The problems that many smaller (and even some bigger) banks have in obtaining meaningful protection in contracts with third-party technology service providers is one near to my heart. The Tech Law Guy, Tom Hall, put up a post yesterday that gives businesses of all types, including banks, useful tips to deal with the process of negotiating a contract with a technology vendor.
Tom's basic premise is that the purchaser's options may be limited by the "leverage" that it has or does not have entering into the negotiations, and that leverage is usually a matter of whether or not the business has the option to walk away from a vendor and find another vendor for the same or a similar service. Increased leverage could also result from the fact that a business does not need to engage in the activity with which the vendor is going to assist the business. If the business terms or legal terms of the contract imposed by the vendor are too unfavorable to the purchaser, the business can say "No Thanks."
As Tom notes, times have changed in the technology services business.
I can recall when, many years ago, “negotiating” with IBM for data services meant haggling over volume discounts and service hours. There were competitors in the market, but none of them rivaled IBM’s reputation for service and cutting edge technology. With little competition, IBM had no incentive to change its standard terms and conditions
Today there is vigorous competition in most sections of the IT market. Few companies dominate their fields, giving Customers room to negotiate.
That ought to be the case, but I find that many banks fall in love with the product or service, hash out the basic business terms with the vendor, then get their lawyer involved to review the contractual terms. At that point, there often exists an emotional commitment by the client's business people to "the deal" that results in the bank agreeing to knuckle under when the vendor digs in its heels. Often, the bank rationalizes the granting of concessions in some fundamental contractual benefits or protections that it wouldn't have to give if it, too, "dug in its heels." In essence, the bank begins to negotiate with itself, a process that seldom ends well for the bank. Tom recognizes this danger and suggests a solution.
Once Customer has said “You’ve got the deal,” Vendor has no incentive to make concessions. Better to award the contract only after the competing vendors have made their best offer on price and terms and standards and service levels and warranties, etc. Also, consider requiring vendors to comment on your standard contract terms as part of RFP. Vendors who request unreasonable changes, or an unreasonable number of changes, may be weeded out early in the process. Time spent on needless negotiation will only delay project completion and a difficult negotiation may portend a difficult relationship.
Doing an RFP makes sense for most major technology transactions, but some banks either lack the attention span or the in-house expertise to manage this process and won't spring for the cost of a third-party consultant to manage the RFP process for them. At the very least, the bank should have at least one alternative vendor in mind, and senior management ought to sit down with the bank's legal counsel, before the business negotiations start, decide upon the "have-to-have" risk allocation and other critical contract provisions, and make those contractual requirements available to both vendors at the outset. The reactions of the vendors to those requests can make (or, at least, SHOULD make) a difference in the overall evaluation of the ultimate "winner." I've been involved in a number of transactions where the resistance of the vendor to the bank's customary risk allocation provisions (or other standard terms and conditions) was the deciding factor, even trumping price. In one transaction, the CEO of the bank observed that it appeared to him that at one specific vendor, the "legal tail seems to wag the business dog and they've forgotten who's the customer and who's the service provider. I don't want to deal with an organization like that." Of course, that observation is also a lesson to all bank lawyers as to how savvy clients view the role of lawyers for the bank who unreasonably scrap over every phrase in a contract. They might find their telephone silent when the next deal rolls around.
Again, as Tom says, it's all about "leverage."
Legend has it Archimedes said “Give me a lever and I will move the world.” The business lawyer might well say “Give me more leverage and I’ll get you a better deal.”
A little bit of forethought and preparation in setting up the process to purchase technology services so that contractual terms are thrown into the mix early, not late, can often add more leverage and, in the end, result in a better deal for the bank.




