How to efficiently manage third party costs

Vendor management is not usually seen as the most technologically dynamic and exciting area of corporate operations. However, vendor management is one area where innovative data technology has the potential to achieve dramatic improvements in transparency, costs and efficiency.

In times of economic growth, vendor management can be the core of efficient and effective cost management, however, it is often not given the priority and focus resulting in inaccurate and incomplete records. 

Financial organisations will typically have a large number of third parties that provide services. These services usually amount to a significant amount of their costs and are often provided under contractual agreements which are subject to complex usage based charging. Reconciling purchase orders and invoices against these agreements is complex and time-consuming. The challenge is usually compounded by global agreements where services are supplied to numerous different entities in different countries. Contracts are often annual with automatic renewal and price increases as well as specific termination dates and notice periods.

It is clear that managing these agreements and invoicing to ensure services are provided cost-effectively is challenging in terms of resource and expertise. And for many organisations, these suppliers arrangements will have been in place through many evolutions of supplier mergers and acquisitions, (M&A) as well as through iterations of M&A for the consuming firms. This results in numerous overlapping contractual agreements with different terms and periods.

Many organisations will find themselves with occasional audits from Information Technology companies as well as exchanges and data providers. This places significant pressure on the task of tracking usage of services throughout the organisation.

Maintaining a global contract database with complete sets of terms and conditions linked to purchase orders and invoices is the foundation to being able to manage these suppliers and costs.

Combining innovative technology, supplier expertise and good governance can improve the data available to negotiate and agree improved terms and conditions as well as rationalise and reduce services and costs.

Natural Language Processing (NLP) technology allows contracts, purchase orders and invoices to be automatically read and the data used to be able to populate a well structured database of suppliers and agreements. Data science can then be used to reconcile the numerous terms used to refer to entities, jurisdictions and supplies as well as grouping related suppliers and services. This provides the fundamental data for teams with expertise in the specific services to rationalise and manage costs. In the case of market data provided to global financial services, there maybe thousands of contracts with exchanges, index providers and specialist data providers, with the data delivered via multiple market data providers. The use of NLP and Data Science combined with subject matter expertise can unlock the potential for significant rationalisation and cost efficiency.

The use of technology has the potential to take vendor management  into a new era of  of transparency, control and efficiency transforming the cost agility of the business.