So Just How Much Should Bank Technology Cost?

Forty-four percent of my clients will seek price concessions from their IT vendors. All kinds of prices seem to be going up where we never expected them to, but maybe my clients are using the price of gasoline as their indicator for action. Regular unleaded went from $4.20 per gallon on July 8 to $2.47 last week. Are banker's now thinking there might be an "OPEC" in the bank IT services business that regulates prices based on self-serving methods? Or are they just looking for ways to cut costs to ease their earnings picture as a result of the credit crunch.There has always been a sort of discomfort about what bankers thought IT should cost. After all, bankers don't have to spend six ways from Sunday to figure out the price of their most popular product. They rely on one guy to do it for the entire industry.

I don't have all the answers, and I don't "negotiate the best price" for my clients. I determine the best value; they do the negotiating. But I have some comments on the subject of what technology should cost, and I offer them as guidelines to both vendors and bankers.

• Only a fool would select a service or IT product on the basis of price, whether it's the highest or the lowest. I've heard some vendors say, "Price it high and bankers will respect it more." They didn't accuse consultants of that. In my own case, I maintain an updated guide of standard rates for every IT service. It looks like the report a lab produces from a patient's blood test. If a number is outside the range, something's wrong, or it requires an explanation. • Some IT solutions appear to be commodities, but a careful examination will reveal that there is greater value in some solutions than others--thus the need for explanations when a price is outside the standard range. • Transaction processing services probably are viewed by some as mechanical and thus without distinction. But the Brain Trust services are anything but mechanical. For example, risk management: How does one price three thousand transactions worth of risk management technology? • Some services appear to be priced higher, and in some cases, a higher price is justified. You can pay for strong technology or you can buy cheap technology and add more labor. • After decades of a relationship with one vendor, a banker may get the idea that it's now time for huge discounts. That's an individual case kind of argument. There's no general rule. The only solution is to talk about it with arguable evidence. "I'd rather have the savings in my pocket than yours" is not arguable evidence. • If a price seems unreasonable, a banker deserves a good explanation. On one procurement, a vendor charged a cool million dollars more per year than the field of other vendors. I asked why. They never answered the question. My client dropped the vendor from the list of bidders. Knowing the company, I felt it was their way of saying we're not interested. That company has since sold its bank IT business. • A banker has the right to know if the price he's paying is due to a mistake the vendor made in delivering the service. When I worked for a bank that did IT processing for other banks, we used a time deposit system that was a dog. Our cost accounting system was so accurate we knew we could never charge our actual cost. So we offered it at market prices and ate the loss. • At the same bank, we were selling a cost accounting system for trust departments. it was designed to earn higher fees for trust services, and it was the only one of its kind in the industry. we sold it to several of the major trust companies, and we commanded a price based on value. for example, our clients always got the courts' approval for their fees when they showed up with green bar paper listings showing the time spent by trust officers managing the estates of their customers. How valuable is that?

I believe it's smart for bankers to know what their IT expense is, and more importantly, what it should be. If there is reason to adjust the fees that IT vendors charge banks, it is more likely to be the result of changes in the way IT has evolved as opposed to the rate each vendor charges to process, for example, a DDA. The Brain Trust applications are inching up in terms of importance as well as usage. That's the sector that will separate vendors into groups of "me too" transaction processors and value-add solutions providers. Pricing the latter becomes an exercise in business management that even the best cost accounting system can't calculate.