After eight long months of work, the bank’s system selection team picked the new core system vendor and it’s not the incumbent. Visions of new features, expanded capabilities, easy to use products, improved interfaces and simplified ad hoc reporting are dancing through the heads of the team members. “Whew, it’s finally over and we can all get back to our full time jobs!”
Amidst the celebrating, the CEO walks in with a letter from Core ‘R’ Us, the incumbent vendor. “Ladies and gentlemen, our account manager dropped off this revised pricing proposal today and we need to take a look at what he has offered. On the surface, it appears that they have tossed a financial bomb into our decision process and we are obligated to take a look.”
“What is a financial bomb?” you ask. A financial bomb is financially equal to or less than your best offer, is substantially less (25% or more) than what is currently being charged to the bank, and includes additional products and services.
Does this sound familiar? Has this happened to your bank? Why is this happening today and how you should respond if it happens?
Why would Core ‘R’ Us, at the last moment, make an aggressive financial proposal? Desperation perhaps, but the real reasons are far more complex than you might imagine.
System offerings from the traditional core providers have actually changed very little in the last 10 years. This is particularly true of the customary core offerings, deposit and loan accounting, CIF, etc. My email will likely overflow on Monday with many vendors recounting the multitude of functional enhancements implemented in the past few years. This may be true, but much of the work has revolved around “pretty” front ends, regulatory changes and improved integration with other products. Remember the days when you could walk downtown in any U.S. city and tell where you were by the brand name stores? Try that today in almost any city in the world and you’ll have no idea where you are because all you will find are the international chain stores. The same is true for core products; everything you see is available in every other product.
To be fair, a few vendors have worked hard to differentiate themselves with innovative products, but it is a small list. Without different products, competition often becomes price based. How else can they capture your attention?
Banks tend to be sticky with their primary system vendors. The reason is simple: it is an expensive, risky task to change core providers. In my experience, the incumbent vendor tends to be complacent about the risk of losing its client’s business. The incumbent often believes the only reason a bank formally reviews options is to force better pricing.
It is not uncommon for the incumbent to propose the same product at the same or slightly different price. A lax attitude combined with a “me too” offering just doesn’t dazzle the review team. Consequently, the incumbent is amazed when it is notified of the loss. It is only then the vendor focuses on its customer and gets serious about retaining the business. This is a good place to insert my editorial comment.
Dear Mr./Ms. Vendor:
If your customer has started a system look, it is because you have not delivered the service, product or relationship that meets their needs. Now you must slug it out with the competition.
Why do price bombs get tossed?
Price bombs happen because the industry has a few, large vendors with more capacity than demand for their product. Replacing lost business simply means this year’s goal is now equal to planned revenue growth plus replacement of all lost revenue.
Briefly, your vendor will put an aggressive price offer on the table for the following reasons:
What is the obligation of your bank? I believe an offer of this magnitude should be treated in the same manner as an offer to buy the bank; you have an obligation to your owners, management and customers to fairly evaluate the offer. In spite of your obligation, some management teams react negatively to the offer believing that the current vendor should have addressed the issues earlier. If the beliefs are strongly held, then further review will be a waste of staff resources.
Assuming that the offer is not rejected, let’s agree on a few rules.
These rules will help focus the effort and ensure it does not bog down in process for the sake of process. Keep the review at a high level and be prepared to discuss results with management.
Here are the questions that should be considered:
What is the real cost of continuing with the incumbent set of products and services?
Staying with the incumbent means that missing functionality needs to be identified and fitted to the solution. For instance, if a CRM product was necessary to meet the sales focus in the business plan, then a CRM solution cost estimate, including integration costs, should be included in the estimates. It is likely there are four or five important functional gaps that will need to be filled. The total of these pieces will yield a more accurate picture of the “real” cost of continuing with the incumbent.
Meeting business objectives is important to employees, management and owners. Systems are tools to help accomplish those goals. Selecting a new set of bank systems generally is driven by the need for improved or missing functionality. Can the incumbent build a credible business case for filling those gaps in a reasonable amount of time and control the integration risks? This case must then be weighed against the new vendor’s ability to deliver its promised products and services.
Finally, if no change is made, will the business units renege on their ability to make goal? Well, probably not, but the water cooler talk would be entertaining. These managers may have committed to their plans based on the capabilities inherent with the new solution and to reach goal may require additional head count that would have a negative earnings impact. Their answer will depend heavily on the team’s answer to the second question.
Lastly, the morale of the selection team and other bank staff must be taken into consideration. As noted earlier, the typical selection process can take six to 12 months and involve every bank employee to some degree. Staff excitement following demonstrations of enhanced and improved products can be hard to stifle if they face continuing with the “green screens” of yesterday. Once they have seen Paree…….
Well GonzoBankers, this opportunity does not come along often, but it can offer insight into both your current and potential new vendor. If your selection process fairly evaluated the alternatives, it makes responding to the financial bomb much easier.