Posts

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Vendor Relationships: Signs You Should Be More Strategic

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Vendor and partner relationships are essential to financial institutions, therefore we are reposting this blog in light of recent conversations with our clients.  Taking a strategic approach to these important relationships can better position the organization for future moves, boost performance, save resources, and maybe even lessen the total number of relationships required.  Optimizing these relationships helps add value for your customers and employees, yet the complexity and sheer volume of relationships can be overwhelming.  As the industry continues to evolve, institutions will have to rely even more on third parties, which means this challenge is growing.  Taking action, sooner rather than later, will help.

Most have an objective of leveraging vendor and partner relationships to their fullest advantage for the benefit of the customers employees, and other key stakeholders.  Many have systems in place for contract management, due diligence, and managing/monitoring third party risk.  While those foundational functions are critical, there is far more opportunity to leverage relationships for higher performance and efficiency.

Here are a few signs that opportunities are being missed:

  • Contracts are renewed even though the partner has no plans to offer key capabilities that you will soon need to support your strategy
  • Multiple pieces of software or service providers are performing the same function in different areas of the organization. Downstream effects are compounded when you’re left managing extra relationships and updating more software than is needed
  • Features and capabilities that are planned for implementation are never made available because they were postponed during a complicated rollout with the best intentions to go back and activate them later
  • Desired features and capabilities are added by the vendor but not implemented. It’s possible no one knows they’re available, and it’s not uncommon for software to be branded “no good” or “out of date” because it was not updated regularly or features were not implemented
  • Products or services are contracted, but training is minimized. This is often due to time constraints, making the new products or services far less effective and beneficial

It’s important to understand your partners clearly, just like you would your employees.  Are they bringing the minimum requirements to the table or are they true extensions of your staff?  How forward-thinking are they?  How quickly do they adapt?  How does their strategy support your strategy?

As vendor and partner relationships grow in number and importance, determining how you will approach them going forward will provide clarity.

Here are a few questions we’re asking our clients as they shift to a strategic approach:

  • What is your strategic position on vendor and partner relationships?
  • Who owns the overall vendor and partner relationship process?
  • If the process is broken down into categories, such as software and non-software, who owns the different categories?
  • Who owns the individual relationships? If a vendor provides multiple products or services, is there a single owner or multiple owners?
    • The owner of the relationship is the person responsible for paying attention to what’s happening with the company, their software or service, their plans for the future, their representatives, etc. This includes understanding and choosing whether to implement updates and new features
    • Relationship ownership is a strategic decision. Why are the owners chosen?  How well do they understand the business and organizational priorities?  How well do they build relationships and drive results?
  • What should the relationship owner know about each vendor in order to understand how well their strategic positioning aligns with your strategy? For example:
    • If you are interested in artificial intelligence abilities/integration in the future, is the vendor planning to support those capabilities?
    • If you’re utilizing the cloud for some services, is it important for this partner’s services to be cloud-based?
    • What does this vendor’s development roadmap include, and how can you assess their ability to deliver on that roadmap?
    • What other products and services do they offer that may help you move forward strategically?
  • Is your organization using the products or services at the desired level (include upgrades, features, training)?
  • What type of customer do you want to be to your vendors, and what level of service do you expect in return? How difficult or easy are you to work with?  How difficult or easy are they to work with?
  • How should specific vendor/partner relationships be prioritized for the organization?
  • How much resource should you dedicate to ensuring that these integral relationships are optimized?

Strengthen your approach to vendor and partner relationships to meet today’s and tomorrow’s needs.  These relationships will only become more necessary, complex, and further ingrained in the fabric of your business.  Investing intentional effort in this area brings organization and efficiency, and a strategic approach helps leverage the institution’s relationships for optimal performance.

 

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The Power of Seeing Multiple Futures

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3 minute read – While none of us can predict the future, those who anticipate various future scenarios and work through their options tend to fare materially better than those who don’t.  Utilizing scenario planning to rehearse for potential future events can boost confidence in decision-making for an unknown tomorrow, while building the strength to handle it along the way.  

