Chapter 9: Choosing the Right Tool
Of course, if that were simple to do what Dean’s bank did in Chapter 8, we’d see a lot more pricing ecosystems out there. Instead, what we often find are a bunch of cautionary tales about what can go wrong when you’re trying to add new systems and solutions at a bank.
How NOT to Buy Technology at a Bank
(The following is Dallas’ story of an ill-fated trip to the grocery story. But trust us, this could just easily have been Jim or Carl, or maybe even you.)
Have you ever turned a simple shopping trip into a complete and utter failure? Just a few weeks ago, my wife made out a detailed grocery list for me, including specific brands and how much of each item to purchase. It looked idiot proof. But looks can be quite deceiving.
I spent the next 90 minutes driving around town like a mad man, visiting three different stores to get everything on the list. I returned home triumphant, ready to be praised for my grit and determination. I had only forgotten one thing (milk), which is way better than my typical trip.
My wife, though, was not nearly as proud of me as I expected.
“What is all of this stuff? And where is the milk?!?”
You see, it turns out that when I got to the store, I grabbed the wrong list from the passenger seat of my truck. It happened to be the list from a few days before, and I never noticed. The correct list only had four items, and the milk had a star beside it, because it was the one thing we REALLY needed to make dinner. Oops.
In this case, my shopping mistake wasn’t too disastrous. Sure, we had no milk and doubles of everything else, but in the grand scheme of things, we will survive it.
Five Technology Shopping Mistakes to Avoid
What about banks, though? Is it possible for them to be as bad at shopping as Dallas is? When it comes to technology, the answer is a resounding YES.
The issue, though, is that mistakes in technology shopping don’t just leave banks stuck with expensive, inefficient systems. Those subpar systems also provide a lousy experience for their customers. This is especially true now, as banks around the world are busy spending unprecedented amounts to overhaul their technology stacks (see chart below). These shopping blunders can cripple an organization for years.
Dallas has spent years as a banker sitting through meetings with vendors, and a few more sitting on the other side of the table. He’s seen plenty of examples of technology purchase decisions gone awry. The memory of sitting in a board room around 10 years ago trying to explain to his directors how a virtual server worked is still fresh in his mind. Let’s just say that they weren’t thrilled with the idea of spending thousands of dollars to have their bank run on “imaginary hardware.”
While a lack of technical knowledge is certainly a hindrance, these five recurring issues are the ones that cause real damage. If you are sitting in a meeting and hear one of these lines, some red flags should immediately be raised.
1: Either IT or a procurement team makes every buying decision.
“Is this software? Then IT has to decide.”
Your IT and procurement staff should absolutely be a part of every purchasing decision. But remember what their goals typically look like. Their jobs are to A) make sure new systems don’t break anything or expose the bank to undue risk, and B) save money.
Both are necessary, but are actually due diligence items that should be addressed after the business lines have found a tool that meets their needs. If the IT or procurement groups are running the show, the process is generally slow and tedious, as the team searches for reasons not to buy.
The best banks let the business lines run the process and make final buying decisions, of course subject to verification that the new systems don’t break anything. When prospects are struggling with this while evaluating our pricing tool, we suggest the approach used by one of our best clients.
He gathered his top commercial lenders in a room for a demo and told them, “I’ll be back in an hour. Tell me if this is something that you would actually use and would help you do your job.” In an hour he not only had his answer, but also early support from the people who would be the system’s end users.
2: Decisions get derailed by “turf defenders.”
“Why do we even need this? My Excel model does the same thing, just without the bells and whistles.”
There is a saying in the sales world that you are always competing against an established competitor. This is especially true in banking, where there is typically a budget built around what’s already in place and little room to add new categories of systems. So when a new system is added into the budget, someone else is getting something taken away, even if that new system deals with an area that the incumbent systems don’t address.
The problem arises when people start defending their turf by putting their self-interest ahead of the bank’s interest. This is basic human nature, but some banks allow this to have an out-sized influence on the decision. The results can be ugly. These banks are now not only working with inferior legacy technology (or homemade solutions), but they also have allowed little fiefdoms to crop up in which individuals are using their specialized knowledge to protect themselves or elevate their own status.
3: Resources are not allocated by the ROI of the project.
