Article

Tech Time: Getting the Upper Hand in Core Contract Negotiations

businessman pointing to a contract being signed by another man with a pen
By The Cornerstone Team

4 minutes

Leverage these three opportunities to secure a better deal.

Reprinted with permission from GonzoBanker. Read the original here

It’s rarely convenient for a busy credit union executive to review a core contract. If a contract reflected market rates when it was signed, how much easier it would be to just file it in a drawer and let it auto-renew! What financial institutions may not know is that taking advantage of industry “sales” events could mean savings at renewal time.

Contract negotiation is typically not the favorite activity of most banking professionals. Ironically, the business events that can cause CFOs and COOs the most stress are the same events that make it the best time to negotiate with vendors for a better deal.

In all our years in the fintech marketplace, we at Cornerstone Advisors have come to recognize one certainty: Sales makes the world go around. Fintech sales teams are paid on commission. Their bosses are paid on commission, and all the way up to the top of the organization (often even in their earnings calls), the vendors speak to sales objectives. Losing a sale or missing a sales target is such a large misstep that the opportunity for a new sale can drive illogical behaviors when it comes to repricing current business. This can be great news for your organization.

Let’s look at some opportunistic situations that can build and support your CU’s ability to effectively negotiate. Note that each of these unique events coincides with a “sale” from the vendor’s perspective:

1. Merger/acquisition—We have seen banks and credit unions negotiate some of the best deals during a merger/acquisition. Why? Because if one financial institution is using Vendor A and another is using Vendor B, it can create a good healthy price war. Neither vendor wants to lose the business—and absorbing the account and transaction volume that formerly belonged to a rival feels like victory.

Add in all of the activities that go into a merger or acquisition—conversion labor, de-conversion labor, and other migration-related expenses—and it’s clear that in-depth negotiations are needed right when executives feel rushed to make decisions and operationalize the merger.

2. In-house to ASP migration—Market momentum is afoot for financial institutions to run core and ancillary platforms in an outsourced model. While evaluating moving from in-house to outsourced is a common event in the industry, evaluating moving from outsourced to in-house is a rare exercise these days. Organizations that have yet to make the move from in-house to outsourced processing have a valuable negotiating chip at their disposal. A vendor will typically charge more when it converts an institution to an ASP environment—fairly so, as the services being provided represent a much deeper value. They also can come with a five- or seven-year contract whereas many older in-house contracts run year-to-year.

Credit unions must ensure that providing this vendor with more valuable “software as a service” annuity revenue is met with a better deal on things like conversion fees, migration fees and services the vendor has been supplying for years. The new agreement also should be inclusive of all of the additional services the vendor will provide under the new relationship.

3. Asset or branch acquisition, or the addition of a major product—The acquisition of assets, accounts, branches, mortgage loans for servicing, or any other non-organic growth event that unexpectedly increases an institution’s expenses (and increases revenue for the vendor) is an opportunity to look at current contracts to determine if the time is right for a renegotiation.

Acquisition events often require an organization to seek additional services from vendors, and that is a time to be careful and negotiate the right deal in the heat of integrating new scale. Even a major product acquisition, such as advancing your institution’s digital or payments platforms, provides a sweetener to vendors that a financial institution will not have during its average contract renewal. Translation: Do the homework and be proactive to drive the best overall value for a bigger package of services.

Most of these events already cause abnormal workloads for the operational staff because they may require training, personnel decisions and/or organizational changes, and they likely require significant financial or strategic modeling and discussions. But these are exactly the times when a credit union is in a position to negotiate the best deal.

The commission check is one of the most powerful forces in the fintech organization. Cornerstone has seen organizations create material value through an informed and assertive negotiation process, and others leave money on the table by failing to recognize the emergence of a true opportunity. In the heat of some of the biggest deals and organizational change inside your credit union, remember: This is the time to bring your A-Game and level the playing field in vendor negotiations.cues icon

A CUES Supplier member and strategic provider, Cornerstone Advisors partners with you to bring innovative insights to help you reach the next level of performance. For more than 15 years, Cornerstone’s financial services and technology experts have focused on one goal: delivering tangible business impact to our clients. 

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