A few weeks ago, the American Bankers ran a story about how community banks were hiring outside consultants to negotiate major IT contracts with vendors.
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 [an IT consulting firm] 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.
Not surprisingly, some IT service providers aren't happy to see the "hagglers" appear on the scene. My response would be "Tough." Then again, some IT service providers go with the flow.
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.
Spoken like a man who, when handed lemons, can whip up a gallon of tasty lemonade in no time flat.
Nowhere in the article is made the very important point that the consultant is only one member (albeit, a potentially valuable member) of the financial institution's negotiating team. Another critical player is the bank's IT counsel. The consultants who are described in the article are focused on the business terms, including pricing, add-on services, and term. Knowledgeable lawyers would be focused on other issues, such as legal risk allocation, including warranties, remedies, limitations, disclaimers, and indemnifications. As OCC Bulletin 2001-47 states, concerning risk assessment:
The risk assessment phase should include the identification of performance criteria, internal controls, reporting needs, and contractual requirements. Internal auditors, compliance officers, and legal counsel could help to analyze the risks associated with the third-party relationship and to establish the necessary control and reporting structures.
There is also contained in that bulletin and other guidance issued by the federal banking regulators, a laundry list of contract issues that should be considered and negotiated in third party service agreements. Again, input from legal and other areas of the bank is advisable to ensure that these issues are properly assessed and addressed in the written agreement between the bank and the service provider.
Hagglers may be a valuable add-on to the bank's other resources, but they're not the only necessary player on the evaluation and negotiation team of a financial institution's technology service agreement.