Case Studies

Challenger bank: When to engage your suppliers

You’ve decided to start a bank, you’ve built the unique offering, your C-suite is on board, and you’ve delivered your initial submission to the Bank of England. The next things to consider are: What’s going to be done in-house and what’s going to be outsourced? When do you engage your suppliers? While systems providers are the focus of many outsourcing efforts, what about your customer services, back office, bank infrastructure and risk controls and audit function? All are candidates for outsourcing.

Retonomy has worked with a number of fintechs and challenger banks, and in each case, the engagement of key suppliers has been critical to the success: engage too soon, you start to burn through cash, but wait too long to save money, and you stand a chance of being delayed in launching the bank. The Bank of England likes to see evidence not just of the plans of engagement but also of the system architecture and credible progress in building the capability.

How to manage your suppliers

Outsourcing requires careful management, and there are two main options: manage internally or use a service integrator? This is a question of scale and a service integrator can work well in large organisations. With multiple suppliers delivering into the same service or product, it is sometimes preferable to have one “throat to choke” by having one supplier lead the delivery. In this case, being removed from the supplier management “coal face” must be a strategic decision rather than a default position. However, in smaller organisations and start-ups, this requires a leap of faith by the founders in the service integrator and can often be more costly than having a dedicated resource internally.

“Planning engagement with suppliers is a challenge for new entrant banks. The length of the application process for a ‘banking license’ can vary, but is almost always longer than the applicant hoped. For a period of time they will need to carry the full operational cost of a UK financial institution without permission to trade. For an entity with limited resources, this expense and the delay in revenues can derail the project.

To try to mitigate this cost, the management team might be tempted to short-cut vendor selection and commercial negotiations and to appoint suppliers at the last possible moment. This lack of diligence is also problematic as it can introduce risk and reduce the quality of the delivery. It may also impact the new entrant bank’s application for a license as they will be unable to evidence effective outsourcing systems and controls to the regulator.

Timing all resourcing decisions, whether recruitment or supplier engagement can make a substantial difference to a new entrant banks chances of success.”
Jof Walters, CEO: Million

Danger to cash flow

Challenger banks suffer from the same affliction as most startups: investment. In banking, investors are reluctant to put cash in too early until they see evidence of the bank spinning up. But until the investment comes in, the bank runs on whatever money (usually the founders’) is available. Of course, this concerns operating cash… the capital needed to support the banking operation is another matter!

This is particularly the case with some of the challengers who have built their offering on technology and whose first round investors tend to be from the tech arena. These investors are used to gaining a return from initial investment, but quickly find that it’s not enough to build the infrastructure needed and nowhere near the capital requirements.

Building a bank is not a cheap business, to date, Tandem has raised more than £110m and Starling more than £64m, with a further £80m needed. Getting the financing wrong can have a considerable impact on the financial health of the bank: Metro recently miscalculated its capital requirements causing a drop of more than 40% in the share price.

Danger to timelines

Getting a banking licence takes longer than expected. Currently it’s taking approximately two years from acceptance of initial submission. Although the process is a defined year from application to decision, we see delays in both the application being accepted initially and also at the decision stage. Applicants are willing to let the twelve month time limit lapse rather than retract their application or be declined. Starting to pay your suppliers too early endangers the viability of the new venture; too late and it could extend the time to granting the licence. And until this point the bank doesn’t make money: it cannot take deposits and cannot start trading.

Without experience in managing suppliers there is also the risk of misunderstanding supplier delivery timescales. Not only do teams often fail to include enough contingency for slippage in the delivery but they also fail to understand how long it takes a supplier to recruit resources, stand up a project team, and set up programme governance.

How to resolve the problem

  • Decide how you’re going to outsource and to who by formulating your Sourcing Strategy and conducting supplier selections.
  • Take a staged approach: work out which has the longest lead time and engage these suppliers first. And build in contingency!
  • If you are going to use a service integrator model, decide which supplier is best placed.
  • In your negotiation, make sure you have sufficient protection, especially in the situation of a decline of licence. It has been known recently for the application be turned down at a very late stage or delayed indefinitely. In this situation, having the ability to reduce the services or cancel the contract with minimum penalties is advisable.
  • Give yourself longer to engage your suppliers than you initially estimate: the engagement and contracting process can become protracted.

Starting a bank is an exciting proposition, and the current dissatisfaction with the high street banks makes it an appealing challenge, but takes longer and costs more than most expect. Making the right choices in sourcing and engaging the right model at the right time can increase the chance of success.

