“New shoes, new shoes, / Red and pink and blue shoes” is the start of one of my favorite childhood rhymes. My sisters and I love shoes, and the beginning of a new school year meant a new pair of shoes. Several of us had narrow, long feet and could not buy just any shoe from any store. Many times, we ended up at a high-end retailer that carried narrow sizes. There were also other considerations that came into play such as budget, style, practicality, and functionality. Although my parents were conservative, practical, and very budget conscious, they also understood the importance of having good and properly fitting shoes.

Choosing a vendor or finding solutions in areas such as ALM, CECL, big data analysis, vendor management, and strategic planning, to name a few, can be compared to getting that “right pair of shoes.” The first step is to define your credit union’s needs and to identify any unique characteristics that must be allowed for in the purchase decision. Then, become educated on the subject. Read the regulations or other source documents, ask questions, talk to peers and industry experts, etc. to gain a good understanding of the subject. Next, assign a person or team responsible for managing the decision and process. Buying a pair of shoes did not require a committee, nor was it as technical as choosing ALM related solutions or vendors, but the processes have similarities.

The next step is to define and prioritize what is important to your credit union. These priorities should be documented. The documentation will support and justify the final decision if due diligence ever comes into question. The criteria for buying a pair of shoes may include the shoe’s material, the purpose or special event being planned for, brand reputation, return policies, the age of the child, and budget. The criteria set a framework for making a good decision and picking the best solution, as well as aiding in easily eliminating some options. For outsourced solutions, criteria may include price, functionality, ease of use, support, training, or regulatory compliance. In addition, take care to address the unique needs associated with your credit union, such as not having all the right data or not having the in-house expertise to run or develop a model.

Then begins the shopping. When shopping for shoes, some of my sisters liked this process more than others. Some loved to shop, which included having patience, going from store to store, seeing what was available, and comparing all the options. Others ran out of patience or did not have the time to devote to the process. This stage involves looking at the available options, reviewing the data requirements, comparing model attributes, and trying it on for size. The act of trying on a solution may not be possible in all situations, but ask questions, watch demos, speak with a specialist, and gather as much information as time and resources will allow, to make an informed decision. The question, “Does this solution seem to fit our credit union’s needs?” must be answered. All solutions that fit the needs become valid and good candidates.

In the highly regulated financial institution industry, due diligence becomes a significant step in the process of choosing a third-party vendor and should be done prior to entering into a new agreement. Many credit unions utilize third-party arrangements to leverage the talents and experience of third-parties to assist in accomplishing their strategic goals or meeting regulatory or other requirements. NCUA has issued several letters on the importance of due diligence and evaluation of third-party vendors. Some steps in due diligence include conducting a background check, legal review, financial, ROI, insurance requirements, and evaluating whether the solution is consistent with the credit union’s strategies or risk tolerance.

The final step is choosing the best shoe, or in this case, model or solutions for your credit union. Once the decision is made, implementation and ongoing controls become important. The controls ensure the relationship is meeting its expectations and the third party is meeting its responsibilities. A credit union staff member should be responsible for monitoring the performance of the program and submitting appropriate reports to credit union management or directors. The reports should consist of appropriate and understandable information, so the users can make informed decisions in a timely manner and take corrective action if needed.

The “Choosing Shoes” poem by Frida Wolfe continues, “Tell me, what would you choose, /If they’d let us buy?” Mark H. Smith, Inc. offers outsourced solutions in the areas of ALM/IRR analysis, CECL, ALM model and process Validation Reviews, online Comprehensive Loan and Deposit data capture and evaluations, and online Peer Analysis. Please keep us in mind as you explore your outsourced vendor options.