I recently misspelled my wife’s first name when I booked an airline ticket. There’s no easy fix to that, let me tell you. I made numerous calls. I begged. I tried logic (go figure). I threatened never to fly that airline again. Turns out the only way to correct the mistake and not have my wife potentially denied boarding the plane bound for Italy was to cancel the original ticket, pay a fee, and re-book the flight. An expensive typo and a “sheesh, they got me” moment.
When I’m not haggling with airline personnel, I’m negotiating vendor contracts. The “gotcha” part of correcting my oversight reminded me of a number of areas in a typical vendor contract that can be a real gotcha to financial institutions down the road. Unfortunately, the long-term monetary pain from a poorly negotiated contract can be much greater than the cancellation fee I had to pay the airline.
What follows are a few examples of vendor contract language that can cost financial institutions big bucks if they’re not careful – and my recommendations for spotting and avoiding these big-ticket gotchas.
Deconversion Fees
Financial institutions thinking to move to a different core vendor may find it difficult to decipher – or even find – the language relative to deconversion fees in their vendors’ contracts. In my experience, this section may include a reference to “standard” deconversion fees or it will state that the institution will be billed for time and materials. Often, deconversion fees are not mentioned at all. So what does this mean for the institution? As an example, one of our clients with 10,000 accounts received a bill for $200,000 to deconvert to the new core product, which came to our attention during the course of a re-negotiation engagement. Ouch.
An institution that receives what seems like an astronomically expensive deconversion quote has a few options. It could try the negotiating tactics of begging or logic that I used with the airline, but that is likely to be as successful with the vendor as I was with the airline. It is difficult to argue what “standard” fees should be if there’s not a definition of standard in the contract; usually it is the price list the vendor assembles and provides after the institution asks about it. This puts the financial institution at a disadvantage, since it needs the files to make the move to the new vendor. And, the existing vendor is well aware of that.
The lesson here is this: FIs need to have specifics on what deconversion fees will be, negotiated at the time they enter into a new contract or renew an agreement with their existing vendors. Common ways of approaching this are to have a “not to exceed” cap or a per-unit approach on calculating deconversion fees.
“Just in time” management techniques might work for inventory control, but they don’t work for negotiating fees in the middle of a contract. Some of the most common ways of approaching this are to have a cap of “not to exceed” an amount or a per-unit approach on how to calculate deconversion fees. Vendors will probably push back and say they can’t do that, they don’t know how much work it will be, how many test files the institution will want or what its special programming needs will be. In fact, all vendors have done hundreds of deconversions from themselves to one of the other major vendors, and they likely have pretty detailed data of the effort it takes to accomplish this.
Conversion Fees
If we had asked our clients five years ago how many were planning on growing through acquisition, most of them would have said “unlikely.” Then the financial crisis hit, and all of a sudden there was heavy acquisition activity from failed institutions and branch sales. A $700 million asset client saw a great opportunity to buy a branch in an area it really wanted to enter. The branch in question did not have many accounts , less than 3,000, but the purchase made sense for many other market reasons. However, our client’s core vendor quoted a six-figure fee to convert the small branch, and that killed the deal. I don’t remember the vendor mentioning how we want to be your business partner at this point in the relationship.
Conversion fees should be spelled out in the contract, and again it is doubtful that there is a mention of them or a time and materials reference in the present agreement. We like to turn the table on the partnership spiel with the vendors at this point in negotiations. If the vendor wants to be a true partner, during initial contract negotiations is the time to commit to performing a modest conversion for a modest price. Vendors have done countless conversions from the other major core products. So, vendors that argue that they cannot quote a conversion fee due to the unknowns are lying, stalling, bluffing or all three. Many times vendors will waive conversion fees for new clients, so why won’t they at least be reasonable with existing clients? Logic doesn’t always work with vendors after the ink is dry on the contract, so financial institutions should make sure to negotiate all key fees explicitly during initial negotiations.
Contract Dates
As the major vendors have continued their acquisition sprees and added more products to sell, their pitch of one-stop shopping and seamless integration makes some sense. Over time the institution adds products and services to the contract via amendments. One of the classic mistakes FIs make is to allow these amendments to have termination dates that are different from the master agreement. This can be an expensive mistake if the institution ever wants to change its provider relationship. One of our clients was surprised to learn that the new Internet banking contract it signed with its core provider had a termination date that extended four years beyond the core agreement. Terminating the IB contract early would have cost the institution in the middle six-figure range.
This issue is one of the simplest to fix. Financial institutions should make sure there is language in the master agreement that any amendments to the master are coterminous with the master.
The Disappearing Discount
We have seen contracts that allow the vendor to immediately raise prices and/or discontinue all discounts, some retroactive to the beginning of the contract, if the client gives notice that it is not renewing its agreement. This little gotcha is less common than some of the others we run across, but it can be a pricey oversight. Institutions should carefully read and negotiate any discount provisions that have “payback” or “discontinuation” provisions.
Unlike the airline industry that really has become a “take it or leave it” environment, vendor contracts still need to be mutually agreed to by both parties. We have hope.
-bh
Cornerstone Advisors has negotiated contracts with virtually every major technology vendor in the financial services industry. The Cornerstone Vault – our comprehensive database of vendor pricing and service terms – has helped hundreds of our clients realize millions of dollars in savings.
For the peace of mind that comes with knowing you got the best possible contract pricing and terms, contact Cornerstone Advisors today.