In the exciting world of contract negotiations, service level agreements in vendor contracts are a source of continual irritation to Cornerstone’s merry band of consultants, and they inevitably lead to the SLA dance with vendors. Guess what? I don’t like dancing with vendors any more than I like dancing at family weddings.
Unfortunately, when the FFIEC updated its guidelines in 2015 to incorporate SLAs and the corresponding corrective actions in vendor contract terms and conditions, SLAs went from being nice to have to being necessary. This means plenty of new opportunities to dance with vendors, a prospect that excites me about as much as the thought of dancing with Aunt Ida at my niece’s wedding reception next week.
In outsourced arrangements, which account for 43% of core contracts according to the Cornerstone Performance Report, a financial institution has, in essence, ceded control of the data processing technology function to a third party. In practical terms the FI is now at the mercy of the provider to keep its system up and running, have adequate response times for transaction processing, answer customer support calls on a timely basis, and have reports available after overnight updates. This is where SLAs come in.
A properly negotiated service level agreement helps protect an FI if its vendor is unable to provide services in a satisfactory manner. Sadly, at Cornerstone we rarely see adequate protection in standard boilerplate contracts from the major oligarchs, an omission that could send an FI up the proverbial creek without a paddle if there are service issues.
What we want to see at a minimum in client contracts are these conditions:
When we see contracts like this, we know it won’t be long before we’re engaged in the dance we’ve come to affectionately call the SLA Shuffle. After reviewing and discussing the contract with our client, it’s time to shuffle our way to getting meaningful SLAs included in their contract:
We repeat this dance multiple times, exchanging requests and phone calls, until we arrive at appropriate levels, penalties and termination provisions.
A word of warning to our FI friends: vendors often try to insert cure periods before penalties kick in or a termination provision can be effective. At Cornerstone, we call this a “gotcha” and we urge FIs to pay very close attention to these inclusions. Why should a vendor have a cure period if its service has been below standard for an extended period of time? Institutions also need to see a red flag when they read “sole and exclusive” language about accepting monetary penalties for missed performance. Accepting a monetary penalty for poor service as a sole and exclusive remedy precludes the institution from collecting any direct damages even if the direct damages exceed the amount of the penalties in the future if the poor service resulted in monetary damages to the FI.
In our experience, vendors will agree to SLAs with monetary penalties for poor performance and termination provisions if the failures are excessive, but only after a lot of negotiating. An FI that reaches a negotiating impasse can always use the big stick of regulatory requirement to get what it needs. So why isn’t this standard operating procedure? And why don’t vendors lead with this approach?
Vendors that want to walk the walk of being a true partner will make SLAs part of their standard contracts and not make their clients go through an elaborate dance to get what regulators tell them they have to have. Bankers need to remember they are paying a lot of money for these services, and the FI that inadequately negotiates an SLA is essentially buying a hamburger at steak prices.
I truly believe there should be easier ways to accomplish SLAs without having to do the dance. If vendors ever get to this state of nirvana, dancing at the occasional family wedding won’t seem so bad.
A must read for senior bank and credit union managers who want to better understand the dynamics of vendor contracts for core processing, debit processing and eBanking services, and negotiate the best deal for their institutions.