“We agree that this is a MUST HAVE and could make us a lot of money. But, we have so many other things going on, we just can’t do it yet. Check back later.”
Would you like to venture a guess on how many actually implement it “later” at that check-in? There are always a bunch of projects going on, and new things being implemented. Celent’s 2015 study on bank technology spending found that more than half of banks’ total budgets were being spent on security, compliance, and core systems. Should you really delay something that is accretive to earnings or customer experience because you are too busy with a multi-year (!) roll-out of a back-office system?
4: The process is owned by a committee instead of an individual.
“We will discuss internally, and then someone will get back to you.”
Like most things involving a committee, if everyone owns it, then really no one owns it. The best banks insist on naming individual owners of every project. Someone’s name is attached to every decision, adding both responsibility and accountability.
One champion pushing for a decision will get to an answer much faster. A quick “yes” means that the project stays on track, but sometimes a quick “no” is just as valuable. It saves an entire team of people countless hours of sitting through demos, follow-up calls, and “check-ins” from salespeople that ultimately aren’t heading anywhere useful.
5: There is no defined process or timeline.
“I’m not sure what the next steps are. I think we have a few others who need to see it, so let’s set up another demo and we’ll go from there.”
This is probably the most marked difference in the banks that excel at purchasing versus those that don’t. The best banks know exactly how they go about making these decisions. They have a clearly defined process, including precise steps, expected timeframes, and clear designations of who is responsible for making final decisions.
The process at most banks is much fuzzier; no one is sure who has the official authority to decide, and so no decision is ever made. Plus, any decision that does get made is then thrown into a chaotic budgeting process where it may or may not actually get funding.
Quick to Decide, Quick to Revenue
While the symptoms and causes may vary, nearly all of these issues result in wasted time. The best banks move through the decision process as quickly as possible so they can focus their time on actually implementing tools instead of evaluating them indefinitely.
Once the process is in place, it becomes a powerful feedback loop. The best banks choose the best tools and quickly get them up and running. Those tools then help add revenue or improve efficiency, leaving the bank with more resources to invest in even more tools. Wash, rinse, repeat, and pretty soon they have left their competitors in the dust.
The banks that struggle with this, though, end up with the bank equivalent of no milk and doubles of everything else: old, expensive systems and no ability to differentiate themselves.
The Five C’s of Bank Vendor Assessment and Selection
If you’ve avoided the pitfalls listed above, congratulations! But you’re not out of the woods yet. Having the right framework in place for technology purchasing is just step one. Step two is figuring out which vendor you’re going to do business with.
It’s a daunting task. As Carl puts it, in any given week we’ll likely do more product demos and presentations and than you and your management team will participate in over the course of an entire year. That’s true for most of the vendors out there selling tech to banks.
All those repetitions mean that vendors are pretty good at looking good. So it’s very likely that at the end of each vendor presentation you sit through, you’ll have a very favorable view of what you have just seen.
How then do you separate the promise from the reality? What sort of questions could you ask each vendor that could be used to underwrite the promise of the demo?
The great news for banks is that you already have a trusted framework for doing this. In fact, this capability is at the heart of one of the most important things that you do every day: credit underwriting.
It’s a disciplined process of asking questions and gathering information to underwrite a borrower’s promise to repay a loan (plus a promised return). Most credit underwriting is based around a useful framework known as The Five C’s of Credit: Character, Capacity, Capital, Collateral and Conditions.
We looked back over the thousands of demos we’ve done over the years as a vendor to banks. We identified the best questions we were asked by potential clients – either during the demo or later as part of their vendor due diligence process. Two very interesting patterns emerged when we examined these questions and the clients who asked them:
The prospective clients who consistently asked the best questions took a credit underwriter’s approach to vendor and solution assessment and vendor due diligence. They were trying to underwrite the promise of the demo with facts and evidence.
The questions they asked could be grouped into what we now refer to as the Five C’s of Vendor Assessment and Selection: Company, Culture, Customers, Churn and Conditions.
It’s no coincidence that these Five C’s map over, almost directly, to the Five C’s of Credit. Those who apply the credit discipline to their vendor selection process don’t view the vendor’s solution as merely an expense. Instead, they view it as an asset (like a loan) that requires an initial investment of both time and capital but should, if the promises are met, pay back their investment and provide a meaningful return with minimal risk. Their goal is to underwrite that risk.
