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July 30, 2012 by Bob Roth Bob Roth

7 Insider Tips to Vendor Contract Negotiation

120730aI told my wife last week that I was about ready to retire. Exit the working world. Bid adieu to the working stiffs. Set sail for the vast horizon. She gave me the “I don’t know where this is going but can’t believe I am going to like it” look. I preempted her and said she didn’t have a thing to worry about. And no, I wasn’t handing her off to another sugar daddy. No sir. I have a dream – a good one this time. I am going to start offering data processing services to banks. I figure the bar is set so darn low that in the first year or two, I could pick up a few bazillion bucks without breaking a sweat. You see, I’ve been around the block. This ain’t my first rodeo. Yes sir, I even have a business plan. It goes something like this:

Title: Preliminary business plan for being a data processing supplier to banks

Resources Needed: 1) One large Cadillac dating from the ’80s with a trunk full of golf balls and 2) a junkyard dog attorney. (It can’t cost much – for the attorney I mean; they’re a dime a dozen these days.)

Projected Revenue: Endless

Projected Cost of Goods Sold: Write some software one time. Better yet, buy a company that’s not doing so well. I’ve got a list made up already. Preferably use other people’s money to do so. If all else fails, just begin development and start selling the app before it’s done.

Risk: It will take the regulators three years to even figure out I’m in business. I will have cut and run well before then.

As anyone can see, I am almost ready to go. But in an effort not to be greedy, and in full belief that there is enough fat on the hog to feed a bunch of us, I wanted to pass along some of my thinking as a gesture of goodwill before I hit the trail. Here at GonzoBanker, we have been “blessed” more than most with exposure to the inside of our industry. As a consequence we have likely forgotten more about pricing and vendor services than most people will ever know. We’ve decided it’s time to share some of this insider knowledge.  


 

(Not So) Secret #1: Plundering and pillaging of banks by the vendors has been going on for years. Vendors don’t publish list prices. They by and large have a “can’t sell it for any less than this price” that they give to their sales execs before turning them loose. There are a few good salespeople out there that value a relationship over time and will quote a fair price out of the gate, but for the most part, many of the vendor sales execs throw out a price that is sure to make the customer choke. If the customer accepts the price, he’s just another rube. For the customer that negotiates aggressively, the vendor has a “good old boy” discount. (Never mind that this discount is still x percent higher than they really could go.) Whilst negotiating, customers need to be especially on the lookout for “golf ball” salespeople. These are salespeople who hand out free golf balls and take orders for new software and services and then head off for the next gig, never to be seen again.

Defensive Tactic #1: Make sure your vendor’s account rep adds value … and if not, ask for a replacement. The salesperson who shows up twice without knowing his company’s technology roadmap should be shown the door.

120730b(Not So) Secret #2: Vendors hold their customers’ data hostage and sell it back to them. They have been getting away with this for years. They “require” customer data so they can provide services, and once they have it, they extract it, and massage it, and then provide it to the customer as “advanced analytics” for premium pricing. If the customer doesn’t want to pay for it, the customer doesn’t get it.

Defensive Tactic #2: While negotiating their next renewal, Gonzo bankers work to get a few data universes or extracts thrown in free. They also look to get advanced reporting/analytic needs down to a reasonable fixed price. After all, the customer owns the data; the vendor is just borrowing it.

(Not So) Secret #3: Sales execs make the majority of the pricing decisions in their customers’ parking lots. They say they have all these hoops to jump through to get a good price. They say they have an executive team at the mother ship that needs to review pricing. They tell customers that the pricing is so good it needs to go all the way to the CEO for approval. They say they can’t give any more discounts because corporate turned them down. But the truth is, they know how low they can go or they wouldn’t have been given that Cadillac (and the golf balls).

Defensive Tactic #3: When the sales exec says he will have to run it up the corporate ladder and comes back with a “no,” we suggest he be asked to get the decision makers on the phone. It won’t take long for the story to start changing.

