Bankers Hiring Hagglers to Negotiate IT Contracts

Community banks are spending a little bit of money now in hopes of saving more on core processing and IT-service contracts.

A growing number of lenders are hiring consultants to negotiate technology contracts, which are typically among a bank's biggest expenses. Hiring experienced hagglers can lead to more favorable terms and better equip banks for future growth, industry observers say.

"Bankers are at a disadvantage because they don't know how the game is played," says Aaron Silva, president and chief executive of Paladin, a firm that negotiates IT contracts for financial institutions. "Bankers really have no idea what they should be paying for their contracts."

Roughly 60% of bank and credit union executives who participated in a study released Monday by Business Performance Innovation Network listed lowering noninterest expense as a top priority for the next 12 to 18 months. That concern was topped only by a need to book loans and add interest income.

"Banks don't have the revenue to offset expenses," says Dave Murray, director of thought leadership at Business Performance Innovation, or BPI. "Reducing expenses is not a cure-all, but it is a significant step."

BPI, which worked with Paladin on the study, found that community banks and thrifts, on average, saved more than $915,000 over a five-year period after restructuring a contract.

In comparison, a small bank would need to book $5.6 million in loans, on day one, to generate the equivalent of $1 million in net interest revenue, BPI estimated using the average net interest margin for the fourth quarter.

Hiring consultants, including those who once worked at tech vendors, can make a difference, industry observers say. Vendors have an advantage because they are constantly negotiating deals, while bankers only visit the issue every few years, says Greg Schratwieser, president and CEO of International Consulting.

Paladin collects data tied to the processing contracts of financial institutions with less than $5 billion of assets. It then uses its database to determine whether a bank is overpaying for its services.

Core processors use certain tactics, such as contacting a bank about renewing its contract when it's too late for the bank to switch to a new company, in an attempt to tilt negotiations, industry experts say. Bankers would be well served to start talks when they have 18 to 24 months left on the contract, experts say.

There are also free services that banks can demand during talks if they know when and what to ask for, Schratwieser adds.

"It's like buying a car," Schratwieser says. "The guy across the table has sold thousands of cars, so they know what they are doing. The difference here is the money on core contracts is enormous and a lot more is at stake."

Dedham Institution for Savings in Massachusetts recently hired Paladin to renegotiate its relationship with Fidelity National Information Services. The move seemed natural since Dedham already worked with consultants on deals for services such as landscaping and printing, says Mark Ingalls, the $1.1 billion-asset bank's chief financial officer.

Though "bankers are famously cheap," it makes sense to spend "one dollar to save three dollars," Ingalls says. "You don't bring a knife to a gunfight, so we went out and got ourselves a gun. There are a lot of opportunities to work with consultants to drive down some costs. They have expertise in areas that I don't."

Initially the FIS representative was "somewhat upset" that Dedham hired a negotiator, but "they regrouped quickly and the process" moved forward, Ingalls says.

FIS did not return a phone call seeking comment.

Dedham will save more than $2 million over the course of its 64-month contract, which was shorter than the bank's previous eight-year deal, Ingalls says. Paladin receives a percentage of a bank's overall cost savings when a deal is completed, Silva says.

Contracts should typically last five to seven years, industry experts say. Agreements shorter than that lose pricing advantages; longer ones may make it difficult for a bank to add services as technology evolves.

Despite the head-to-head competition, consultants and core processors have a good relationship, says Stephen Ward, senior vice president of the global sales organization at Fiserv.

The presence of a third-party negotiator shows that a bank is serious about the contract, and it "instills a process that has a start time and end time," he says.

"If the bank is paying for that service, it is more likely to follow the timetable," Ward adds.

Normally, renewing a contract involves adding services, making it difficult to compare old contracts with new ones while making it equally hard to verify consultants' claims about cost savings, Ward says.

Depending on the size of the bank, there can be 40 to 150 terms to review, including an exit strategy, which is often overlooked, Schratwieser says. Potential sellers must check about the inclusion of early-termination fees, he adds.

Likely buyers should restructure contracts to favor rapid growth in accounts and transaction volume, which would reduce the time it takes for a buyout to become profitable, BPI's study said.

Executives need a clear understanding of their expansion strategy so they can adjust contracts accordingly, says L. Michael Wofford, president of L. Michael Wofford Consultants & Advisors. Contracts should reflect overall strategic plans, he says. "I think community banks are beginning to grasp that this isn't one event every five years. You have to continue to monitor your contracts to ensure you are doing everything you can to keep costs down.