"My Primary Telecommunications Carrier Just Declared Bankruptcy!" and Other Tales from the Technology Vendor Analysis BanX-Files

By Hensel, Donald D. | The RMA Journal, November 2003 | Go to article overview

"My Primary Telecommunications Carrier Just Declared Bankruptcy!" and Other Tales from the Technology Vendor Analysis BanX-Files


Hensel, Donald D., The RMA Journal


I received a call from a business systems analyst one afternoon. He said: "We're in negotiations with a prospective new technology vendor. But the process is going too easily. The vendor is conceding every single negotiating point. Could you review the financial information on the company?" I retrieved the company's statements from the Internet. The company was losing money, it was insolvent, and its accountants had just issued a "going concern" qualification. I called the systems analyst and conveyed these facts. "Is that bad?" he asked. I again tried stating the information in financial terms. I ended up telling him: "If we pulled up to the company's headquarters tomorrow, I wouldn't be surprised to see the lights out and the doors locked."

Several years ago, vendor due diligence primarily involved conducting background checks, nailing down operational requirements, and negotiating contract language. While evaluating an armored-car company or check-printing vendor once seemed arduous, today's technology risk managers face such nettlesome questions as these:

* If the bank's primary telecommunications company declares bankruptcy today, will the phones ring tomorrow?

* If the Web-hosting vendor cuts back on customer support personnel, will the bank's Web site be down for hours rather than minutes?

* How would the bank know if its transactions-processing vendor were sold to management of questionable character?

Even if a vendor is in poor shape, there may still be compelling business reasons to stay put rather than seek alternative solutions. Shifting front Crafty Crocodile Software to Big Boa Constrictor Systems can take a bite out of your budget as you leave your old vendor and squeeze your resources while installing a new one. Like the man who journeyed the world searching for romance only to return home and fall in love with the girl next door, sometimes the best course of action may be to sit and do nothing.

Indeed, many robust and cutting-edge solutions come from vendors who lack a long track record or have weak financial statements. As one vendor recently lamented:

"I am sorry to hear that your bank has decided not to take advantage of our revolutionary new product. I think that it is a grave mistake to eliminate a vendor from consideration based on a due-diligence process that appears to be unduly focused on number crunching as opposed to seeking opportunity for your bank to gain a competitive advantage."

Although a less formidable technology vendor may require a smaller contract with a closer maturity date, a stronger vendor may merit a larger, longer-term contract. Moreover, some vendors have capitalized on their financial and operational strength: "Sign a three-year deal rather than an annually renewable contract and save $500,000!"

Evaluating a vendor's risk profile is troublesome because not all of the risks are financial. National banks are old hands at providing the Office of the Comptroller of the Currency with many indications of direct credit risk to borrowers (risk ratings, repayment histories, independent credit reviews, etc.), but they may be less experienced when it comes to evaluating third parties. In addition to credit risk, the OCC asks banks to consider strategic, reputation, compliance, transaction, and other risks, (1)

While encouraging national banks to use technology in a safe and sound manner, the OCC has stepped up its third-party risk assessment. Recently caught short, one national bank had to devote extensive manpower and financial resources to vendor review. As fate would have it, the solution involved the help of a new database from a technology vendor.

Ironically, while financial institutions are increasingly relying on technology, they also are migrating to progressively more outsourced solutions. As a result, banks are delegating control of the very functions that are becoming more important to their success! …

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