(Not So) Secret #4: Vendors charge absurdly more for new technology than it costs them to develop it. In Gonzo land, we call this the “pricing maturity curve.” By this we mean pricing goes through a lifecycle. When a technology is developed, it is priced high, supposedly to recover research and development costs. As the technology matures, it comes down in price. Eventually, the pricing enters the commodity phase and becomes very competitive. We would like to believe that as our technology ages, our account reps help us navigate the waters and give us bigger discounts. That doesn’t happen. They want to constantly increase revenue to keep their shareholders happy.
Defensive Tactic #4: Bankers who are early adapters of vendor services should negotiate minimums and adaption rates for new services until they are blue in the face. We have lost track of the number of calls from CIOs telling us their mobile banking penetration is 50% of Internet banking users.

(Not So) Secret #5: Automatic renewals are the vendor’s silver bullet. Many banks have outgrown the prices they are paying for at least some of their contracted services, but no one from the vendor is going to swing by and announce that. They are just going to let the bank’s contract renew into the sunset. Banking is a unique market. Banks grow both organically and through mergers and acquisitions. Vendors price their products on a per-unit basis that is inevitably tied to growth. These vendors have a great thing going. Their revenues keep going up because of their customers’ growth, and they don’t have to develop any new products or services. Theoretically, as a bank grows, its pricing should go down. But in practice this doesn’t happen if the bank doesn’t “reset” its pricing.

Defensive Tactic #5: At the next renewal, Gonzo bankers will reduce their automatic renewal term to one year (if it’s not already there). The bank whose vendor strong-armed it into an auto renewal term longer than one year should send the notice of intent to not auto renew the next day.

120730c(Not So) Secret #6: The vendor is using every renewal to change the contract language to reduce their risk … and increase the bank’s. The vendor is going to tell the bank that it needs to sign up for all new contract paperwork at the next renewal for its own good. Then the vendor is going to hand the bank a brand new agreement that was pored over by a legion of attorneys with the sole purpose of protecting the vendor against every conceivable event that could go awry. This new agreement will set aside anything the bank had negotiated favorably over the past relationship.

Defensive Tactic #6: I strongly urge bankers to read their old agreements and look for the most important business terms. A side by side comparison between the new contract and the old one will reveal just where the bank stands to get hosed. Making a list of issues is a great bargaining tool. Enlist help from the banks’ counsel. These are dangerous waters, and a strong team will help level the playing field. If the bank has had years in a satisfactory relationship with this vendor, neither side should use a renewal as an opportunity to redefine the terms of that relationship.

(Not So) Secret #7: The vendor will use every opportunity to extend the bank’s term. Every time a service is added to an agreement, the vendor will try to put a fixed term on that service that is longer than the term of the other services on the agreement. This, in effect, extends the bank’s entire relationship. Example: There is one year left on the bank’s Internet banking agreement and the bank wants to add mobile banking. The sales exec writes up mobile for a three-year term for that service. This technique makes it extremely difficult for the bank to find a finite time to ever consider alternatives. This happens ALL the time!

Defensive Tactic #7: Never, ever add a product or a service to a negotiated master agreement without making sure that service terminates at the same time as the other services on the master agreement. Then renegotiate the master all at the same time. Make this a bank policy.

There’s Hope, Gonzo Bankers!

As long as we continue to share knowledge, have good vendor account teams in place, and align the organization’s people to work with our vendors effectively, we can level the playing field.

Or, if it’s easier, wait until I retire and give me a call. I’ll have this new system to show you. It just went beta last week. I’ll be able to help you out with that poor little core/Internet banking/card processing system you have now. You name it, I’ll have it. It will be a little expensive, but you won’t get quality without spending a little. Then we’ll walk out to the parking lot. I’ll have something to show you … … got some nice Callaway 4s in this week from my core account rep. Been saving them for my next gig …

See you down the road …

-ber

Signing on the dotted line?

You’ll want Cornerstone Advisors on your side. Cornerstone has negotiated contracts with virtually every major technology vendor in the financial services industry. Our proprietary database of vendor pricing and service terms has helped our clients realize millions of dollars in savings.

For the peace of mind that comes with knowing you got the best possible contract pricing and terms, contact Cornerstone Advisors today.

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