We have always been impressed by Brett Martinez, and his team at Redwood Credit Union.  The consistent strength of their performance in delivering for their members, their community, and their financials, is impressive.  There are many factors that led to the success they have created, one of which is their relentless focus on scenario planning.  The message that Brett brought to the Governmental Affairs Conference (GAC) is one that can benefit the industry.   

If you didn’t have a chance to hear Brett speak at the GAC in early March, we thought you would appreciate the opportunity to read an article published in CUtoday that summarizes his message.  Click here to read the full article.   

We know that Brett, like us, has been passionate about scenario planning for years.  We are equally as excited to see financial scenario planning gain traction across the industry, making its way into more and more strategic discussions.  In addition to the summary of Brett’s message, we gathered a few more resources to help decision-makers approach scenario planning and alternate paths. 

Consider starting with the exploratory scenarios that the Fed released last month.  These scenarios are designed to test the resiliency of the banking industry and take a different path than their typical supervisory stress test for large institutions.  The exploratory scenarios can be found here. 

In response to the Fed’s Exploratory Analysis, we recorded a new episode of c. myers live, where we discuss our takeaways from this report, and how it can help any institution prepare for the future, regardless of their size.  Click here to listen.  

You might also find this blog helpful, where we dive into the 4 main components of scenario planning and its importance, as decision-makers plan for a future they cannot predict.  Scenario planning should cover a wide range of environments and combinations of events to understand potential challenges and opportunities.  We agree with Brett, “it’s never just one thing,” and until we perfect our ability to see the future, we will continue encouraging the industry to proactively embrace scenario planning.   

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A New Kind of Balancing: Navigating the High Wire Act as Balance Sheets Adjust to Higher Rates

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7 minute read – Great news!  The elevated rate environment provides financial institutions (FI’s) an opportunity to take advantage by putting new assets on their books at higher rates as existing lower yielding assets roll off.  By itself, this helps improve their net interest margin (NIM).  However, the other side of the balance sheet is also adjusting to higher rates – hence the balancing act.  These 6 key questions can help financial institutions navigate these waters and better position themselves for financial success as well as prepare for regulatory examinations.

How long is your balance sheet – Do you know how much of your existing assets are expected to run off in the next few years?

This is a question that all FI’s should know the answer to and one that regulators expect FI’s to understand.  The table below shows empirical balance sheet data from a wide range of our ALM clients, and it indicates the average amount of existing assets that will be on their books a year from now is about 70%.  But some have approximately 84%, while others have as low as 41% of their existing assets remaining after 1 year.  This creates a vastly different picture for those financial institutions when it comes to opportunities to add new assets at today’s higher rates.  For example, if your organization has a longer balance sheet, it suggests that you may need to be more selective when you are considering new assets to add.

The disparity in the different lengths of balance sheets continues with the average after 2 years at 52% of existing assets remaining.  The longer balance sheets have 71% and the shorter balance sheets have 30% of the existing assets remaining on the books after 2 years.  If rates were to fall, the assets added at today’s higher rates could provide better returns compared to future potential assets, but a longer balance sheet limits the opportunities to add those higher-yielding assets.

 

What specific assets are you targeting?

When considering what assets your financial institution is targeting as possible additions, the length of your balance sheet should be factored into the decision-making process.  FI’s with longer balance sheets should generally be more selective in terms of the types of assets they consider because they have fewer dollars rolling off their books to redeploy in the form of new business.  It is critical to evaluate the profitability profile of new loans relative to expected future COF and credit losses as well as any related operating expenses.  This is not the time to take the approach that any loan is a good loan to add, particularly if your liquidity position is tight.

What is your current and expected liquidity position?  Do you have enough liquidity capacity remaining for unexpected circumstances? 

