That’s a huge red flag. After all, if they suffer - you will suffer too. Be especially wary of cybersecurity issues since an unexpected disruption to your services or an attack targeting your clients’ data will damage your brand image. It’s easy for customers to lose faith in a financial institution that has fallen victim to any cyberattack.
Those are the minimum requirements, but there is much more. The proficiency with your language, the security of your partner’s locations, the certificates they earned… The list goes on and on. If you found a rare consulting/outsourcing company that meets all these requirements, you may be able to benefit from a sole vendor model with no regrets.
Advantages of having a sole technology vendor in a bank
The sole vendor model enables 2 companies to work together in symbiosis. Managers in both companies know they can rely on each other, and both parties do their best to deliver the desired results. The benefits of working with one technology partner include:
- A long-lasting partnership between companies. You rely on them, and they rely on you. It’s a situation in which the prosperity of one company entails the growth of the other. Top partnerships can last for many years, even decades, usually until the management in at least one of the companies undergo some major changes.
- The vendor becomes your trusted advisor. Your technology partner will have a seat at the table because they handle a huge part of your business. In many cases, the vendor is responsible for the security, so their involvement in developing your business strategy becomes necessary and valued.
- Both sides learn from each other. Partnering with an innovative company means that whenever they come up with solutions that streamline processes, you benefit from them as well. When your technology partner invests in Digital Transformation, you benefit from their improved performance and their support in your own DT efforts. When you invest in new technologies, your vendor will gain priceless, hands-on experience implementing them.
- The scale of the partnership brings the price down. Forget the prices you know from working with multiple vendors. The more people your partner sends to work on your projects, the easier it gets to negotiate and convince your vendor to drop their rates by a few percent.
- Easier integration of systems. It won’t be easy to design and develop thorough integrations between you and your vendor at such a scale. But every initial success will allow the next task to arrive much faster, easier, and cheaper. Continuous integration is a process that becomes more efficient over time.
- Less administrative work. This point is self-explanatory. You manage only one vendor instead of a dozen, meaning less admin work on the side of your company.
- Reduction in interoperability issues. A variety of problems resulting from miscommunication and mistrust can arise if two or more vendors work on one project for you. With just one trusted partner, you eliminate this risk.
- Increase in the vendor’s availability. Being such an important client (and likely the most important one) results in the vendor being ready to do everything they can to keep you happy. Just bear in mind that excessively high availability can sometimes come with a cost increase.
Working with one company means you can be pretty sure that they’ll give you their best. But to achieve this exceptional level of cooperation, the right partner is a must.
Disadvantages of relying on one tech vendor
With great power comes great responsibility. With one vendor come many restraints and risks. All companies face challenges, and in business, you can never truly rely on just 1 person or company. You have to take into account the following disadvantages of a sole vendor model:
- If their business faces a challenge, yours does too. That’s one of the biggest challenges because it’s impossible to know everything about your vendors’ internal politics, shuffles, and company culture. But it impacts you as well. For example, when your partner loses an important staff member, it’s also a loss for you. Try to find out about the retention rates at your prospective sole vendor. If employees leave them frequently after just 1 year, that’s a clear indicator the company is not a reliable partner.
- Your competition can try to take advantage of your dependency on one tech supplier. Working with various tech vendors allows your rivals to fill their job openings faster, and if one partner screws up, there’s a chance the other can step up and minimize the losses. But there is a much greater risk in them targeting your vendor’s employees with job offers. Many technology companies acquire talent from their competitors.
- One external entity has a tremendous impact on your business. One partner knowing all ins and outs of your business might be considered a pro sometimes. But if it means that all your systems depend on their work, it becomes a huge risk. For example, sometime in the future, you’ll have to hire an additional vendor to lower costs. What's stopping your recently-sole vendor from trying to sabotage those efforts? After all, they know how everything works, probably better than you do.
- The best employees are spread across different organizations. To work with the best, you’ll have to work with at least a handful of companies. People have various needs and habits. And tend to switch companies every few years. For this reason, you will never get the best talent from just one vendor. A network of reliable providers will do much better in attracting a range of brilliant talent for you.
- Possible pricing issues. Having several vendors comes with the advantage of direct access to market prices. It’s also easy to negotiate the rates if you have a better offer from a competitor. By relying on just one vendor, you put yourself in a situation where they can force higher prices if they ever feel you’re at their mercy.
- If your vendor doesn’t have the resources, you can’t move forward with projects. New projects may be on hold for as long as a few months because your vendor needs to find the right people for the job (or because they have to learn and set up new systems). Having several technology vendors ready to start instantly is a significant value-add if you want to stay competitive.
- Different vendors have different market insights. Every company has a distinct set of expertise and experience. In a sole model, you get only one side of the whole story. Working with multiple vendors gives you access to a broader knowledge base. Sometimes your partners can propose innovative solutions you don't know yet, like the Build-Operate-Transfer model.
- Your vendor’s other clients consume the time and resources you need. And if a vendor operates many projects, you’re left with no backup. No vendor will limit their activity to your company only. Then why would you limit yourself to one provider? There’s always a strong possibility that your IT partner will receive new requirements from other clients, and they will decide to prioritize the other company above yours.
- Your IT supplier can be bought by your competitor. While it’s unusual to acquire another company’s sole vendor, companies get bought quite often. In the 1990, the biggest U.S. banks held less than 10% of industry assets. 5 years ago, JPMorgan Chase, Bank of America, Wells Fargo, and Citibank owned more than 40%. Thanks to mergers and acquisitions, over 20 banks disappeared in that timeframe.
- You are affected by the politics inside the vendor company. When your partner’s company undergoes any change, your enterprise will feel its impact. The business landscape is constantly fluctuating, and you can’t be bothered by the things outside your control. That’s why two trusted providers will always be better than one.
- Issues with transferring projects. That’s a problem we’ve faced when taking over a project from a previous vendor. Their team was slowing down the knowledge transfer. Because of this, the project was delayed by a few weeks.
- When delivery issues come, it’s only your problem. You have to take care of stakeholders, clients, and employees. If your vendor didn’t create the promised solution on time, you are the one having to come up with an excuse. By working with multiple IT partners, you enjoy the flexibility that lets you quickly add needed resources.
- The vendor's standards can drop over time. Competition by its very nature forces companies to do better. The tech market is changing faster than others, and those who are not up-to-the-minute lose. A lot of IT businesses died abruptly. There is no guarantee your partner will respond quickly enough to a future change in technology that will transform the banking industry forever.
Create a good plan to make it work
Working with a sole vendor in the banking world could work theoretically, but it’s incredibly difficult to pull off. If you’re still willing to try, start with creating a detailed plan that will protect you for at least a couple of years. Do due diligence on the partner company and learn everything you can about it. Knowing the banking industry as well as we do, Maxima will always insist that a multi-vendor model can be a better option for you. To learn more about it, come back soon and read the next article in this series.
It’s worth working with specialists who already know how the best financial institutions operate. At Maxima Consulting, we have focused on the banking industry since 1993. We know the ins and outs of both North American and European banks. Contact us to see how we can support your organization.