FEATURE Vendor Contract Negotiation
BEFORE YOU SIGN…. Sheila Noll, EVP/Chief Operations Officer, Midwest Independent Bank
MIB, as well as the community banks we serve, have been increasingly disadvantaged by data processing and core vendor contracts through the years. In fact, MIB has lost a number of customer banks due to contract language that unknowingly caused a bank to lock into vendor specific products and services. It is no surprise that the big bank software providers have designed their contracts to most benefit themselves. As you look to renew contracts or consider new service providers, here are a few items to consider to better level the playing field.
• No contract should be executed without legal review. Council will help protect you from surprise contract terms that could impact the way you do business.
• Negotiate, Negotiate, Negotiate! Never accept the first offer. Never pay list. (Have you been to a core system user’s meeting? It would seem they can afford to lower the price.) Get what you want for your institution now while you have leverage.
• Specific things to look out for and/or avoid: – Note automatic annual rate increases. Often tied to CPI or an arbitrary percentage rate. Can you live with the increase over the life of the contract? If not negotiate lower. (5% turns into a 25% price increase over the life of a 5 year contract.)
– Note the date you must notify the vendor of your intent to negotiate future contracts and/or exit the relationship. Consider providing a letter with intention to not renew automatically at contract signing.
– Make certain all related contracts with the vendor are co-term; that is, they end at the same time so you are not stuck due to an ancillary product.
– Make certain you have complete access to your data. (Before, during and after entering the relationship.) Contract clauses and system designs can hold your data hostage. Make certain you can extract data for your own purposes without purchasing a separate analytics system. Sometimes you just need information you can massage and analyze yourself with no need to purchase expensive analytical tools, though they can be useful too.
– Make sure you know specific costs to de-convert, per product. Do not accept a vague statement related to de-conversion costs at “then” stated schedule prices. Negotiate a set dollar amount that you can live with.
– Watch for hidden “gotchas”. For example, if you negotiate incentive pricing, make sure there is not a clause that indicates you must pay it back if you do not automatically renew at the end of the contract.
– Watch for language that decreases the vendor’s risk and increases yours. Contract renewals is often when these types of changes slip in.
– Negotiate what will be included with professional services such as training. For example, request a follow-up training
session in six months or a year to make certain your staff is maximizing the capabilities of the software. Or, negotiate a bank of training hours for future training needs. Understand additional costs for onsite training such as travel, room and board for the trainers.
– Negotiate complementary user meeting registrations for key staff to take advantage of training and networking opportunities available at those meetings.
– Understand communication costs. APIs and other direct connections are increasingly critical and will continue to be as payment processing becomes real-time. As it relates to real time payments or any payments processing, make certain your vendor is not pushing you into a solution that may not be right for you in your particular market. Do not make product decisions based solely on what your core provider has available. Their solution may not be right for you.
– If you are happy with your current cash letter processing arrangements, do not let your core provider force you to their product. Make certain you can send your payment processing files anywhere you wish. Make certain the contract language is reflective of this.
– Can you add on new third party products at a reasonable price or are the fees cost prohibitive, forcing you to only use their product(s)? If you plan to add another vendor’s product during the life of the contract, negotiate interface costs now. This holds true for existing products and or interface and file share with other entities such as correspondent banks. For example, files that pass between core providers and correspondents should not have excessive fees attached and can be negotiated down or removed altogether.
– What recourse do you have if contract SLAs (Service Level Agreements) are not met? As it relates to non-performance, try to have stated liquidation damages removed or lowered in the event of vendor failures. What is the responsibility of the vendor in the case of a data breach?
– Finally, if you plan to grow your bank, make certain you have room to grow within the item level fees in your contract. Alternatively, if you might sell during the life of the contract, negotiate a reasonable “out” for such circumstances.
These are just a few items to watch for. I would be happy to visit with you one-on-one if you would like to discuss contract specifics. Again, a legal review is always recommended, but sometimes it helps to have another set of eyes look over things from a functional standpoint as well; particularly as it relates to your correspondent relationship.
10 MIDWEST INDEPENDENT BANK
MIBANC.com
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