Cost Inefficiency – An Industry Plague
By Aaron M. Silva, President Paladin fs, LLC
By Aaron M. Silva, President Paladin fs, LLC
A 2nd annual report from the Business Performance and Innovation Network (BPI Network, www.bpinetwork.org) focuses again on the impact that core and IT services contracts have on community financial institutions nationwide. The 2013 report titled “Less Burn, More Return” was well received by the market and generally panned by major core service providers. The newly released 2014 report, titled “The Core Way Forward,” will have a positive reception by bankers as it is a tome of informational data and analysis, never before assembled in one resource. The report includes:
CLICK IMAGE TO READ THE NEWLY RELEASED CORE WAY FORWARD REPORT:
Key Takeaways from the Core Way Forward Report.
Impact on Mergers is Real. The number of mergers has grown since the Less Burn, More Return report was issued in 2013 and of those that have taken place, an ample number were tracked in BPI’s, 2014 The Core Way Forward report, which allowed for actual and quantified measurements of impact. I believe, as the valuation of an institution moves away from tangible book value to profitability, we will see the entry and exit clauses of these agreements reaping havoc on M&A deals going forward unless bankers are willing to attack these agreements in advance, rather than waiting until they already have an LOI or purchase agreement working with another bank. The Core Way Forward report points out that leverage with vendors is wasted if you ask for help after word on the merger is out.
Vendor Consolidation: Vendor consolidation has turned the tables of negotiation even further against the industry. With so few vendors (the report details a total of 5, 3 of which control 85% of the market) there is little competition. Demand for core and IT services [according to BPI’s survey] will increase for the foreseeable future. An oligopoly has formed and there is real concern that banks will have a difficult time getting a fair shake.
Hard Market Data Trumps: No longer can institutions go into a renewal situation with professional negotiators unless they are armed with information that can be backed up and substantiated. Very little efficiency in pricing exists, according to BPI Network, and this may be a result of vendors delivering a “get what you can” approach to pricing. Companies like Paladin, which is equipped with the Paladin Blue Book™ database, are keeping vendors fair and allowing for an introduction of favorable terms and conditions into contracts. Accomplishing these conditions is not without great amount of time, effort, finesse and experience.
Over the coming months Paladin will break apart BPI’s The Core Way Forward report into small, manageable and easy-to-understand chapters. These sectionals provide education and analysis of the material, as well as additional information and insights not found in the report.
You may also find this article in the not yet published quarterly magazine from Community Banker's of Washington's. Click here to view Summer 2014s publication.
In October we highlighted a clear and present danger resulting from the further consolidation of the Core IT vendors. Fewer vendors exist than ever before and the impact to your service level, legal rights and business options are even slimmer if the institution does not make restructuring your relationship and contract a strategic board-level matter. We teamed up with attorney Gary Findley to put on a national web seminar on this very topic that was widely attended by CEOs and CFOs of all sized institutions. With tremendous feedback we have scheduled an encore presentation on December 10th and 11th if you are interested in joining and hearing some proprietary legal and business strategies on how to manage and mitigate this major risks area please attend.
As a middle-aged man I ask this same question of myself all the time. Luckily, my wife is nice enough to not bring it up so often as she might otherwise like to - which is good since this is what makes her a great wife...she lies to me (about me). And of course I know what to say when she asks that question about how she looks in those new pants she just bought too.
I was maybe only 5 or 6 years old when my father took me to the Cow Palace in San Mateo, California to watch Ali and George Foreman fight in what is known as The Rumble in The Jungle on closed circuit television broadcast on giant movie screens. I don't remember much of the fight except that I recall how surly the crowd was and all the smoking. My Dad was always, and still is, a big boxing fan and it was a favorite pastime listening to Howard Cosell describe Ali fights. I watched that fight many times in years since and grew ever more appreciative of just how masterful Ali really was in using the "Rope-a-Dope" to fool his opponents and snatch victory. In my book he is the greatest fighter of all time and like so many sports - there are lessons which can be carried into life and certainly into business.
A recent poll of 10,000+ CEOs and CFOs uncovered a very interesting result: The majority agreed they would participate in M&A in some way however, very few sheepishly admitted (3%) to wanting to sell. But I think the die has been cast.
For an institution implementing a future merger strategy, what would another $250,000+ per year in additional profit mean (without having to make a single loan)?
The Business Performance & Innovation (BPI) Network created quite a brouhaha releasing a new and unique study in May called the Less Burn, More Return (LBMR) that looks at the issues and priorities facing today’s community banks during a period of prolonged low interest margins, increased regulatory pressure and sluggish economic growth. While the study touches many different aspects of current industry business problems, it looks closely at one key area of non-interest expense (NIE) – spending on core bank processing and related IT outsourcing services. The study uncovers a major opportunity for improved efficiency ratios, profitability and franchise value. One California CEO quoted in the study completed a merger just a few months after restructuring a new 7 years deal with their core vendor that in turn added more than 7% to the merger deal for his shareholders. The data used to validate the BPI Network study was collected from surveys conducted with over 10,000 senior executives from banks and credit unions with less than $5 Billion in assets. Interviews and testimony from CEOs, CFOs, investors, and advisors are peppered throughout the 24-page report further standing up BPI’s claims and data sources. The report can be downloaded for free at bpinetwork.org – just look for the Less Burn, More Return program link.
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.