How to Negotiate A Bank Tech Contract

I'm not a fly, so I don't know how vendors negotiate IT deals with banks. But I do know how to direct my clients once the choice of primary vendor has been confirmed. I basically tell them to negotiate from a position of intelligence, not psychology. Don't chisel; don't beg; don't hang on to the banking crunch as if you were a welfare recipient; don't threaten; don't tease with "better" offers from other vendors; don't make claims that your deal will put the vendor on the map. They're already on the map. In other words, be smart and be fair. Since I don't know who will be in the room from the vendor's side, I also prepare a list of "beware ofs." When I say I pick the right vendor for each client, I'm thinking long term. My clients have all walked out of the negotiations room with fair deals that are still fair today.There's some noise spreading throughout the industry these days that vendors are being clobbered at renewal time because banks are negotiating price reductions. Investors believe this is going to result in lower vendor profitability, and they're pulling back. I don't know which fly is spreading that noise, and I don't believe every vendor is caving in to arbitrary price cutting.

I do know, however, why negotiations might occur, and it has nothing to do with the economy, bad times, or threats. Vendors know their costs down to the fraction of a penny. And vendors don't have inventory reduction sales, or end-of-year sales, or closeout sales, or moving sales. For example, Metavante didn't reduce its rates when part of it moved from Brown Deer to Jacksonville, even though presumably, its heating and snow removal costs got greener. Bank operations change and technology changes. As a result, there may be reasons for the cost computation and pricing to change.

So here are some guidelines for bankers that will assure long lasting relations with tech vendors:

• If you really want a vendor who will behave like a partner, learn the meaning of fair pricing. I know what fair pricing is because 40 years ago when I worked for a bank-owned outsource company I developed a cost accounting system that evolved into what I now use as a standard cost system for any IT-based bank transaction. I update it annually. If any vendor charges a rate close to my standard, it's fair. If it's above the range, it's a rip off. I've never seen a vendor charge less than the standard.

• Regulatory standards touch all aspects of banking, even tech pricing. In computing the monthly charge for a savings account, I followed true cost accounting methods. But the resulting price was far out of range, and the reasons were clear. Our savings system was a dog. I tossed out the accounting and we used a price that was competition-sensitive. We never earned a nickel on our savings system, but we knew why.

• I once appeared in a Texas courtroom as an expert witness to testify on the costs of IT services. I had used my "tools" to determine fair pricing. When the two parties were at odds as to the monthly charge for a commercial loan, I was asked by the judge to explain their disparity. I offered this: A prime bone-in ribeye steak at the meat counter sells for about $10. At Bob's Steak House, it sells for $55. One can assume the value-add from raw meat to on-the-plate-sizzle along with excellent service and comfortable environment. In the case of an IT charge to process a commercial loan, it may not be obvious to the court why the vendor is charging five times the standard rate, so it should be explained. No one representing the vendor chose to explain the disparity.

• If you want a vendor who will deliver service just the way you expect it (which is usually over the top), then be prepared to pay for it. "Free" anything is a euphemism for, "You fell for the vendor's sales pitch, and you'll pay for it after you sign."

• In just the past seven years, new innovations in IT have changed the pricing algorithm for everyone. For example, vendors are saving money on Item Processing because of Check 21 legislation. Are they still charging banks based on paper check processing? They shouldn't. New technologies such as electronic clearing and remote capture are welcomed by all, but they result in reduced revenue for the tech vendors because the labor portion of transaction processing has shifted from vendor to customer (the bank or the bank's customers).

• Ironically, the best resources tech vendors possess these days are their people, not their products. Products are important but they can become almost commodities. It's a lot harder to robotize employees, so in the process of negotiating rates and charges, a smart banker should always make sure a vendor's price concessions do not result in a shift of personnel assignments to the bank from "our best support people" to "next year's rookies."

• Volume of work is still the basis for how a vendor charges its customers. When a banker tells his vendor he's been a customer for decades but hasn't grown in new services or added volumes, it's like the vendor is hearing the Saints say they've been in the NFL for decades. But the fans want to know how many times the Saints won a Super Bowl. If you're a Super Bowl winner kind of bank, you now have negotiating power. If you're not, you're just another also ran.

• Vendors are like New York cabbies. They don't take risks. Knowing their pricing algorithm doesn't tell you what the meter will read at the end of the ride. In my request for proposals, I ask the vendors to submit a pro forma invoice for the sixth month after the go-live date. Some vendors do it; others don't. Now there's a show-stopper.

There are ways a bank can save money on IT. Slapping the hand that feeds you is not one of them.

Next week: How to save IT dollars the intelligent way, for the life of the contract.