The Remedy Blog

Every bank CFO I have ever met would like to pay as little as possible for the most value. Each executive would like to pay their vendors, employees, landlord, the janitor, and even consultants as little as possible if they thought they were getting a good deal. Most of them are proud of their ability to reduce expenses.

If you are one of those bank executives, here are some areas you may be missing in expense reduction with your technology vendors:

1. Eliminate Usage Redundancy

Every technology contract has “per-use” charges. For Office 365, you pay by the number of Office 365 users. For debit processing, you pay by the number of card transactions of your customers, and for your core banking system, you likely pay by the number of bank accounts your core vendor is hosting on your behalf.

Banks can often help themselves significantly by reviewing the number of inactive users. Let’s use an example where you pay for eCommerce, mobile applications and bill payment on a per user basis. If you have customers that have signed up for these services but are not active users, you continue to pay for active users when your customers might not even be utilizing the service.

Consider a bank policy where services are deactivated for customers that have not used them for six months or more. Our bank clients have found that this type of a policy has very little disruption to these customers. Some of our clients even charge customers a monthly fee when there is no usage, again with little customer disruption.

Consider a bank policy where services are deactivated for customers that have not used them for six months or more. Our bank clients have found that this type of a policy has very little disruption to these customers. Some of our clients even charge customers a monthly fee when there is no usage, again with little customer disruption.

2. Review Hidden Contract Language

There is nothing exciting about reading a technology vendor contract. However, deep in the bowels of your contract, you may find some double charges that may be of interest to you. We have seen contracts that allow clients to be charged for cost-of-living increases. This is typical, and often reasonable. However, many contracts still have “greater than” language in the cost-of living adjustment which seems a little less reasonable. That language might read something like “the greater of 5% or CPI” or something similar. This language allows the vendor the ability to increase your rates beyond what would seem reasonable, particularly in a contract with a longer term.

What you may also find in your contract are escalators for growth. An example of this might be if your bank increases its assets. Taken independently, this may seem reasonable, but combined with a cost-of-living increase, this begins to feel like double dipping by your vendor. Dig deeper, you may find other examples of where your costs are increasing faster than your revenue.

3. Complete Pricing Due Diligence Reviews

Your job as a bank executive is to maintain your bank’s competitive edge. You do that in many ways. You hire the best people, pay competitive wages, find the best locations, sell better than the competition and reduce expenses.

Technology is typically the third largest expense behind real estate and salaries. Where you may find a competitive advantage is that technology is the only one of your largest expenses where you negotiate much of the expense once every five or seven years. As the executive in charge of these expenses, you should not be asking yourself whether you feel you like your monthly technology invoice—most do not. The more relevant question is:

“How much am I paying compared to other banks of a similar size?”

Technology contracts are complicated and you do not have access to a Consumer Reports or Kelley Blue Book for technology spend to help you understand whether what you are being charged is the same as your peers of a similar size for similar services.

Consider bringing in a third-party consultant. A good consultant has years of experience negotiating these types of contracts and should have worked at a large vendor for several years. A consultant that worked as a salesperson or client partner will be effective but may not know as much as someone who worked in a centralized finance role at a vendor where they compared hundreds or thousands of negotiated rates.

The adage the “two heads are better than one” definitely applies here. Your team’s experience working inside the bank is good, but the amount of data available at the vendor far exceeds your internal knowledge.

A good consultant should be able to ask questions that make you think. Most have a methodology where they have found success for negotiating the best deal, and by and far should be able to get you to a better place with your vendor. Many will have a deep knowledge of contract terms and conditions to educate you on areas to concentrate on as you grow your bank.

4. Consider Buying in Advance

If you have ever purchased an add-on product from one of your large technology vendors midway through a contract period, you realize that you are likely paying full price. Imagine walking into a car dealership and paying MSRP. You would not do that if you felt that someone else had just walked out of the dealership with a lower rate.

Once you sign a long-term contract, you become what the vendors know as a “captive audience” when it comes to adding future product throughout the contract. For several reasons, you are unable to shop elsewhere. Generally, that is because the vendor’s products integrate much better to their core than their competitor’s products. Since you only have one place to shop, you pay full price when buying midway through the contract.

Our recommendation to reduce future spend is when our clients are preparing to sign that long term contract with their primary vendor that they consider any additional products they may need or want throughout the contract length of potentially five or more years. Prior to signing of the contract is the best time to get incentives on those future purchases, even if they are not ready to purchase and install immediately.

Review any products that are not working well or that your vendor may sunset over the next 5-7 years. Do you have a pre-approved rate for the replacement product if they offer one? A bit of pre-planning may save you a lot of money over the course of the contract.

Good luck, and feel free to reach out if you have any questions on the ideas discussed here.

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