#89 - Give me 5 minutes, I'll tell you if your vendor's worth it.

Your fraud vendor’s contract renews in six weeks, and procurement wants a recommendation by Friday.

This shouldn’t come as a surprise, but somehow it is.

Are you overpaying your vendor? Should procurement try and negotiate?

Your instinct is to conduct a rigorous attribution study with clean cohorts, a control group, and bulletproof results.

But you simply don’t have the time. And frankly there are more important things on your plate.

Here’s the fast version I use to calculate vendor ROI.

No, it’s not the most accurate one, not by a longshot. But it gives you a rough answer in five minutes, and sometimes that’s more important than being laser-accurate.

Measure loss reduction

Pull your average monthly fraud losses in basis points (bps) for the last 12 months. Pull the same number for the 12 months before the vendor went live.

Subtract one from the other.

Multiply that delta by your processing volume, then by a year, and you’ve got a rough dollar figure for what the vendor saved you.

Is it blunt? Extremely. Most of you are moving uncomfortably in your chair right now, I know. Bear with me.

Plenty of other things changed in that window too - your traffic mix shifted, you tuned other rules, maybe a fraud ring that was hammering you migrated to someone else’s business.

You have no clean way to isolate the vendor’s individual contribution here, and I’m not going to pretend otherwise.

Use the number anyway.

Measure false-positive mitigation

Measuring false positives is hard. Actually, it’s one of the hardest challenges in fraud prevention, and I’ve written extensively about it before (p.s. check out my False Positives Masterclass).

So like with loss, let’s make it dead simple.

For this exercise, don’t use transaction-count approval rate. Use settled-amount approval rate: the dollar value that actually cleared (versus what you approved at checkout and not what bounced back later as a chargeback).

Compare the 12-month average before the vendor to the 12-month average now. Take the delta in percentage points. 

Now calculate how much more you processed this year in dollars based on that figure. Then apply your margin to it.

That margin-adjusted number is what’s actually comparable to both loss and vendor cost on your P&L. 

Side note: is your approval rate lower than before? It might be that your fraud pressure is up. Don’t be too quick to blame your vendor for that.

Measure headcount savings

Ask yourself this: did this vendor automate or eliminate work your team used to grind through manually?

If yes, estimate the percentage of time freed up, on average, per person. Be honest about it - 5%? 20%?

Nobody outside your team knows your analysts’ actual workflow better than you do, and no vendor deck is going to get that number right for you.

Multiply that percentage by your gross team cost for the year. That’s how you attribute your saved time to the vendor’s value.

Again, I’m fully aware there are issues with this calculation.

For example, you might say that the time saved was used to fight fraud more effectively, and hence the reduced losses this year. Value we already accounted for in step 1.

Just keep in mind - this is a rough, back-of-the-envelope calculation. Not something you’ll present to your board.

Set your ROI bar

Here’s the thing about rough numbers: they’re rough in both directions, which is actually useful to you. An optimistic estimate built this way can be wildly off. But it’s unlikely to be 4x off from reality.

So set your bar high enough to absorb that error and still mean something on the other side.

3-4x ROI ratio is the minimum I’d accept without digging further into the numbers.

If your rough estimate doesn’t clear that bar, I would flag that both internally and to the vendor as needing additional validation.

A 5-7x ratio is where I’d want to land for real confidence that you’re squeezing full value out of the relationship, and not just compromising because switching sounds like a pain.

Bottom line

Let’s state the obvious - this isn’t my preferred way to calculate ROI. But it’s a good way to run a 5-min sanity check on whether you should actually spend time on this.

Clears 3-4x? Move on with the renewal. Spend your limited analyst time somewhere that actually needs it this quarter.

Doesn’t clear it? Flag it, and see if the vendor can either provide a convincing business case, or alternatively - a new pricing structure that would get the ROI to that ballpark.

And if this feels too uncomfortable to consider - just make sure you don’t get caught by surprise when a contract is up for renewal.

What shortcuts do you use to sanity check your vendors’ ROI? Hit reply and tell me what works best for you.

In the meantime, that’s all for this week.

See you next Saturday.

P.S. If you feel like you're running out of time and need some expert advice with getting your fraud strategy on track, here's how I can help you:

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