For more information about how outsourcing to Retonomy can help your busines, get in touch or give us a call on +44 (0) 1438300200.

Restructuring a manufacturing supply line

The takeover of a traditional UK based electrical engineering firm by a global defense contractor, meant a supply chain restructure. Retonomy was brought in, initially, to manage this process. It was then asked to consult on a separate internal programme.

In May 2014, the aerospace and defence giant plc paid almost £1bn to takeover a manufacturer of wireless communications testing equipment.

After a successful pitch to the operations director, Retonomy was asked to apply its knowledge and experience of outsource management to restructure the UK manufacturers supply chain.

Rationalise and consolidate

Following the takeover our client was in a position to rationalise. The firm needed to move on much of its existing component manufacture supply chain and, where appropriate, bring in new suppliers.

Our client’s new parent company already had a range of existing contractors. In the first instance, Retonomy was tasked with analysing existing supply contracts to ensure they were fit for purpose.

As the contract analysis was underway, it was also vital for our client to understand the requirements of the firm’s future product order and likely costs. Retonomy therefore ran a parallel process to understand these elements and forecast likely demand and process costs and management issues that were likely to arise as a result.

Once the analytical elements of the project were complete, Retonomy took on the key change management role of establishing supplier exit scenarios, supporting negotiations on extraction from existing contracts, and overseeing the bringing on-board of new suppliers.

Additional oversight

Because of its unique position within our client, and its experience of managing complex outsourcing projects, Retonomy was asked to expand its role from solely managing change in the supply chain to also help bring additional oversight to a project where teams had been brought together through the buyout.

The project, which was at a critical phase, was spread across four sites in three countries – with outsourcing partners also across three territories.

Fostering closer collaboration between the separate elements was key. Retonomy brought the various players together into a single team by establishing a set of common goals, establishing daily and weekly meetings, and creating a process for clear communication.

In addition to establishing new ways of working, and providing accurate management information on the project, Retonomy interceded on the problem management process to ensure the overall aims and ambitions of the project were maintained.

Creating a challenger bank

A leading high street bank needed to set-up a challenger bank. Retonomy was brought in to establish critical supplier functions and consult internally.

The financial crisis had a profound and lasting effect on the UK’s economy – particularly for the banking sector.

With Government intervention at its heaviest for a generation, one leading high street bank was asked to reinvigorate the retail sector by using its own assets to create, then sell off, a challenger bank.

Retonomy was asked to apply its outsourcing expertise, and its specialist knowledge of establishing and managing supplier relationships to help create a new, wholly outsourced, IT function for the challenger bank.

New supplier function, significant risk

Without specialist knowledge or experience of outsourcing IT in the new organisation, the parent company needed to ensure that it realised true value from its agreements. Significant risk existed. It needed an experienced gatekeeper to ensure its partner organisations met their obligations and to guarantee each agreement was implemented and delivered to the expectations of the newly established bank.

With up to a hundred IT suppliers allocated to the challenger bank by the parent company, contracts were passed to Retonomy for it to establish and manage the process by which the new bank assumed control of these agreements, then suppliers were brought on-board to begin implementation.

Retonomy took ownership for contract management, creating the performance management process, the supplier relationship management process, while also acting as the single point of contact for all supplier queries during the set-up process.

Using just a small team, Retonomy maintained control and created a seamless process for delivery of critical IT management systems.

Troubleshooting the supply chain

The process of ensuring that governance of the supplier pipeline was correct relied heavily on close collaboration with the client organisation and the outsourcing partners. The responsibility for oversight, added to a general outsourcing expertise, gave Retonomy an intimate and innate understanding of the project.

This unique understanding of outsourcing meant Retonomy’s role developed from straightforward delivery to a hybrid delivery/consultative role, providing outsourcing and vendor relationship management advice across the new organisation.

Dependable and repeatable processes

Such a high number of suppliers, inevitably, meant a great many agreements; the processes were overseen by the team of the Chief Information Officer at the new bank.

With so many contracts to oversee, the potential for the new bank to become swamped by detail and the administration of varying methodologies became real.

Using its experience of establishing large outsourcing programmes, Retonomy was able to alleviate this potential threat – and to make life simpler for the client – by ensuring the various processes it established were free of extraneous method, straightforward, similar in approach, and easily replicable for the future.

For more information about how outsourcing to Retonomy can help your busines, get in touch or give us a call on +44 (0) 1438300200.