Here’s a brief description of each of the Five C’s of Vendor Assessment and Selection, including some of the best questions in each category that we’ve been asked by prospects. We’ve also included some advice on how to frame your questions and how to interpret the answers you get from the vendors. (A more comprehensive list of questions will be included in the Appendix.)
Company & Culture
Is the vendor someone you can trust; someone you’d be proud to do business with? It’s not an easy judgment to make. The questions you ask here need to reveal enough facts and evidence to enable you to reach a confident conclusion.
There is an old saying in credit underwriting: “A ‘1 Credit’ is Bill Gates married to Mother Teresa with joint accounts.” In other words, it’s a borrower with both the proven ability to repay and the moral character to actually do so. You can think about Company and Culture in a very similar way.
Understanding the Company (its size, financial strength, ability to attract and retain great people) will help you underwrite their ability to deliver.
Understanding their Culture (how they measure customer success, how they handle difficult situations, how transparent, open and honest they are with their customers and prospects) will help you understand whether they will actually deliver on their promises.
Questions and Answers
Ask about the size of the company and – in particular – the size of the group that supports, maintains and develop the product you’re considering. And does that group work with other products, or just this one?
How the vendors respond to these questions will reveal a great deal. Do they answer in terms that are more relevant to you or more relevant to them? Or in ways that seem to obfuscate rather than clarify?
Do they talk about number of employees, amount of revenue or market capitalization (terms relevant to them)? Or do they describe the actual size of the group dedicated to developing and supporting the product they’re asking you to buy (terms relevant to you)?
When assessing the Company and its ability to deliver, you want to understand how much the company is actually investing in the product, its development and support. Is this investment declining or accelerating? The number of issues you’ll encounter and how quickly and completely they’ll be resolved is a direct consequence of the level of dedicated investment to the product. The fact that they have 5,000 employees serving other clients using other products is, at best, irrelevant, and, at worst, a deliberate distraction or overstatement.
The culture questions are ways to essentially find out: 1) How the vendor determines if their clients are getting a return on their investment; 2) What the vendor does if clients aren’t getting this return; and 3) Whether the vendor even cares about this.
The answers that a vendor gives here, just like in credit underwriting, will have an enormous impact on how you view the “Conditions” of this relationship (the fifth and final C).
There are two big things to look for in their answers to the culture questions:
First, if you ask how they measure customer success, they may try to answer this with customer satisfaction survey results. Customer satisfaction is necessary in ensuring customer success, but it’s not the be-all end-all, either. Pay close attention to the vendor’s answers here and see if they “foot” with their customer retention answers in the “Churn” section below. High customer satisfaction with low customer retention indicates that their satisfaction surveys are doing a poor job of measuring success.
Second, every vendor should be able to tell a story (or two) about an unsuccessful customer. No vendor is perfect; there will always be a few cases where it just did not work out. Through these stories you should get a sense of the vendor’s level of openness and honesty. Do they blame the customer? Do they blame external factors, such as the economy? Or do they focus on what they could have done better either in the sales process or in the delivery process? Most importantly, what did they do about it? Did they make things right?
Every solution requires an investment of both time and money on your part. In return, vendors offer the promise of a return on that investment. There are really only three meaningful ways this return can be delivered:
- Increased Revenue through:
- Volume improvement (sell more) and/or,
- Pricing improvement (charge more)
- Decreased Expense through:
- Increased efficiency (do more with less)
- Elimination of expenses/loss (just need less)
- Decreased Risk through:
- Reduced likelihood of losing revenue
- Reduced likelihood of increasing expenses
Any vendor should be able to connect their solution’s value proposition to one or more of these. If this is not crystal clear very early in the process, move on. In banking terms, there’s no need to underwrite a loan to someone who can’t demonstrate a clear path to even repaying the principal.
Growth and retention (See “Churn” below) of customers are very strong evidence of a positive ROI. If these numbers are flat or declining, you should be very concerned. A growing customer base almost always leads to growing investment in the product and its associated support and service. A declining customer base often leads to just the opposite. If the vendor has described a growing level of investment in the product, yet you see a declining customer base, you know eventually something has to give.
