Everybody knows that keeping control of your costs is a core part of remaining competitive in the finance industry, but what about in areas where costs are consistently going up for you and all your peers? In the worlds of indexes, ratings, terminals and ESG, where almost everyone is paying more every year, how do you know if you’re keeping a lid on all the increases in comparison to others? Substantive Research has been working with clients to build a “Cost Avoidance Framework” model, designed to give the C-suite confidence and transparency into how their organisation is pushing back against rising costs versus their industry peers.
In a volatile market of compressing margins it’s unsurprising that the theme of “cost avoidance” is gaining so much traction amongst the buy and the sell side. But it’s important to be clear that cost avoidance isn’t about gaming the vendor relationship – it is actually focused on improving commercial compliance with vendors and reducing the risks in these areas.
Recognising overlooked shareholder value
The framework we are building is also about recognising market data and procurement teams’ efforts, when industry dynamics mean they can rarely achieve an actual cost saving. Despite being often categorised internally as enormous cost centres, it’s important to remember that these market data teams aren’t the consumers of the data. They are simply the people tasked with ensuring that these enormous budgets are optimised in terms of getting value, not throwing money away through duplication and wastage, and always looking for opportunities to make the budget go further.
While some firms appreciate the efforts of their market data teams to avoid costs in a market where absolute savings are often unattainable, often these efforts are not measured or highlighted, despite the fact that they represent real shareholder value. Market data teams are often under-resourced and undervalued, so providing management with credible insights into what is contributing to their cost avoidance, what could improve it, and how their firm compares to competitors would be a game-changer. While these metrics may not appear on the P&L, they demonstrate the team’s value, and documenting cost avoidance successes provides valuable corporate memory for future vendor negotiations.
Vendors’ discounting behaviour can make it hard to identify where real cost avoidance begins
The challenge is that this can all be nebulous – where do you draw the line? Scepticism is natural without the validation that makes the numbers more credible. Data vendors may often present an initial price that they don’t expect any clients to pay, so presumably it should be a later price iteration that sets the “par score”, after which savings are deemed to be value-add. But how much later? Having a standardised monetary value that identifies that “par score” would be very useful as we build a framework – and our price benchmarks can help with that transparency.
Clients often say that the real benefits, versus what competitors might be paying, is in the painstaking “chipping away” at the price, agreement language and deliverables from each provider. There are several cost avoidance dynamics that could contribute to a credible framework, but a strict set of rules for what should qualify is required. Categories are now being assessed that meet these criteria and where specific values can be assigned to each one. Some examples of these may be process-driven and automatic (perhaps termed “beta” avoidance) and some would be more complex and value add (perhaps “alpha” avoidance):
- Changing payment terms to be more beneficial to the consumer (beta)
- Usage tracking for specific vendors and negotiations, facilitating the addition of extra user numbers for no extra cost (alpha)
- Ensuring new products are priced to clients with an understanding of what the incremental data costs will be (beta?)
- Cleaning up poorly written agreements to ensure total clarity in terms of usage that the licences allow to reduce commercial and compliance risk (beta)
- No added cost bundles of additional products and services, for products that are actually desired and budgeted for within the consumer firm (alpha)
It all comes from the top
C-suite engagement is essential, which is a refrain which we’ve all heard before – but at Substantive Research, we see the focus from clients’ senior management on data costs increasing significantly, with the scale of current cost challenges and volatile markets making leaders predisposed to engaging seriously. We will continue to work on this Cost Avoidance Framework and invite consumers of all types to get involved, with the goal of providing a useful tool to engage senior stakeholders and highlight the indisputable ROI from investing further into resourcing market data teams with people and tools. Do get in touch, we’d love to swap notes!
