In the past few years I have had frequent opportunity to review and negotiate contracts between banks and their chosen outsourcing vendors. Without sacrificing client or vendor confidentialities, it is well known that a contract written by a vendor is weighted in the vendor’s favor. Actually, if it were possible to physically weigh the interests on either side, the bank’s would weigh in at five pounds and the vendor’s would tip the scales at 95.
But with such large expenditures at stake, why oh why are so many banks signing these contracts with nothing more than a cursory glance? Let’s look at the numbers. A typical mid-sized bank can expect to pay between 15 and 20 basis points on average assets per year. For a $3 billion bank, that is between $4.5 and $6 million per year. Accounting for growth and cost of living increases, this totals at least $30 million over five years!
It is not my intent to cast aspersion onto vendors. If I were a vendor writing a contract, I would want to protect my interests at all cost. Let me share a few examples of how they do just that. These are real life clauses I have seen in vendor-provided contracts.
From the vendor’s perspective, there is a rational reason for every one of these clauses. However, the clauses were generally created as the result of a bad experience and do not fairly represent the relationship between most banks and their outsourcing vendors. In the negotiations in which I have participated, the vendor has always been willing to make reasonable changes to balance contract terms. All you have to do is ask.
You may think I am encouraging banks to recruit their legal beagles to create new contracts. This is not the case, since such an effort would only result in the same terms with different words. Keep in mind vendors have certain protections they must obtain.
Here are a few steps a bank can take to help create a balanced document that protects both parties’ interests.
Fortunately, this process only needs to be done once every four or five years. Make sure your next contract balances the scales.