Are You Leaving Money on the Table at Renewal Time?

In my GonzoBanker article, “Why Banks are Not Changing Core System Vendors”, I stated that each year, driven by expiring contracts and/or service or product dissatisfaction, 20% of banks review their core system vendors. Of this 20%, only 3% actually make a change, and 7% renew with their current vendors without the formal process of comparing the incumbent’s product and price to competitors’ products and prices. If my math is correct, more than 600 banks will renew their core system contracts this year with little knowledge of competitive alternatives.

So tell me – if you are not comparing your current vendor’s renewal offer with other vendor’s offerings, how do you know a fair and reasonable offer has been made? How do you know your vendor’s products are still competitive? Will another vendor’s product be a better match for the bank’s needs? Will your current vendor’s products support your strategy now and in the future?

It is likely the board will approve an allocation of 5% of your total, non-interest spending for core systems. But, thanks to attention gained by WorldCom, Enron and others, it is also likely that you will be asked these questions at the next board meeting. How will you respond?

As I see it, you have three ways to make a renewal decision:

1. Take the easy way out.
Based on what I have observed, most banks follow the path of least resistance and sign the renewal contract because they trust their core system vendors. In most cases it works, but it’s hard to sell it to the inquisitive board member.

2. Get competitive bids.
Conducting a formal review should be done regularly, but it may not be warranted every time your contract expires. If your current vendor is not meeting product or service expectations, or if your strategy has changed or will change, conducting a formal review of the bank’s core systems and issuing RFPs to other vendors is worth the time and money. The review needs to start 12 to 18 months before your contract expires to allow time to select a winner and change to a new vendor if it is deemed appropriate.

3. Do your research.
Making an “informed decision” on your renewal requires gathering relevant information about what other banks are paying for similar services and the functional strengths of the incumbent and competitive vendors. To be honest, obtaining this information won’t be easy, but it can be done. Here are some possible resources:

• A friend at another bank may be able to provide information on his or her bank’s costs. Unfortunately, the other bank may be legally precluded from discussing the specifics of its contract, and, as a result, any information you gather from this source will probably be unusable in a comparison.
• Research will yield some information, but usually at very high levels. The Mid-Sized Bank Study 2002 is one source. Meridian, Gartner and other research organizations may also be helpful. Again, specifics will be difficult to obtain, so comparisons can only be made at high levels.
• Functional comparisons are even harder to attain, and the resultant data is, by nature of its subjectivity, harder to measure. To do a decent job you need to assess your current functional needs against specific vendor products. Your technology group can probably help distinguish current functional requirements, but if your users and business unit heads aren’t complaining, the current systems are probably adequate – for today’s needs. It’s determining whether your needs will be met over the next three to five years that’s the tricky part.
• Vendor research will yield some information, but it will mostly be marketing literature and only useful at very high levels. Most vendors are willing to discuss your needs for the future, but keep in mind that you are unlikely to hear that a vendor’s solution is inappropriate for your bank.
• Contracting outside expertise can save you time and frustration, but you want to make sure you are not hiring someone to perform original (read “costly”) research to obtain the information you need.

Armed with all of this information, you can make an informed decision, have good documentation of the decision, and be able to respond appropriately to your board members’ questions. Maybe even before they ask.

As an end note, I leave you with this: a renewal with your current vendor should cost no more than your current contract – and include all the newest goodies!
-caf