Q&A: Remittance Outsourcing Expert Provides Advice on Vendor Selection
By: Claudia Logan, On: Vendor Selection
Amid a changing competitive payments landscape for all types of billers, a few key questions have emerged. One, should companies build and maintain remittance solutions in-house, or outsource this business function to external providers? And, two, what is the best way to choose an outsourcing partner?
Identifying the answer to these and other questions has become a strategic imperative for all kinds of corporations including banks and other financial institutions which can either lead toward long-term success or see them fall to nimble competitors.
We wanted to hear what a remittance outsourcing expert thinks about this, so we interviewed Mike Lindsey, SVP-Opportunity Development and Implementation, 3 Point Alliance, Inc., to get his views on how companies can approach vendor selection.
CL: First, do you think it’s accurate to state that billers have a strategic imperative – including banks and FIs – to consider outsourcing their payment operations in general and more specifically remittances?
ML: Billers are under increasing pressure to cut in-house processing costs due to steeply declining paper volumes. Developing a successful strategy for first – reviewing the entire payment process from a big picture standpoint — to then migrating the process to a provider is critical to successful outsourcing.
CL: What are some of the competitive threats that billers face? What industry sectors are experiencing the most competition that points to a more urgent need to outsource?
ML: Well, billers and FIs are notably seeking alternatives to in-house processing via private label alternatives because they are increasingly aware that they must offer a robust customer-centric, multi-payment channel approach to servicing their customers in order to survive rising competition from emerging “alternative” payment providers such as PayPal, ApplePay, and others. Any industry vertical that deals directly with consumers is experiencing declining volumes, emerging alternative payment channels and increasing regulatory and compliance overhead.
Outsourcing remittances enables companies to focus on core competencies but, as importantly, it helps them maintain margins and customer loyalty.
CL: What other industries are under pressure?
ML: Healthcare and consumer finance or any high-volume biller such as cable companies. Threats vary slightly by industry. Healthcare is under pressure to comply with the Affordable Care Act and HIPAA regulations. The entire medical ecosystem is being impacted by stringent reporting requirements – electronic records keeping, for instance — along with new sets of requirements for payments routing, payment remitting, posting, archiving. To avoid non-compliance fees, companies are partnering with third-party providers.
CL: What factors are impacting consumer finance?
ML: The Consumer Finance Protection Bureau or CFBP is more actively regulating payments processing and payments practices in general in the aftermath of the ’08 banking crisis. Consumer finance is a fragmented sector because there is such a wide variety of payment methods in play.
In the property industry, for example, landlords can manage very small dwellings to very large properties with thousands of units. Landlords determine what payment methods best align with their internal systems. They are under some pressure from the consumer as well to offer multiple payment options and may or may not be flexible enough to meet these demands. Monthly mortgage payments made via banks, and mortgage entities face similar fragmentation issues.
Outsourcing to a trusted provider not only can have the effect of reducing cost-per-item and offering multi-channel delivery capability, but companies can reduce non-compliance risk by leveraging provider compliance expertise. Plus, payments processing vendors by definition are versed in emerging payments alternatives – add virtual currency to the mix and imagine what this conversation might be like five years from now.
CL: So there is a lot of disruption taking place. What has to happen when a biller finally decides to outsource? Can you provide an overview of the process?
ML: It’s a nine or ten-step process that is fairly simple on the face of it. The entire project – from engagement to full payment migration and implementation – can be lengthy depending on partner commitment. Both parties – biller and vendor – must embrace the process holistically to succeed. That is – they need to commit to achieving macro project goals as well as executing the project on a granular level.
CL: What are the steps? What happens first?
ML: The biller’s ‘stakeholders’ would be identified in the initial phase. A cross-disciplinary team would be established from many different areas of the company depending on the nature and scope of the project. A team should be as inclusive as possible and drawn from human resources, information technology, operations, procurement, legal as well as sales and marketing and decision makers from finance or treasury.
Another key aspect of the process is to ensure effective project communication – both internally but also with any potential vendor. This effort might be assigned to a particular person on the project team.
There needs to be an executive sponsor included in the dialog from the beginning to ensure that the project is in synch with corporate level strategic and financial criteria.
The initial function of the project team is to develop a description of the project, a rough draft of the business case i.e., the objective of the project, and a cost-benefit analysis that would factor in tangible and intangible benefits.
CL: Before we get to the other steps, how long does an initial review phase typically last? Is this where projects get derailed?
ML: The project usually matriculates once the business case is fleshed out. Outsourcing can address an urgent short-term issue – putting out a fire; or, it can be a long-term engagement to develop a comprehensive strategy involving requirements for facility leasing or financing that might stretch over a 10-year period.
CL: Okay, let’s say – the project survives the initial review stage and is greenlighted? What comes next?
ML: Steps remaining are: Define the specific business need and project requirements. Determine which ‘Request For’ – or RFx documents – are needed to obtain quotes, information and proposals from potential vendors. Decide selection criteria and weighting for the RFx process. Then, distribute RPQ, RFI or the RFP to the vendor. Evaluate/score vendor responses. And, perform reference checks and due diligence on each vendor under consideration.
Once these steps are completed, the committee would determine a short list of potential vendors to work with, conduct vetting and due diligence and then enter contract negotiation with one or more vendors.
Each step has many sub-steps that are critical to the process that culminates in a contract.
CL: What are some examples of business needs and business requirements?
ML: This step involves taking the project description or the business case premise and breaking it down into work phases – each with specific detailed requirements for roll-out. These details are defined internally and codified in the RFx documents.
