The Fiscal Cliff negotiations are temporarily off the table as our leadership has figured out a way to kick the can down the road. At every level a qualified failure and we can all be disappointed at the entire spectacle. We all saw this coming a year ago when they manufactured the post-election fiscal cliff show down and none of us were surprised they could not get it done when those chickens came home to roost. Like most Americans I am enjoying the brief pause in non-stop news coverage on the failed negotiations. There is always something to learn from failure and so during this respite I have taken the opportunity to reflect on the mechanics of the failed fiscal cliff negotiation and outline some key similarities and observations that I see all-too-often in the community banking industry when bankers and vendors negotiate their own fiscal cliffs (albeit a lot smaller). I don’t believe for a minute that I might be the best negotiator on the planet, nor do I know anyone who might be, but the fact is over the last four years we have successfully restructured and renewed many dozens of multi-million dollar Core & IT services agreements for institutions of all sizes coast to coast. In fact, all we do here at Paladin is restructure and negotiate deals using a proven, research-driven, outcome-based methodology that doesn’t harm existing relationships. In just four years, we are approaching $65,000,000 in hard dollar non-interest expense reduction for our bank clients, averaging nearly $800,000 per deal, and without having to change core vendors (i.e. Fiserv, Fidelity, Jack Henry, etc.) or perform a wasteful RFP process (scam). We’re proud to stand on such a strong record and experience and I hope to share some of these insights with you here.
Watching President Obama, Boehner and Reid fail miserably reaffirms some of the mistakes we
always try to avoid. For starters, to complete a successful negotiation you must “begin with the end in mind.” When it comes to core and IT contracts the goal must be a “win-win” outcome. You want your relationship with the vendor to be stronger at the end of the negotiation than when it started and you also want your shareholders and franchise in a better long-term position paying Fair Market Value (FMV) for a contract that is in strong alignment with your current strategies – not those strategies of five years ago when you signed it last. Obama failed here big as he began arrogant and aloof assuming, because he earned 51%-53% of the popular vote, that he had a mandate and the country was begging for higher taxes. This approach soured the process Day 1 and compromised the chances of a positive ending. The truth is he forgot about what the other 49% wanted that didn’t vote for him – spending reduction and fiscal controls. Bankers can make this very same mistake. Beginning the negotiation believing, and projecting, that the very existence of the vendor depends on their banks’ business and patronage. On occasion, I have personally observed cocky, arrogant bank leaders playing the “if you don’t give me what I want we’ll go somewhere else” attitude. This is very bad form and the wrong way to start any negotiation. Boehner and the Republicans dug their heels in when the President didn’t want to sit down and talk about mutual goals and work out compromises.
Vendors can react in very much the same way. Vendors understand how hard it is for you to voluntarily leave their entrenched Core services by converting to a competitor and if you are a real jerk – they may be ready to call your bluff. They understand all of the pricing incentives offered by waiting competitors. They are experts at defending their turf too and they study call reports, your profitability, financial strength, efficiency ratios, and staffing levels to determine if you really have the wherewithal to actually pull the trigger on a painful core conversion. Because the President did not humbly sit down to create a ‘win-win’ scenario as his first step with Republicans, what the country got was a ‘lose-lose’ and that is what you will get if you begin and conduct a negotiation from a position of arrogance, threats (RFPs) and a “I win, when you lose’ attitude”.
Once Obama and Boehner got past the first misstep, they both started to make even bigger mistakes once their demands were finally laid out. Both parties proposed polar opposite ‘wants’ with not nearly enough elasticity in their idealology to find middle ground. Neither party tangibly communicated what they were willing to concede in order to get what they demanded. Bankers and Vendors make this mistake too when the next biggest rule of successful negotiation is forgotten: “You must be willing to give in order to get.” Many banks want to take, take, take, and give nothing (or very little). This forces vendors into a defensive posture, they can shut down the negotiation and simply play four corners (Google Muhammad Ali boxing tactic) or challenge the banker to consider the time, toil and business distraction an RFP or vendor change will really cost. Vendors know that banks have enough to worry about just trying to make a very slim profit while fending off regulators. Vendors also know that 8.5 times in 10, bankers come back to the incumbent core vendor when they realize that a Core is a Core is a Core and the grass really may not be greener, or less expensive, on the other side. When this happens – they’ve got you in a very compromising position! All of your leverage is evaporated and you may be at the vendor’s mercy. Boehner screwed up here in the same way when his demands were not only unreasonable they were politically unpopular within his own party and so he was forced to concede to terms he didn’t want – higher taxes on job creators. To avoid this mistake, bank leaders should avoid doing anything antagonistic in the beginning like an RFP process (see Paladin blog: RFPs are D-E-A-D) as a tactic to extract cost reduction. Put together a business case on why the renewal is important to the bank and what is needed for the relationship to improve and become stronger. Pre-emptively suggest and propose concessions you would like to make alongside your demands in order to create some balance. Add products, services or more time to the agreement so the vendor is winning too. Don’t pretend your approach is ‘balanced’ as the President repeated again and again even though it was one-sided at every measure. Vendors are not idiots. Yes, they need your business and want your business but they are also free market capitalists too, just like the rest of us and have a high degree of pride and self-respect for the value they are providing. They know that without them, you could not be a competitive bank. Don’t forget that!And finally the third and biggest mistake made by Obama, Boehner and Reid is that the deal was incomplete and had nothing to do with long-term needs of the country. No one was willing to do the hard stuff although most of the electorate knows what needed to be done. They kicked the can down the road – again! They didn’t put into the deal the necessary reforms that are strategically in alignment with what is really important to the United States for the next 20, 30, 40 years. Entitlement restructuring, tax code reform, spending cuts and deficit reduction were all missing and as it sits today – it is a bad deal for the country. This is really the most obvious mistake we observe on a regular basis when reviewing core contracts for bankers. At Paladin we always provide an upfront (free) cost reduction assessment and national market fairness / peer comparison for any bank in the U.S. simply by confidentially providing an invoice and contract copy. In nearly 90% of the assessments we realize that the contract is totally incomplete and remains very vendor-leaning and below market standard. What is important to the bank today, is not what was important 3, 4 or 5 years ago when you signed that last renewal. If a Core contract were a ‘cake’, you should bake every ingredient you can into it so it tastes great when removed from the oven. Remember, you’re going to have to eat what you bake for at least another 5-7 years. Perhaps your bank is contemplating more products in the next 2-3 years…get ‘em in the deal now – don’t wait. Maybe there is a possibility you might buy (another) or sell the bank…get terms in the deal now that protects your shareholders. If your not sure if this vendor is the best long-term provider for an ancillary service such as Internet Banking, Bill Payment, EFT or Item Processing…get terms into the deal that provide you future flexibility should the bank change course or the vendor’s product begins to suck wind. There are so many things that can be modified and incorporated into an agreement so that the cake tastes just like the franchise needs it – but you must know what to ask for and in exact terms. Remember, the vendor is not going to offer to change their agreement…it’s their agreement after all and it is naturally designed to benefit them! Do you offer to advise your loan clients on how to change the terms to favor the borrower?
In summary, don’t approach the negotiation of a renewal with a Core or IT service provider like our federal leaders managed this fiscal cliff failure. Start humble, begin with the end in mind; prepare to give in order to get and by all means, bake a cake that only Mom could make.