The previously large amounts of excess liquidity in the industry have mostly dried up.  It is important to not only know your existing liquidity position, but also to clearly understand your cash flow low points for the next 12 months.  Beyond simply identifying the liquidity low points, you then need to ensure your liquidity is adequate to cover your stressed event scenarios.  This may require you to take actions to bridge liquidity deficits with a clear understanding of what sources you would utilize in order of priority.  If your FI has already significantly reduced its overall level of liquid assets, what is your plan to build liquidity levels back up?  Consider drawdowns on other sources of liquidity such as borrowing lines and whether those borrowing lines are adequate to cover your stressed scenarios.  Taking the time now to ensure that your borrowing line collateral is as up to date as it can be is helpful to maximize the size of the available line.  It is better to take that action in advance than to try to do so when your liquidity starts to get stressed.  It is prudent to maintain a deep reserve of potential liquidity sources to deal with cash flow stress events.

How are your funding sources and the related costs changing?

Most financial institutions are seeing declines in non-maturity deposits (NMD’s) as consumers seek higher returns in response to this elevated rate environment.  NMD’s are declining at FI’s at a pace of over 10% annually according to industry data.  Funding sources are shifting primarily towards certificates of deposit (CD’s) and borrowings.  Typically, borrowings and CD’s are a much higher costing source of funds, thus pushing COF higher for FI’s.

What is your projected COF for the next year or more and how much longer is upward pressure on COF expected? 

As FI’s finalize forecasts and budgets for the coming year and beyond, expectations are for COF to continue to rise for some time.  Now as more economists and the Fed are starting to project the potential for market rates to begin to move back downward, some FI’s envision their COF moving down in lockstep with market rate movements.  However, there are reasons why financial institutions should anticipate continued upward pressure on their cost of funds, even after market rates start to recede, as they strive to strike a balance between competition and profitability.  When rates fall, competitive pressure could keep deposit rates high, contributing to a sustained elevated COF.  In addition, longer-term CDs and borrowings may remain on the books for years, in some cases.  Furthermore, history indicates that high consumer demand for CDs may accelerate after rates begin to fall, much like a final mortgage refinancing wave after mortgage rates begin to rise.

Recap and Final Thoughts

The effective management of assets and liabilities is paramount for FI’s in an environment with elevated rates which brings a series of challenges and opportunities.  This should prompt a strategic assessment of your balance sheet and demands an agile approach to navigate the turbulent waters.  To plot a course through this complex landscape effectively, FI’s must employ an approach that balances the need to remain competitive with the imperative of maintaining profitability.  This path can look very different at each FI depending on answers to the questions for consideration such as: balance sheet length, liquidity position, COF upward pressure, etc.  Adaptability, foresight, and having an in-depth understanding of answers to the questions above can help FIs thrive in a challenging environment and position themselves for success.

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Why a Financial Roadmap is Important

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4 minute read – More and more decision–makers are understanding how important it is to have a financial roadmap – similar to their technology roadmaps – that links to strategy.  After receiving great feedback on this topic, we have decided to remind leaders how important it can be to use roadmaps as a way to communicate longer-term financial outcomes to stakeholders and help align expectations in 2024 and beyond. 

To help connect the strategy to the longer-term financial future, a strategic financial plan should look out 3-5 years.  The intent is not to be precise, but to provide a rough sketch that builds on the current structure and trends, and layers on the financial consequences and timing of the strategy.  

The longer-term view is important because the budget usually captures only one year – often too short of a time frame to show the full costs and benefits.  In addition, layering on all major efforts to see how they work together financially, in combination over time, helps create a more complete financial picture.   

As you create your strategic financial plan, be sure to incorporate some key concepts:  

  • Initially, create a path where current trends continue.  This paints a picture of where the institution is heading in the longer term.  Don’t get too detailed – this isn’t a budget.
  • Then layer on your major initiatives with their timing and test a variety of outcomes, such as incurring the expenses and getting the benefit you expect and, alternatively, less benefit than you expect.  You may want your team to generate ideas for new initiatives, or ideas to increase non-interest income, or reduce expenses.  Include what-ifs that throw some stressors at the plan like lower (or higher) than expected loan growth, lower deposit growth, and higher provision for loan loss expense.
  • For some initiatives, it may be hard to predict the benefits.  Strategic financial planning can help the team look at those initiatives from different points of view.  For example, a new commercial lending program will likely not be taken on without understanding the costs, but it may be difficult to predict how many new commercial loans will result over the next few years.  Creating a couple of different views of new commercial lending volumes can help clarify how much business must be generated for the program to be worth it.  This helps the team understand how important the new loan volumes are and can also help with setting goals.
  • Since this is a business model-focused exercise designed to bring the team’s thoughts together, the entire leadership team should participate.  The finance department will provide the supporting modeling, but this is not a finance-department-only creation.  The conversations are one of the main benefits because they result in broader understanding as the plan reveals how various initiatives function as part of the whole and moves the spotlight from individual departments to the overall direction of the organization.

