Eliminating redundancy and taking a close look at contract language can curb expense growth over time.
Every bank and credit union 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, landlord, janitorial service and even consultants as little as possible, or at least ensure they’re getting a good deal. Most are proud of their ability to reduce expenses.
If you are one of those 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, and for your core banking system, you likely pay by the number of bank accounts your core vendor is hosting on your behalf.
Credit unions can often help themselves significantly by reviewing the number of inactive users. Let’s consider an example where your organization pays for e-commerce, mobile applications and bill payment on a per-user basis. If you have members that have signed up for these services but are not active users, you are continuing to pay for those users even though they are not utilizing the service.
Consider a policy where services are deactivated for members that have not used them for six months or more. Our clients have found that this type of policy causes minimal member disruption.
Another example is closed accounts. Most core providers charge financial institutions for open and closed accounts. There are reasons that you may need to maintain closed accounts for 12 or 18 months, but often, organizations maintain closed accounts well beyond that period, and some are there forever. Financial institutions generally have a data warehouse available to store the information needed for historical or audit purposes. If older closed accounts can be purged from the core, you could find monthly savings while still maintaining the information in your data warehouse.
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 interesting double charges or potential for over-charging. We have seen contracts that allow clients to be charged for cost-of-living increases. This is typical, and often reasonable. However, many contracts have “greater than” language in the cost-of living adjustment which seems a little less reasonable. That language might read “the greater of 5% or CPI (consumer price index)” or something similar. This language allows the vendor to increase your rates beyond what might 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 occur when your credit union increases its assets. On its own, a fee increase based on growth may seem reasonable, but combined with a cost-of-living increase, this begins to feel like double dipping by your vendor. Dig deeper into your contracts—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 credit union executive is to maintain your organization’s competitive edge. You do that in many ways. You hire the best people, pay competitive wages, find the best locations, sell and serve better than the competition and reduce expenses.
Technology is typically the third largest expense for a financial institution, behind real estate and salaries. Where you may find a competitive advantage is that you negotiate technology expenses once every five or seven years. As the executive in charge of these expenses, you should not be asking yourself whether you enjoy receiving your monthly technology invoices—obviously, most do not. The more relevant question is:
“How much am I paying compared to other banks and credit unions 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 you are being charged the same as your peers 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 industry is good, but the amount of data available to experienced consultants will likely far exceed your internal knowledge.
A good consultant should be able to ask questions that make you think. Most have a successful methodology in place for negotiating the best deal and by and far should be able to get you to a better place with your vendors. Many will have a deep knowledge of contract terms and conditions and can educate you on areas on which to concentrate as you grow your credit union.
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, realize that you are likely paying full price. Imagine walking into a car dealership and paying MSRP. You would not do that if you knew that someone else had just walked out of the dealership with a lower price or rate.
Once you sign a long-term contract, such as for a core, you become what vendors consider a “captive audience” when it comes to adding future products throughout the contract. For several reasons, you are less able to shop elsewhere—generally, that is because the vendor’s products integrate much better with their own core than their competitor’s products. Since you only have one place to shop, you end up paying full price when buying such add-ons partway through the contract.
Our recommendation to reduce future spend is to consider any additional products you may need or want throughout the contract length of potentially five or more years when you are preparing to sign that long-term contract. Prior to the signing of the contract is the best time to get incentives on those future purchases, even if you are not ready to implement immediately.
Review any products that are not working well or that your vendor may sunset over the next five to seven 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.
Charlie Kelly is a partner at Remedy Consulting, New Berlin, WI, and host of the BankTalk Podcast. Remedy Consulting helps financial institutions thrive through best-in-class fintech consulting services specializing in system selections, core contract negotiations, outsourcing/in-house advisory, mergers & acquisition and strategic planning. As a trusted advisor to banks and credit unions located in Wisconsin, the Remedy Team has executed over 600 system selection and vendor negotiations since 2016. Our clients receive a cost reduction on their core vendor contracts and increased efficiency with Remedy’s Price Repository™. To learn more about Remedy Consulting, visit www.remedyconsult.net.