The financial services industry relies heavily on best practices. These are implemented through normal day-to-day business operations, covering almost all areas within the lending and leasing lifecycle. However, when it comes to the software vendor evaluation and selection process, there is no consensus among financial institutions regarding best practices. For most firms, software vendor evaluation and selection is a time consuming, paper intensive and expensive endeavor. Many financial institutions never complete the process because of its complexity. Instead, they continue to maintain legacy systems already in place.

Through many years of experience, Linedata has identified important considerations missing from this process, which provide insight into why so many vendor evaluations and selections fail to meet stated objectives.

Creating the Charter

Creating a formal charter is a crucial first step that is often overlooked at the start of the project. The charter clearly defines the expected outcome, progress milestones and key roles and responsibilities of the parties involved. This does not have to be a lengthy document, but it forms the basis of the project and aligns team vision.

The charter should designate a project leader with decision-making authority and reliable team members. A team with a strong leader, who has the authority to make decisions, will ensure realistic expectations are set and project deadlines are met on time.

In our experience, more than 70% of the requests for proposal (RFP) received by vendors have timelines which are overly ambitious and are impossible to meet. The problem becomes compounded when the financial institution adopts these unrealistic expectations, giving the illusion that the process of vendor evaluation and selection is a simple exercise. The financial institution then understates the impact of the project to their organization, which becomes apparent in the evaluation process. You can see how this can be particularly damaging, given that any software purchase can be disruptive to an organization, especially if it prompts a change in business processes.

Gathering Requirements

The next most important aspect of the process is gathering requirements within the financial institution. Collection methodology, requirement standards and limits on requirements are common issues that an organization may encounter during this phase. Dividing the RFP process among several business units or credit disciplines with the goal of having their requirements met by a software vendor and solution complicates the process. The division often causes requirements to overlap, since each team may be looking for the same overarching solution to an issue which is organizational and not specific to the particular business unit or credit discipline. Often, the result is a duplication of requirements, with the vendor often referencing a previous requirement. Referral to a prior response adds no value to the RFP.

An ideal solution to this challenge is linking standards to the requirement itself. Each requirement should be clearly defined and unique. Organizations have a tendency to list multiple requirements in a single ask. This leads to an exhaustive vendor response and makes a scoring system (if used) ineffective, since the vendor can only choose a single answer (Yes, No, 1, 2, 3 etc.), generalizing the solutions fit to multiple requirements.

Less Can Be More

Always remember that more isn’t necessarily better. Focus on what is important to your organization and what you want a software solution to accomplish. An RFP with several hundred requirements may appear to be comprehensive but in reality, this only slows the evaluation and selection process. You will learn much more about the vendor’s proposed solution in the next stage of the process when you ask for a configured demonstration of the product utilizing your organization’s real world scenarios.

Finally, when your organization is ready to make a decision, make sure your process includes a comprehensive vendor evaluation. The following are some key questions to use as a guide when going through the vendor evaluation process.

1. While the vendor may appear to have the ideal solution, does this vendor align with your expectations regarding financial stability, keeping pace with the market and client satisfaction?

After all, you are forming a partnership with this vendor, most likely for an extended timeline. Evaluate the vendor’s financial stability the same way you would treat an applicant for credit. Gather financial information and review performance trends.

2. Is the budget for the proposed solution greater than or equal to peers?

Ask the vendor about their approach to R&D. This is important and more than fair. This can be a signal to help you determine whether or not the vendor solution is keeping up with market demands.

Following up on this question, ask the vendor what significant enhancements have been made to the solution over the last two years, and be sure to inquire about the proposed solutions roadmap for the next two years. This not only provides the organization with a history of product enhancements but also confirms continued investment in the solution going forward.

3. Ask for client references.

Finally, always ask a vendor for client references and an opportunity to speak with them about the proposed solution. This is valuable from both a solution and client relationship standpoint. Be sure to ask questions about solution use, user perception and the overall relationship the reference has with the vendor. In the end, the vendor selection is just as important as the solution it provides.

An effective vendor evaluation and selection process starts with a defined plan that properly sets expectations, focusing on what is important to your organization and what it is attempting to achieve, while paying particular attention to realistic milestones which are necessary to keep the project on schedule. It is critical to create requirements that are not duplicated or have multiple asks within a single requirement, which would invalidate a scoring system (if one is used). A thorough evaluation of RFPs once they are received involves asking the right questions to paint a clear picture of the vendors behind the solutions and how they fit your organization’s mission and philosophy. Taking these steps as part of your vendor evaluation and selection process will increase your organization’s probability of success.