Many executive teams now consider strategic financial planning to be a part of their broader strategic planning process.  One organization we work with was happily surprised when, after creating their first financial roadmap, the Board said they were very impressed with the depth of thinking that went into it and liked how it completed the strategic picture for them.  The Board’s reaction was a happy surprise since the main reason they added a financial roadmap was for examiners, because they are heavily investing in infrastructure for the future and wanted to emphasize the longer-term view (the examiners were impressed, too). 

quoteAnother institution, that was wavering on whether to take on a particular initiative, said that the financial roadmap provided the view they needed to make a confident decision.  Even the leader who was pushing for the initiative, which they decided not to do, was on board with the decision.  One leader commented that the consensus they reached was a great example of the team leaving their silos.  A different leader, who does not claim finance as a strength, said that the roadmap helped him understand how critical the loan growth goal was for the financial success of the plan.  He found this knowledge to be very motivating. 

As soon as we begin to look beyond today, fuzziness becomes inherent, and that’s okay.  Creating a financial roadmap, or strategic financial plan, is a proven way to gain clarity and a deeper understanding of the organization’s longer-term financial future. 

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Pricing Considerations in a Tight Liquidity Environment

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6 minute read – For many C-Suites, discussions around loan and deposit pricing, and funding strategies are now beyond the short-term band-aid.

Leadership teams are expanding their views to grapple with the inevitable – What may the future hold when our shorter-term funding band-aids peel off?

There is no one answer to this question.  That is why there needs to be diligent focus on thinking through options and modeling potential financial results.  This process enables decision-makers to see, in advance, a range of financial outcomes related to the strategic options they are considering.

As leadership teams work through discussions and financial modeling they typically identify and prioritize their options and the actions they will take.  This advanced thinking helps them better articulate what success looks like as they implement their prioritized options.  If forecasted results don’t come to fruition in the desired timeframe, they are prepared with more options to put into play.

As you do your financial modeling:

  • Don’t forget as you simulate potential financial outcomes, to test rates staying about the same, rates going down, and rates going up.  This helps decision-makers see how various options can help or hurt depending on rate movements.
  • It can be helpful to remind decision-makers and Boards that there are very few high-impact decisions that help regardless of what rates do.
  • Keep in mind that even if rates stay the same, it is highly likely that your Cost of Funds will increase.

Many financial institutions have experienced 10% or more decrease in savings accounts.  To make the math easy, let’s assume that the savings accounts had an average rate of 1% and the money moved to CDs paying 5%.  All else equal, this shift in deposits would hurt the current ROA by 40 basis points.

The cost of liquidity has increased dramatically, as evidenced by the chart below that shows the historical Cost of Funds for all U.S. Banks and Credit Unions compared to the 3-Month U.S.  Treasury rates dating back to the last time short term rates hit 5% levels.

Note how Cost of Funds continued to rise after short-term market rates stabilized and began to decline. This may require organizations to consider a variety of changes in lending and deposit pricing as well as investment strategy to support liquidity and cash on hand needs.  In addition, when evaluating your deposit pricing strategy, it is important to consider the potential impact on your relevancy with customers in the short- and long-term.  Liquidity challenges are expected to continue for some time, so it is essential to continue to sharpen your skills in this area.

 

The following questions are designed to help stimulate the discussions.  As always, more questions will be raised as the strategic discussions progress.  Ultimately, there is not one solution or one right answer.