Questions and Answers
Simply asking the vendor how many customers they have can be revealing. If they say they have 10,000 customers and it quickly becomes apparent with the next question that only 50 are relevant to the current product they’re selling to you, it’s a red flag and should get you thinking about other claims they may be overstating.
You want to narrow down to the set of customers that’s most relevant to your situation so you can determine if future investment in this product will be aligned with your needs. What segment of the vendor’s customer base is growing? This is where investments in the product and service will be focused going forward. Figure out what that means for you – it could be good or bad, depending on how you compare to those current customers. Do they have customers that are similar to you? If so, ask for names so you can speak with them.
Churn is the single best metric for underwriting the value proposition of the vendor.
It correlates, more than anything else, with actual customer success. Jeffery Gitomer said it clearly in the title of his book: “Customer Satisfaction is Worthless, Customer Loyalty is Priceless.” Customers only keep paying for things that are producing benefits that exceed their costs.
Think of it this way. For a company that charges $10k/year for a service, with annual renewals, each year the company essentially conducts a survey of its customers. This survey has only one question: “Did the value you received from using this product greatly exceed the investment of both time and money required to use it?”
If you answer “yes” to this question, you staple a check for $10,000 to your response. If you answer “no,” it costs you nothing. By definition, this survey has a 100% response rate. The percentage of “no” responses is commonly known as “churn.”
Buying any subscription-based Software as a Service solution and not asking the vendor about churn would be like booking a loan without asking to see financials. Yet banks do it all the time. You should ask for the results of this survey above all others.
Questions and Answers
You can look at vendor’s churn rate in two ways: the percentage of clients who renew each year, or the percentage of contract revenue that’s renewed (Net Revenue Renewal rate). The first metric will show you whether the vendor is losing clients. The second metric takes into account whether the vendor is being forced to cut price to keep business or, conversely, if customers are expanding their business and buying more stuff. The latter could lead to a Net Revenue Renewal Rate greater than 100% – a great sign.
Unfortunately, as with all metrics, churn rate has some blind spots. It will miss customers who left in the middle of their contract, because they were not up for renewal. Make sure to ask about this, especially if the vendor pushes for multi-year commitments. (More on this in the “Conditions” section below).
Also be sure to ask the vendor about their strongest competitors and how they compete with them – this is where the best vendors separate themselves. If there are four competitive vendors for a particular product, odds are you’ll only get a straight and honest answer to this question from one of them. That vendor will be the market leader, with the lowest churn.
The market leader competes by offering results and references based on actual customer success. Others may compete by offering significantly lower prices and push for longer terms. It’s not at all unusual for the market leader to have 100 clients switch from a lower-priced competitor for every one client they have churn away to another vendor.
Just as in credit underwriting, you must also understand and evaluate the conditions of the deal in the context of what you’ve learned from the other four C’s. These conditions serve to either mitigate or exacerbate the risk.
Questions and Answers
Generally, you’ll get the actual terms in a written proposal and later a full contract, but it’s still worth asking now about how they price, whether they offer guarantees, the typical contract term, etc. Take good notes; you’ll want to ensure the actual contract reflects the answers you were given.
With vendor assessments, the linkage between the conditions and the other four C’s is even more pronounced because, unlike in credit underwriting, the vendor is setting the proposed terms and conditions. If you’ve done a good job in assessing the Company, Culture, Customers and Churn of this vendor, there should be no surprises from the Conditions.
Consider the case where a vendor’s new customer growth is slowing and, at the same time, they’re losing customers to competitive solutions. When they offer you a rock-bottom price in exchange for a five-year commitment, is it really any mystery as to why? They’re insuring the risk that you’ll cancel on them and they know better than anyone what that’s worth. Buyer beware.
Putting the Pieces Together
The trend toward buying powerful, highly specialized solutions (particularly cloud-based software solutions) will likely continue as more banks look to improve performance, increase efficiency, and reduce cost.
The stakes are high for banks to get it right. That means identifying the vendors you can truly rely on. Fortunately, you’ve already developed a framework for understanding which borrowers are most likely to give you an acceptable return on your investment. There’s no reason you shouldn’t know the same thing about your vendors.
