Subterfuge

Afternoon, GonzoBankers! Contrary to what you may think, life at a top flight consulting group ain’t always as glamorous as we try to portray it. Sure, we spend luxurious nights at Red Roof Inns, drive rented Geo Metros, eat lavishly at Bennigan’s, even politic our way onto the first boarding group on Southwest Airlines – all on our clients’ tab! (That’s just the part we put in the recruiting materials, though.)

Truth is, beneath the shiny veneer of our imported Latvian suits and polished, Crest White Strip-enabled smiles, we spend a lot of time in the trenches, sweating the details for our clients. Personally, I’ve been doing a LOT of number crunching. A significant part of assisting our bank and credit union clients in selecting core systems is helping them understand the Real Costs involved, bubba.

Clients hire us because we see dozens upon dozens of cost proposals every year. But even if you don’t hire a know-it-all consultant, I cannot recommend loudly enough that you invest the time and effort to really analyze the numbers the vendors put before you.

Put a hungry young analyst from Finance or Accounting on the job. You need someone eager to shoot holes in the proposals, someone who will glow at every opportunity to uncover a vendor’s omission, oversight or understatement. One way or the other – just do it, because one thing you can be assured of is that the initial numbers the vendors submit to you are not the numbers you will see on your bill.

You can’t blame the vendors. Their job is to give you a cost proposal that will make their product look attractive – just enough to be technically truthful. If you ask, they’ll give you details. But like that ex-dancer you’ve been dating, they’re not going to just VOLUNTEER the dirty secrets. You have to ask. Keep in mind that you’re just seeing the tip of the iceberg when you see the out-of-the-box numbers from the vendors. That’s the healthy perspective. Then start digging.

Some vendors do a better job than others at describing how their prices change, but never, never, never believe the numbers you see on the glossy “Investment Summary” provided by the vendor. That summary is like the 55 MPH speed limit; it’s more of a loosely considered rule of thumb than something with any real credibility. Cigarette manufacturers do not truly expect you to believe that their new filtered, low-tar cigarettes will kill you less slowly than an unfiltered Camel. Coors doesn’t honestly expect you to pay attention when they whisper “Drink Responsibly” at the end of their commercials. And the core vendors don’t really think you’ll take them literally when you read their Investment Summary. It’s marketing, not a sworn oath.

The vendors are either getting increasingly clever or exceedingly lax when proposing their costs. In the last cost proposal you read, did the vendor:

• Disclose how processing, license and maintenance costs will rise as you grow? Rising costs with the bank’s growth used to be monopolized by the service bureau providers. But the in-house players are now fully on board. Just about every one of the in-house players now increases its license and/or maintenance costs as the bank’s assets or accounts rise. Credit union players tend to vary license and maintenance costs as member volumes grow. But few will tell you that up front. You have to ask.
• Inform you that it can raise prices every year, regardless of growth? Ah yes, the ever-famous cost of living allowance that at best gets mentioned in the fine print at the end of the proposal. I’ve seen COLAs as high as 7 percent.
• Tell you how many seats or licenses you will really need? A famous tactic the vendors will take is to underbid the number of seats that you will truly need to run a given ancillary product as advertised. They will bid 50 seats when you will likely need 75 – and take care of the difference on the first bill.
• Disclose maintenance costs for interfaces? Most of the vendors will charge between 15 percent and 25 percent for maintenance on interfaces, but for some reason very few will tell you about it unless you ask.

Those are just a few of the things you simply have to check. Add to that list hidden modules that you must buy to make the product work correctly, undersized hardware for the FI’s volumes and growth expectations, and real time interfaces weighing in at two to three times the cost of the quoted batch interface. The list ambles on, and though the length of the list varies by vendor, I’d stutter if you asked me to name an exception.

Here are six cases in point. Below are summaries of recent vendor pricing proposals I have analyzed. They come from FIs with relatively modest growth expectations and fairly vanilla system demands. I did not cherry-pick FIs, situations or vendors.

	Vendor’s 5-Year Investment Summary	Five-Year Cost after Analysis and Detailed Vendor Interview	$ Difference	% Difference
Proposal 1	$9,700,000	$13,100,000	$3,400,000	35%
Proposal 2	$16,200,000	$20,200,000	$4,000,000	25%
Proposal 3	$6,500,000	$8,200,000	$1,700,000	26%
Proposal 4	$3,091,317	$4,200,000	$1,108,683	36%
Proposal 5	$3,100,000	$4,100,000	$1,000,000	32%
Proposal 6	$2,713,547	$3,300,000	$586,453	22%
			Average	29%

Coincidentally, the preceding table includes bids from six different vendors. This is not an isolated situation. These variances are representative of every system selection process that we undertake. The average, shoot-from-the-hip cost summary is 30 percent lower than what the FI’s involved are likely to pay to the vendor over the five-year contract period. Only one of the vendors came within 25 percent of the FI’s realistic cost outlays. And 25 percent is not exactly something to write home about. Twenty-five percent on an exam is the difference between an A and a D.

It’s Bad versus Worse out there when it comes to getting a realistic cost estimate from the vendors, GonzoFreaks. Put your time in and study the proposals. Ask the tough questions. Senior management and the board will not hear you when you explain that the vendors didn’t give you the information you needed to accurately assess the costs of a new system. They will only remember the 25 percent expense underestimation that you submitted to them. Plus or minus 25 percent ain’t gonna cut it with that crowd, Chachi.

So fire up your eager analysts and passive-aggressive, tightwad number crunchers and dig in. It just might be fun.
-smh

“If a cop stops us and starts stickin’ his big snout in the car, the subterfuge won’t last. But at a glance, the car will appear to be normal.”
–The Wolf
Pulp Fiction