Questions to Consider – Not in priority order as this is a non-linear discussion:

  1. How does your organization define short-, intermediate-, and longer-term?
  • It is important for everyone to base their recommendations and timing of action using the same definitions.
  1. What are your strategic lending objectives and desired positioning in your competitive space?
  • Consider how the answers to this question can result in competing priorities over your defined intermediate- and longer-term horizon.
  • Make sure to agree, and if so how, to factor in potential increasing credit risk and the implications for loan volumes.
  • Have frequent discussions regarding how operational costs to originate loans (including dealer fees) impact loan pricing, and profitability.
  • Once you understand the net yield on loans, consider comparing that to available alternative investments and/or loan pool purchases.  This can help decision-makers better understand the giveback to your customers should your organization’s loan pricing strategy result in lower net yields.
  • If your plan includes selling some of your loan production, be sure to help those involved in pricing decisions to have a clear understanding of the pricing levels necessary to achieve your desired return on sale.
  1. How much and what type of funding do you need to support your lending and growth objectives?
  2. How does your deposit strategy impact your non-interest income, fee income, customer stickiness, and customer growth?
  • This is also a good time to discuss and reconfirm your target markets and your value proposition for them.
  • If your funding needs are lower and your organization can allow some deposits to migrate to other financial institutions’ make sure to have healthy discussions around your level of concern about the potential longer-term implications if those depositors were to never return.
  1. For your strategic options around deposit and funding strategies, how sustainable and affordable are each of the options?  What external forces could severely threaten sustainability and/or affordability?
  • For example, what could be the impact on your Cost of Funds if many of your competitors need liquidity such that their pricing becomes irrational?
  1. What role does your investment portfolio play?
  • Discuss what portion should be allocated to support current and future liquidity needs versus investment return.
  • It is important to view this in light of lending and deposit objectives as well as emerging external forces.

Many of our clients have found that these types of questions, considerations, and discussions, supported by financial modeling, accelerate their leadership teams’ and Boards’ appreciation for the complexity and interdependence of pricing decisions.

The result is a much more cohesive and strategic approach to pricing decisions versus having to make quick reactive decisions, without having time to absorb the potential intermediate- and longer-term implications.

Events

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America’s Credit Unions CFO Summit

Loan Pricing Strategies for Optimal Performance

Effective loan pricing strategy is crucial for maintaining competitiveness and profitability across a range of possible futures.  Improvement of leadership to be agile in a dynamic financial landscape, which includes a material rate environment, can provide a key edge.  During this session, we will explore different pricing models, optimal pricing strategies, and new tools for developing and refining loan pricing strategies.  We will also touch on different factors including market conditions, risk profile, member needs, and alignment with your overall institutional strategy.

C. myers will be speaking on Wednesday, September 18 at 9:30 am ET.

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Cultivating Leadership Presence

This course is designed to accelerate an individual’s development with the primary focus on leadership presence and communication.  The secondary emphasis includes a combination of advancing critical thinking and financial acumen, using real-world situations.   

Why:

Taking your supporting talent to the next level by helping them become more solution-driven builds bench strength.  As they develop their abilities, it frees up time for executives to think and act strategically more often. 

The focus of this experiential learning includes helping participants:  

  • Explore, using awareness accelerating techniques, how they are intentionally or unintentionally showing up to others and develop practices that can help make desired adjustments 
  • Strengthen the ability to critically think through opportunities and solutions by asking and seeking answers to thought-provoking questions 
  • Advance their willingness and ability to have uncomfortable conversations with peers and other team members in a timely manner 
  • Learn to communicate more effectively and across departments to better engage peers and team members in order for the organization to be operationally successful 

The Cultivating Leadership Presence course will consist of the following:  

  • 3 days of experiential learning – either onsite at c. myers’ offices in Phoenix or virtually  
  • A pre-engagement telephone call with the participant and the participant’s executive sponsor
  • Identified next steps for the participant to share with their Executive Sponsor 

Learning will be in a group setting working with a limited number of participants.  Experiential learning allows the participants to step into real-life situations, work through the challenges, and reflect on their learnings. 

Some of the experiential learning exercises include: 

  • Role-playing a variety of real-world scenarios 
  • Critical thinking challenges 
  • Think-fast exercises

Throughout the event, participants will work to create an initial development plan that helps them build on their learnings and desired growth. 