For example, Company A has in-house legacy payments processing systems and processes that must be upgraded due to compliance and maintenance cost issues. The estimated capital expense of a hardware and software upgrade is such that the Company decides to investigate outsourcing the process. The internal project team, normally enhanced by a business analyst would drill down to the detailed functionality specifications and translate these requirements to prepare for the RFx process.
CL: You mentioned ‘scoring’ vendors. How does that work?
ML: Each component of the project is scored. A scale of 1 to 5 could be used with 1 equaling the worst, and 5 equaling the best.
Selection criteria examples in the RFx might be: Do you have a processing location in a certain geographic region? What services do you offer, i.e. retail, wholesale, or wholetail lockbox processing?
I’ve seen upwards of 700-800 hundred questions on requirements or selection criteria in an RFx.
CL: This is where weighting comes in?
ML: Yes. Weighting determines the relative importance of each of the selection criteria or requirements we talked about. If a biller determines it is crucial that the vendor has a facility in a geographic area that matches their footprint; that would be scored high. A medium weight would be given to a vendor with a facility say in the northeast where there is a less critical need for that particular biller, but it would still be factored in.
Billers also serve different constituents. Some companies process mostly consumer bills and others are strictly B2B or corporates billing corporates. Vendors’ expertise should, of course, be a good fit with billers’ needs.
If a vendor does not offer retail lockbox to a biller with high-volume consumer billing, they would be eliminated immediately. This is called ‘killer criteria’ and that’s one method of arriving at a short list.
Weighting is done by subject matter experts from each functional area involved.
CL: Now it’s time to distribute RFQs, RFIs or an RFP. Can you share some best practices?
ML: First, each vendor should agree to participate in a mutual non-disclosure agreement.
Second, before entering the negotiation process, the company needs to keep aligning vendor criteria with the business case (including any financial component). If business needs change, amend the business case. Compare short-list vendor solutions against the original business case and project description to make sure that the original premise is still valid.
Third, summarize all proposed vendor solutions and financial projections for the executive sponsor; ensure internal stakeholders are still on board.
Overall best practice in vendor selection – unless the company is very accomplished at managing an RFx process and has considerable expertise in the subject matter and the vendor market, it is a really good idea to engage a consultant to provide expertise in the subject matter and to prevent bias in the evaluation process.
CL: Who or what else is involved at this stage?
ML: The project team would have done some market research – as I mentioned sometimes consultants are hired — to determine prospective vendors. A project lead – often someone in procurement – would then query vendors in advance to assess their level of interest.
When the RFx is complete, it is distributed to these vendors along with background documents on the company, a description of the project, the timeline for the RFx, and other relevant instructions.
Today, most RFx documents are available via a Web-based, password-protected company portal which makes the process easier.
CL: Let’s talk more about killer criteria. How do companies arrive at a shortlist once the list of prospects is drawn up?
ML: Well, we use the 1-5 evaluation score for each criterion for each vendor response. Then we go a step further and multiply each score by its weighting. This adds up to the total vendor score.
The simplest way to a short list is to eliminate any vendors with fails on a “killer” criterion. Then, you eliminate vendors by total weighted scores – which is Weight times Criteria Score – that fall below a designated threshold.
The objective is to evaluate only further the top two or three vendors.
CL: Due diligence must be time-consuming as well.
ML: Performing reference checks and due diligence can be time-consuming but is an absolutely critical step in the process and should not be abbreviated, regardless of the urgency of the project.
CL: Talk about the differences and importance of reference checks and due diligence.
ML: A reference check can involve interviewing other companies that use the same service or product. If a bank is looking to outsource their remittance processing, they might investigate other banks that their prospective vendors are working with.
An in-person reference check is highly advantageous.
To add another best practice: ask for at least five references. Every BPO company has a couple of customers that are ‘friendly’ and will always give a positive reference.
However, guard against being steered toward any particular vendor. If the biller or FI knows of other companies using the vendor that are NOT given as a reference, check with them as well.
Due diligence, on the other hand, requires gathering vendor history, financials (last three years); knowledge of company ownership and any outstanding litigation or any negative news that might impact the partnership.
It’s good to get any information available on the potential vendors’ new products and services, revenue growth projections, and other relevant information impacting financial stability.
CL: Then the company makes their choice and proceeds to negotiate the contract for the engagement. Can you share this process?
ML: Correct. The negotiation phase comes with some complexity. There are sub-parts to a typical service agreement for outsourcing:
First, the parties lay out the Master Services Agreement with terms and conditions.
Schedules under the MSA include:
…a Statement of Work or SOW which is a description of services to be provided; it defines who does what, project timelines, and milestones;
…a Service Level Agreement or SLA which ties performance levels of services provided to pricing, bonuses, and even penalties; and
…Pricing. Line item pricing for processing plus other project costs defined in the contract is typical.
A best practice in the negotiation phase is to begin with the vendor’s standard contract and modify as needed.
Company MSAs can be used but normally must be modified substantially to fit an outsourcing scenario. Vendors understand how to tailor the MSA to the unique circumstance and to the services for delivery whereas company MSAs tend to be much less detailed and ultimately require significant modification.
CL: What is the timeline for the negotiating/contract phase?
ML: This stage varies from a period of several weeks to several months. Larger companies take longer because more stakeholders may be involved.
The bottom line is that the evaluation and selection process is complex and can be lengthy. But one cetainty is that the outcome of the process will be a direct reflection of the quality, expertise, commitment and effort that is put into it. There are no short cuts to successful outsourcing projects.
Mike Lindsey is responsible for opportunity development and implementation which includes the creation of custom payment processing solutions for all 3 Point Alliance clients.