By Bret Herbert
Computers offer myriad places to store data -- file servers, desktop PCs, or even a laptop that leaves the office on weekends or business trips. Imagine doing that with cash.
As an expense control mechanism, negotiating has become indispensable in today’s economic environment. In fact, opportunities are at an all-time high right now to negotiate better pricing for costly information technology (IT) software, systems and services across all key vendor relationships. Fortunately for many bankers, negotiating is a skill that can be learned and perfected.
Talking to vendors
Most banks have deferred for now any decision to convert to a new core processing system due to concerns about expense control. Our research indicates that only 3 to 4 percent of financial institutions are doing system conversions.
On the vendor side, the shrinking pool of new sales opportunities drives a greater focus on retaining current clients and preserving existing revenue streams. For the few opportunities that do arise, vendors are making price concessions, resulting in a steady downward pressure on fees for outsourced core processing and discounts for in-house solutions.
During 2008, we saw outsourced processing fees steadily decline due to term and relationship discounts, and discounts for core software have also been significant. These pricing adjustments are substantial and represent real savings for the banks that negotiated them. Given the overall cost of IT, even a relatively modest 15 to 20 percent reduction in processing costs can have a material impact on expenses over the life of an agreement.
Play it well
Before discussing negotiating principles and tactics to cut costs and strengthen your bank’s balance sheet, let’s look at a few examples of negotiation opportunities that might be relevant for your bank.
Case #1: Staying together
A $400 million bank was 15 months from the end of its outsourced data processing agreement. The bank was generally satisfied with its current vendor but was willing to consider alternatives if a compelling case could be made for cost savings. When the vendor was informed that the bank was already thinking about the contract, it made an offer to lower monthly per-account pricing by 10 cents. Instead of pursuing that offer, the bank asked for a term discount.
What the bank took advantage of was the willingness of most vendors to offer price concessions in exchange for longer-term agreements. The vendor in this case offered a monthly discount if the bank renewed for a five-year term. When applied against base processing costs, the bank’s per account pricing is now in the 30 cent range, which is excellent pricing for its particular IT solution. The bank was also successful in getting small adjustments on several interface fees that had been in place for several years.
Overall, the bank lowered its processing costs by $4,500 per month, and the vendor agreed to make the savings immediate with the signing of a new five-year agreement. As a result, the bank did not have to wait 15 months to see the effects of its negotiating efforts, and it really only entered into a four-year extension from the original contract expiration date.
Finding pressure points
A $475 million multi-bank holding company approached its current vendor about a short-term extension of its processing agreement pending the outcome of a full vendor evaluation. Among other things, the bank was concerned about unfulfilled promises for several system enhancements. These issues were pressure points for the vendor, which immediately offered a renewal agreement with built-in contractual obligations to complete the development projects.
In an attempt to save the relationship, the vendor also offered a 30 percent discount in current processing costs, which amounted to about $24,000 per month. The discount took effect immediately, and the savings were deposited in an escrow account. If the bank decided to stay with the vendor, the funds would be applied to its processing costs. If the bank decided to end the relationship, it would forfeit the funds in the escrow account.
Overall, this small bank holding company was in a position to save $1.75 million over the next 60 months if it stayed with its current vendor, and it could get the product enhancements it wanted as well.
Case #3: Getting concessions
Banks that purchase software for in-house processing have a strong hand too. A $5 billion bank that engaged in a full vendor selection process was offered steep discounts for its core and ancillary systems from one of the vendors being evaluated. Compared to the vendor’s first proposal, the bank received savings on its seven-year cost of ownership of $4.2 million.
Likewise, a $1.2 billion bank saved almost $650,000 over the term of a contract when it was able to convince the vendor to remove an escalation clause that had pushed its annual maintenance fee for in-house software to up to 34 percent. As part of the renewal agreement, the bank was able to lower annual maintenance fees to 22 percent and to modify the escalation clause to achieve lower annual caps.
What it takes
The process of negotiating an agreement for IT systems or services can get exceedingly complex, and you may go back and forth with dozens of scenarios and various iterations before reaching agreement. To succeed in this process, strong negotiators keep several principles in mind. The following are a few of those principles along with words of wisdom from some born negotiators:
Realize that a successful negotiation yields an agreement that benefits both parties and preserves or creates a good relationship
Understand that the other party is acting in its own interest
Do planning and research
Approach each negotiation anew
Use your leverage wisely
Walk away from bad deals
In today’s environment, vendors are willing to come to the table early. Fifteen to 18 months before contract expiration isn’t too early to start a conversation, and when you’re successful in your negotiations, you may be able to start realizing those savings immediately.
Editor’s Note: This article also appeared in the Fall 2009 issue of New Jersey Banker.
Bret Herbert is the technology practice manager for Sheshunoff Consulting + Solutions (SC+S), overseeing the execution of a broad suite of technology-related engagements. For more information, contact Herbert at 512-703-1536, 800-477-1772 or firstname.lastname@example.org.