Fee: $3,500 for each participant. 

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Cultivating Financial Acumen

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This course is designed to help talent gain a clearer understanding of key financial metrics, how they are interrelated, and the types of decisions that impact them.  Participants will also explore primary economic engines that often drive the business model.  The secondary emphasis includes elevating leadership presence and communication.

Why:

Just about every decision has a financial impact.  As the external forces continue to come at a relentless speed, executives are realizing that they need to lean more on their supporting talent to make more sound decisions, faster, so that executive leadership can focus on moving their business forward, strategically.  

This course is highly interactive.  We use real-life situations and experiential learning to help participants accelerate their understanding.  This includes:  

  • How to better link decision-information from various business lines and delivery channels to have a more complete view as options are being considered and decisions are being made  
  • Great questions to ask and answer when reviewing key metrics  
  • The power of asking and answering “What-if…?”  

The Cultivating Financial Acumen course will consist of the following:  

  • 3 days of experiential learning – either onsite at c. myers’ offices in Phoenix or virtually  
  • Participation is limited to facilitate individualized learning opportunities 
  • Small groups to allow participants to step into real-life situations, work through the challenges and create opportunities, and reflect on their learnings.  

Fee: $3,500 for each participant. 

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Cultivating Financial Acumen

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This course is designed to help talent gain a clearer understanding of key financial metrics, how they are interrelated, and the types of decisions that impact them.  Participants will also explore primary economic engines that often drive the business model.  The secondary emphasis includes elevating leadership presence and communication.

Why:

Just about every decision has a financial impact.  As the external forces continue to come at a relentless speed, executives are realizing that they need to lean more on their supporting talent to make more sound decisions, faster, so that executive leadership can focus on moving their business forward, strategically.  

This course is highly interactive.  We use real-life situations and experiential learning to help participants accelerate their understanding.  This includes:  

  • How to better link decision-information from various business lines and delivery channels to have a more complete view as options are being considered and decisions are being made  
  • Great questions to ask and answer when reviewing key metrics  
  • The power of asking and answering “What-if…?”  

The Cultivating Financial Acumen course will consist of the following:  

  • 3 days of experiential learning – either onsite at c. myers’ offices in Phoenix or virtually  
  • Participation is limited to facilitate individualized learning opportunities 
  • Small groups to allow participants to step into real-life situations, work through the challenges and create opportunities, and reflect on their learnings.  

Fee: $3,500 for each participant. 

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Cultivating Leadership Presence

This course is designed to accelerate an individual’s development with the primary focus on leadership presence and communication.  The secondary emphasis includes a combination of advancing critical thinking and financial acumen, using real-world situations.   

Why:

Taking your supporting talent to the next level by helping them become more solution-driven builds bench strength.  As they develop their abilities, it frees up time for executives to think and act strategically more often. 

The focus of this experiential learning includes helping participants:  

  • Explore, using awareness accelerating techniques, how they are intentionally or unintentionally showing up to others and develop practices that can help make desired adjustments 
  • Strengthen the ability to critically think through opportunities and solutions by asking and seeking answers to thought-provoking questions 
  • Advance their willingness and ability to have uncomfortable conversations with peers and other team members in a timely manner 
  • Learn to communicate more effectively and across departments to better engage peers and team members in order for the organization to be operationally successful 

The Cultivating Leadership Presence course will consist of the following:  

  • 3 days of experiential learning – either onsite at c. myers’ offices in Phoenix or virtually  
  • A pre-engagement telephone call with the participant and the participant’s executive sponsor
  • Identified next steps for the participant to share with their Executive Sponsor 

Learning will be in a group setting working with a limited number of participants.  Experiential learning allows the participants to step into real-life situations, work through the challenges, and reflect on their learnings. 

Some of the experiential learning exercises include: 

  • Role-playing a variety of real-world scenarios 
  • Critical thinking challenges 
  • Think-fast exercises

Throughout the event, participants will work to create an initial development plan that helps them build on their learnings and desired growth. 

Fee: $3,500 for each participant.