My friends, there is no doubt we are in the midst of unique and challenging banking times. As we approach the start of a new year, we are beginning to see vendors notifying their customers of fee increases larger than ever before. Negotiating opportunities abound in these inflationary (for us, anyway) times. Everything from maintenance fees, to core processing services, to EFT fees begs for better pricing. With this in mind, we thought GonzoBankers out there might be able to profit from some negotiating pointers.
We’ve all negotiated at some point in our life, right? Surely you negotiated the Porsche you bought. Possibly you even asked for a better rate for that outrageously priced hotel your kids just had to stay at right next to the water park.
My first lesson in negotiations happened when I was nine years old and my dad went to buy a new family car. At the local car dealer he found a 1955 Ford Fairlane he thought might make a good hauler for his herd of truants. Dad walked up and asked the dealer what he wanted for the car, listened a bit and made an offer. The salesmen said he couldn’t sell it for that. Dad gathered us up and walked out the door saying, “The offer’s still good through the weekend if you change your mind.” Well, I was thinking my pop was a bit short on the old negotiating style as we were driving away from the dealer and I saw that shiny new ’55 Fairlane receding in our rearview mirror. Amazingly, on Sunday evening, here comes the car dealer to drop off our new car. I couldn’t believe how smart my dad had suddenly become!
Over the years I have had numerous opportunities to negotiate both at work and at home. The lessons learned in my experiences have led me to believe that the principles of negotiation are consistent regardless of the product or service being discussed. It’s safe to say that we all bring some negotiating prowess to the class. But for those slow learners at the back of the class (not you), let’s start with some basics. We’re going to call these the 9 Principles of Negotiating. Here they are:
Principle #1: Make up your mind on what you want.
This is the first principle for a reason. Too often we see our clients ready to enter contract negotiations for a product such as a core or ancillary system when the product set hasn’t been completely defined. Unless price isn’t an issue with your institution, do your research up front and solidify the product set before you start negotiations. If you don’t, the negotiating advantage goes to the vendor. Add on options won’t be discounted at the same rate as the base purchase price of the item.
Principle #2: Know the market price of the item.
Asking a peer who has the same product you’re interested in what they paid for it is asking them to break their non-confidentiality agreement with the vendor – so don’t do it. At a minimum, you’ll need to obtain competitive bids. We suggest a request for proposal process in which you formally ask for bids from the leaders in the products and services you are seeking. Over time you should get a feel for the “street pricing” on the services/products you are looking to purchase.
Principle #3: Establish a budget specific to the item.
Before you buy a new product or service, know how much you have available to spend and stick to it. As you price the product, look at the total five year cost model of what you are buying including initial investment, maintenance or other recurring costs, and cost of living escalators. Building a model will let you see how much of your total budget is going to be consumed by this purchase.
Principle #4: Decide whether you’re willing and able to walk away.
In a core selection or any major service or product purchase, you have to decide how far you’re willing to go down the negotiation path and whether you are ready to move to other alternatives. (Remember the story of my dad and the Fairlane?) We recommend setting up a negotiation strategy before proceeding to negotiations with a vendor. You need to set expectations for what you are looking for from a vendor and discuss what your practical options are. Conscious decisions before the negotiation process starts will supplant many emotional decisions during the negotiations.
Principle #5: Make an offer that’s realistic.
Vendors have margins to meet on the sale of products and services just like any other business. Asking them to move below those margins by offering a ridiculously low price can actually work against you. It lets them know you don’t have a realistic picture of what the street prices are. This adds to their power and detracts from yours. Additionally, you should be aware that when it comes to banking software and services, each vendor has things that can’t be negotiated and things that can. The more information you have on the pricing methods of the vendor before you start negotiations, the more successful you will be.
Principle #6: Be ready to shift your point of view to understand the seller’s role.
Knowing what the vendor wants to achieve and what excites them can help you in your negotiating strategy. For instance, you may find a vendor ready to rewrite a long term contract if you can guarantee them a longer revenue stream or lock in sales from additional services.
Principle #7: Be prepared to compromise.
The Encarta dictionary defines “negotiate” is an “attempt to come to an agreement on something through discussion and compromise.” If you expect to win on every negotiating point you make, you shouldn’t be negotiating. Negotiating is a series of small, deliberate compromises, hopefully well thought out in advance. Make a list of issues concerning the whole spectrum of the relationship (price, terms, conditions, etc.) and decide which are “must haves” and which are “second tier” prior to starting negotiations. Letting the vendor know the “must haves” will help you achieve your goals and let the vendor have a path of retreat on lesser issues.
Principle #8: Be able to understand the terms of the sale.
Not everyone is familiar with the pricing schedules and contract paper used by vendors. Vendor contracts are written to protect the vendor. Not you. Even the best vendors will admit their contracts are confusing and prone to different interpretations. If you aren’t an old hand at reviewing such documents, enlist the services of people who can. At Cornerstone we have seen situations where terms and conditions were so outrageous that no price concessions would have made up for them.
Principle #9: Demonstrate both an ability to trust and be trustworthy.
Key to making a major purchase work is trust by both the consumer and the vendor. Be particularly careful of the commitments you make as you are certainly going to want to hold the vendors to theirs as you proceed to procurement and implementation of your purchase.
As we enter the uncharted waters of next year, we may or may not see even more chaos in our little world of banking. But this much we know: profitability pressures will continue to be on us, and we need to start putting every one of our contracts for products and services under the microscope. If we’re going to have to go back to turning the lights off in the bathrooms, we probably ought to start reviewing some of those high dollar contracts sitting in our contracts file and start seeing what expenses can be reduced. We also need to be knowledgeable consumers in our purchases for new services and have the vendors help share the pain.
In contract negotiations with major vendors, Cornerstone Advisors has saved our clients hundreds of thousands of dollars.
We understand your ultimate system selection is a critical strategic initiative that ultimately supports the company’s long-term strategic plan.
We’ll put 10+ years of experience and our proprietary database of vendor market information to work to help you wade through the hype, reach an educated, objective decision and negotiate a contract with the most favorable terms.