Time to Negotiate IT Contract?

CUNA’s E-Scan Newsletter
December 6, 2010 | COMMENTS

Financial institutions need to be aware that in the current recession, opportunity abounds to strike better deals on products and services from IT vendors as they try to gain market share. Half of the vendors serving the banking industry have experienced revenue declines since 2007, according to Christine Barry, research director at Boston-based Aite Group.

“Financial institutions are sitting in a seat of power now,” Barry tells the Independent Banker. “Most vendors have felt the pain of the crisis, and they’re motivated to negotiate with their customers to keep them.”

Vendors also have consolidated, and the market is competitive.  Some vendors have approached institutions that haven’t requested bids, says Bret Herbert, technology practice manager at Sheshunoff Consulting Services. Consolidation requires that vendors work harder to retain customers they have while enticing new ones—all in an atmosphere of reduced IT spending. 

“The pipeline really shrunk for a lot of the vendors,” says Herbert. “It’s a very aggressive market.”

Several situations are worth consideration in the negotiation process, including:

• Institutions within two years of contract expiration will have more room to leverage than those in the initial terms of the contract.
• Those that purchased upfront the hardware, licensing, maintenance, and software for their IT departments have less chance to negotiate.
• Because the number of vendor customers has decreased, institutions that outsource might have a good chance to renegotiate.
• A customer that has previously chosen not to haggle might have better luck in cost cutting than one that consistently does so.
• Requests for proposals can be solicited up to two years before contract expiration, thus indicating serious bargaining intent.
• Addition of products such as remote deposit capture or fraud management can be a bargaining point.
• Many vendors offer training, branding, and marketing materials that can become part of the package.

“Contract negotiation is an art, not a science,” says Kent Conrad, director, RSM McGladrey, a specialist in technology consulting services, in his white paper The Art of Negotiating Vendor Contracts. 

There are several critical negotiation and review issues to address when designing IT contracts, suggests Conrad. Be sure to consider the following:

• Services provided. Know your expectation of the vendor, and include time frames, custom requirements, and scope of work to be provided.
• Performance standards. Define them, based on in-house or service bureau delivery mode. Consider downtime parameters, delivery and accuracy of data statements, and penalties for deviation.
• Security controls and confidentiality. Consideration may vary depending on in-house or outsourced provision of services. 
• Data ownership and licenses. Think about terms and expenses related to possible future de-conversion. Retain ownership of domain names and logos your institution needs for your web presence.
• Length of terms. Consider automatic renewal clauses and penalties or early termination language.

 Financial institutions can do some leg work before even approaching the negotiation table, according to Conrad.  For example, a sample contract should be obtained for thorough review, along with an initial price quote. 

Also, keep in mind that vendor contracts constitute a relationship. It’s to the benefit of both parties that the outcomes bring mutual gain—in effect, funds are made available to the vendor for provision of future support and product improvement.