What to Look for in a Pricing Tool
Doing all that due diligence won’t matter if the vendor doesn’t have the product that fits your needs.
As you might guess by everything we have covered in earlier chapters, we have found that a pricing tool needs to be much more than just a calculator. From way back in Chapter 2, where we introduced the Price Setting and Price Getting concepts, we know that getting the math right is necessary, but not sufficient. Your bank must have a way of actually executing on the price, and getting it on the books at the needed volumes for your business to grow and prosper. To that end, a pricing solution will be as much a sales and negotiation tool as it is a calculator of returns, and that means that there are two vital characteristics that need to be present.
Start at the Customer, End at the Bank
First, the solution must start at the lender’s interaction with their borrower and then work backwards. If the entire system is designed from the bank’s perspective, you have already lost. A customer doesn’t care about a facility risk grade, or overhead cost, or how much economic capital is being allocated. We know that these are necessary for the bank to get to a price, but if this is the sole focus of your tool, it is also going to become the primary focus of your lenders.
Instead, the tool should facilitate a better conversation with borrowers. That means that the terms used in the solution are not internal bank jargon, but are deal terms as they would be discussed with a borrower. You talk to borrowers about collateral and guarantees, not facility grades. You talk about the length of the project, not the maximum terms the bank allows. And you offer options based on what the borrower is willing and able to do, not based on what the bank’s standard, cookie cutter structures look like.
All of this, of course, requires that the system is intuitive and incredibly easy for lenders to use. We’ve stressed the importance of giving your lenders the ability to make decisions in the moment, while the borrower is sitting across the table from them. You can’t do that if you’re constantly hunting around the screen, looking for relevant information.
Want an idea of what it looks like when a lot of important data is presented in a way that’s easy for the user to digest and act upon? Look no further than your fantasy football site. Every day during the season, fantasy football players (present company included) log into million-dollar websites that manage their drafts, provide in-depth analysis, graph recent trends for dozens of metrics and even provide meaningful statistical projections.
Even novice players can use the clean, simple interface and wealth of data to play what was once an overly complex game. Not sure if you should make a trade? The site will show you projections for each potential lineup for the rest of the season, allowing you to quickly evaluate the pros and cons of the deal.
How does this compare to your pricing tool? We’re guessing for most of you, these two aren’t even in the same universe. If your lenders have far superior tools for playing a free fantasy football game than they have for managing multi-million dollar loan deals, then you can understand why they are frustrated. It must be a priority to provide them with the proper tools to effectively do their jobs, and that means a pricing tool that is actually valuable to them. It should help them, in real time, have better conversations with their borrowers that enable better deal making instead of being an overly complex calculator that is used a week after the deal has already been negotiated.
Connect the Front of the Bank With the Back
The second vital characteristic of a successful pricing tool is it must be the conduit for communication between the back of the bank (the Price Setters) and the front of the bank (the Price Getters). As we covered in Chapter 7, transparency is one of the key ingredients to effective pricing and relationship building in a bank. But, one of the reasons that so many banks struggle with transparency is that the logistics are really hard.
How we do let all of the lenders in our entire footprint know what the bank’s strategy looks like? And in turn, how do they let us know what the competition in the marketplace is doing? Since pricing is the fulcrum between the front and back of the bank, the pricing tool MUST act as the means of communication. It is the means by which management can adjust profitability targets to steer the balance sheet, pricing aggressively the types of business that best fit the bank’s strategy and increasing prices on the types of business for which the bank has little appetite. It is also the means by which management can see the results of those targets. Is volume shrinking because targets are too high? Are we seeing too many deals priced below the targets as exceptions? Or did we see a big jump in volume, and could we possibly be leaving money on the table because we are too far below market?
Logistically this is all communicated through profitability targets and results (both of which are, of course, adjusted for risk). Notice we say targets and not hurdle rates. For the tool to work effectively as a sales enabler, we should think in terms of the profit levels we are aiming at, not the bare minimum we will accept (which should likely be one of the few closely guarded secrets in a transparent organization). This allows lenders to see the returns the bank desires, but also to make exceptions where it makes good business sense to do so, like with the bank’s very best relationships.
