undefined"No man is an island." – Businesses cannot succeed in serving their customers without the support and services of other businesses that specialize in certain areas, and banks are no exception. Without the services of third-party providers, it would be impossible for banks to provide their customers with the technology, products, and services they demand. Ultimately, a bank's relationship with its vendors is nearly as important as its relationship with its customers. 

That's why, when it comes to contract negotiations, a growing percentage of banks are choosing to engage the services of an outside consultant or attorney (or both) to assist them. When renewal season arrives, each bank must determine whether to go it alone or work with a partner, in addition to several other critical decisions. 

Factors to Consider First

When approaching a contract negotiation, bank leaders should consider three main factors before crafting their action plan: the importance of the vendor's services, how the contract fits with the institution's overall strategic plan, and timing. 

The very first question to ask is "how important is this contract?" because the answer will help determine how much to invest and whether outside assistance is required. "The criticality of the relationship that you're building, whether it's in terms of cost, your customers, or a particular product line, will help determine the amount of time and effort you put in," said Shane Bauer, FVP/Compliance, BSA & Security at Bankers' Bank, Madison. Hypothetically, a bank could put in weeks or months of work to negotiate the most beneficial contract possible with their office supply vendor, but they'd get a much better return on that time and effort by focusing on a technology or data contract instead. 

The next question management should consider is "how does this contract fit into our strategic plan?"; the answer will help the bank define needs, wants, and wishes. "Make sure you understand what you want to get out of the contract," Bauer advised. "What do you absolutely need to have, what will you ask for, and what will you wish for? Knowing that will help you stand your ground on the most important points." Understanding how the contract fits with the bank's strategic plan will also guide negotiations on terms. "One of the questions to think about is how the contract fits within the bank's strategic plan," said Patrick Neuman, attorney at Boardman and Clark, LLP. For example, many core data processor contracts, among others, have early termination fees. "Do you plan to remain independent for the next five years? If so, a five-year term is fine," Neuman explained. "However, if a sale or merger is on the table, then it may be worthwhile to take a hit on pricing in the short term to avoid a large termination fee or negotiating specific termination fees in connection with a sale." 

Finally, banks must consider time constraints when embarking on contract negotiations. Two of the biggest mistakes in contract negotiations are waiting until it's too close to the expiration date to do a thorough review of the contract and missing the expiration date altogether, triggering an auto-renewal. 

Three Common Mistakes to Avoid
  1. Not bundling. Using the same vendor for multiple services but not bundling those services together can be an expensive oversight. "If you bundle services from the same provider you tend to get a better rate and they're typically coterminous," Flynn explained. "If you have overlapping contract expiration dates, it could make it harder to leave that vendor in the future."
  2. Glossing over the boilerplate. "Not paying attention to the boilerplate provisions in a contract can be a mistake," said Neuman. "Nobody wants to read those provisions, but there really are a lot of important terms in the boilerplate that sometimes get overlooked." For example, venue and jurisdiction. If the vendor is located in a different state, the contract likely says that any contractual dispute suits or arbitration need to be brought in the vendor's home state. This puts the bank at a big disadvantage – it's dealing with unfamiliar law and will likely need to hire local counsel, increasing the bank's expense. 
  3. Not shopping around. Many banks are not fully aware of the scope of today's vendor marketplace, especially when it comes to technology providers, according to Flynn. "Don't get comfortable and complacent with a specific vendor, or you could miss significant reduction in expenses or new products and features," she said. "The marketplace is changing so rapidly, especially with the card processing mergers taking place. Sometimes it's beneficial to look around at other providers."

"Set a realistic timeframe for the project," said Kelly Flynn, national sales director – contract optimizer at John M. Floyd & Associates. "If your contract expires within the next six months, you're not giving yourself enough time to really evaluate the contract and whether or not you want to put it out to bid." She recommends starting the process 12-18 months prior to the expiration date. Avoid auto-renewals if at all possible, especially for technology contracts. "As technology advances, costs should go down," Flynn explained. "So, if you let a five-year technology contract auto-renew without sending a nonrenewal letter, chances are you'll end up overpaying. Let the vendor know they will need to earn your business each term." Starting early gives the bank time to set accurate pricing targets. "Efficiency is crucial to a community bank's survival, and much of that starts with making sure you are not overpaying your vendor compared to what the bank next door pays for similar services," said Charlie Kelly, partner at Remedy Consulting.

Regulatory Resources for Contract Negotiation

Choosing a Partner or Flying Solo

After determining the importance of the vendor's services, how the contract fits with the bank's overall strategic plan, and any timing constraints, the next step for bank leadership is to decide whether to enter into the contract negotiation using only in-house talent or to seek assistance from an outside partner. The primary benefits to keeping negotiations in-house are cost, speed, and simplicity. The bank does not need to pay for the services, doesn't need to spend extra time vetting and contracting with a third party before beginning negotiations, and eliminates the complexity of managing another third party.

However, for contracts that meet a certain importance threshold, the cost of keeping negotiations in-house could outweigh the cost of acquiring outside help. "If the cost of getting the contract wrong greatly exceeds the cost of getting assistance, you should get assistance," said Bauer, noting that core processor contracts are where banks most often seek outside help. By working with a third-party consultant or attorney, the bank gains access to valuable experience and information they wouldn't otherwise have. "Many banks simply do not negotiate their core contract frequently enough to know how much they pay compared to their peers, so they do not understand their negotiating strength," Mr. Kelly explained. "This can usually only be solved by bringing in a consultant that has a database of previous negotiations that can provide guidance to the bank."

The number of banks choosing to negotiate important contracts on their own is shrinking, but flying solo still may be the right choice for some institutions. The most important considerations when keeping things in-house is to centralize information. "If you're going it alone, the biggest thing is to stay organized," said Mr. Kelly. "Assign one individual to do the research and own the negotiation. Get organized internally so you know what you are trying to accomplish in price, product, and contract terms and conditions." However, even when electing to negotiate on their own, most community banks today hire an attorney for a legal review of their core data contracts, according to Neuman. "What you're looking for is someone who has experience with these vendors," he said. That familiarity, he explained, can save time and money for the bank because the attorney will see how the contract changes from year to year, allowing revision requests based on previous versions of the contract.

To find the right partner to guide negotiations, the bank should ensure the individual negotiator they'll be working with has deep industry experience. Requesting and verifying client references is one way to do so. It's also critical that leadership make the decision to work with an outside consultant early in the process. "If you're ultimately going to have someone do it for you, make that decision sooner rather than later," Mr. Kelly said. "The later they join, the less effective they can be."

In the end, the most important factor to keep in mind when negotiating third-party contracts is that the negotiation is the beginning of a relationship, one that is an important component of the bank's ability to serve its customers. "The best contract is one where both sides walk away feeling like they got something valuable out of it," said Bauer. "Even though you're playing poker and laying your cards down carefully, you're not trying to beat them. You want to build a good relationship."

Seitz is WBA operations manager and senior writer. 

Bankers' Bank is a WBA Gold Associate Member.
Boardman and Clark, LLP is a WBA Gold Associate Member.
John M. Floyd & Associates is a WBA Bronze Associate Member.
Remedy Consulting is a WBA Associate Member.