Using targets instead of predefined structures with hurdle rates also allows the lenders to see a myriad of options on how to reach those targeted returns. It shouldn’t always be about rate, or else we risk becoming used car salesman haggling back and forth over the one flexible part of the deal. Instead, all of the levers should be available, including term, rate type, collateral, amortization schedule, and expanding the opportunity to include additional business.
While these two vital characteristics were described in terms of the pricing tool, they should also be applied to the other pieces of the ecosystem outlined in Chapter 8. The CRM tools, workflow tools, and portfolio analysis tools should all stay true to the same concepts. They must focus on the end users, and they must facilitate better communication between the front and back of the bank (and therefore between the bank and its customers). With the right vendors and the right tools chosen, you are well on your way to arming your bankers with everything they need to build the meaningful, long-lasting relationships that will define your brand.
Building a Partnership With Your Vendors
Purchasing technology at your bank isn’t merely a transaction. It’s the start of a long-term relationship with your vendor.
Cornerstone Advisors, the authors of the insightful and entertaining Gonzo Banker blog, have a post titled “Is Your Vendor a Partner?” It lists 10 questions you should ask yourself to determine if your vendor behaves more like a partner and less like a salesman.
We won’t go into all 10, but here are some of the most important points they made:
Your vendor should do research for you, not vice-versa
During their sales pitch, all vendors portray themselves as experts in their fields. It’s a point they have to prove – otherwise why would you buy from them? If you’ve got the right vendor, they don’t stop sharing their expertise once you’ve made your purchase. Instead, they keep sending you newsletters, inviting you to webinars, conferences, etc. If you’re at the point where sometimes you’re a little exasperated by the amount of times your vendor reaches out to you in a month, then you’re in a good partnership. It’s okay if they overshare. It’s not okay if they ignore.
Your vendor needs to be able to play nice with other vendors
There is no overarching single solution to everything a bank needs done. That means your vendor’s tool needs to be able to interact with the tools of other vendors. If your vendor has developed a variety of integrations and is constantly working on adding more, then you’re well positioned to be able to expand your technology stack. If not, then you’re in for a lot of work on your end and a whole lot of headaches.
Your account rep needs to be your advocate
When you’re struggling with a problem, you shouldn’t be the one updating your rep on what’s going on. They should be the ones bringing the issue to the attention of the right people and making sure it stays front and center until it is either resolved or there’s at least an explanation why it won’t be. It’s a lot harder to ignore the squeaky wheel when it’s squeaking from across the office instead of across a phone line.
Your vendor should work to make you a better customer
This goes back to the churn questions you should be asking during vendor underwriting. Follow the logic here: Vendors have low churn if their customers are happy. Customers are happy when they’re having success with the tool they’re using. Therefore, smart vendors take steps to ensure their customers know how to get the most out of their tool.
Not-so-smart vendors? They take a passive approach, assuming everything is fine unless they hear otherwise from the customer. Sometimes that’s fine; you might be doing well on your own. But a vendor that’s unwilling to commit resources to ensure your success is not the type of vendor you’re going to want to lean on if/when you do hit a snag.
Granted, having a vendor stick their nose into your business and point out ways you could be doing your job better can be a little awkward, even a little annoying at times. But as Gonzo Banker points out: “Partners don’t shy away from uncomfortable conversations.”
If you’re a little apprehensive about buying technology at your bank, that’s completely understandable. There’s a great deal at stake. Get it right, and your star will rise right alongside the bank’s. Get it wrong and you’ll be connected with that failure as long as you’re at the bank … which may not be much longer.
Doing nothing might seem safe, but remember, it’s still a choice. A choice to stand pat and hope that all the trends leading to shrinking margins and fewer banks will somehow magically reverse themselves. Good luck with that.
This is important. But don’t worry. Just take a deep breath and think of this decision in familiar terms: risk and return.
If you know the major pitfalls to avoid and the right questions to ask potential vendors, you’ve decreased your purchase risk considerably. Then, if you have the right goals in mind when buying the technology and you’ve formed a strong relationship with the right vendor, you’ve increased your potential return as well.
Take those steps and you’ll get the buy-in you need from the key players at the bank. But your work isn’t done there. Next you’ll need buy-in from the actual users.