Paladin Blog

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.

Trekkie fans will understand the reference to the BORG and what it fees like when you don't have many choices.  The assimilated Captain Picard provides this famous line, "...from this time forward you will service us."  With the recent purchases of OSI by Fiserv and Harland by D+H many bankers believe the line could be rewritten, "...from this time forward ONLY we will service you...And you have nothing to say about it."

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.

“How do you do that and make money?” “Are you crazy, why would you give away what you know?” “There has got to be a catch – really…for free?” These were the top three questions heard from bankers after we announced that all of our national market research on Core & IT providers was accessible to CEOs and CFOs for no cost or obligation. Yes, we even provide our analysts’ time up front to discuss the entirety of your Core & IT contract renewal options, make recommendations to the bank and specifically detail what steps you should take even if you do it on your own. Is it crazy consulting? No. It’s called Naked Consulting and while not a new concept in business, this model is quite rare in a community banking industry accustomed to the rote approach of paranoid vendors holding back the answers until after you have signed their contract. Coined by a old friend of mine and best-selling author Pat Lencioni (Five Temptations of a CEO, Five Dysfunctions of a Team, Death by Meeting) it describes a way of consulting whereby you build trust, confidence and respect with bank leaders [in you] by being vulnerable, disclosing and completely honest in advance. And yes, you do give away proprietary business intelligence, insights, advice and direction in the early stages of earning business relationship and without expecting a penny of compensation in return.

I had the great fortune of hiring Patrick as my CEO Coach for about 2 years (circa 1998) just as he was publishing his first book. I learned a lot from him about being vulnerable, completely clear and not being afraid of saying what I thought was important even if it meant taking a slightly weaker negotiating position. This style of management and consulting has served me well over the years and while he had not yet invented the concept of naked consulting back then – his most recent book Getting Naked finally does and I recommend it strongly.

In my last article we summarized that there are two initial steps necessary to successfully renegotiate a new or renewal service agreement with any Core or IT vendor. Step One: Admit that you’re a banker and not a CIO. The deck is stacked against you. These multi-billion dollar corporations have forgotten more about writing a obnoxiously favorable vendor-leaning agreement than you might ever know in your entire career as a banker. That’s nothing to be embarrassed about – it’s reality. Begin with the humility of “knowing you don’t know what they know.” Step Two: Don’t believe for a second that beating up your vendor will get you anything that might not be gained with a more partnering approach. Using an RFP process or overtly entertaining other vendor pricing (when you genuinely have no real intention of ever leaving your current provider) is a crime and a shame. Speaking as a former vendor…there exists a silent code amongst vendors for treatment of bankers that use this water boarding tactic to extract improved pricing, terms and conditions. That is, you may get the pricing you want – but the partnership is over. Forget ever calling in a favor or receiving anything that resembles a “deal” in the future. Unlike terrorists, you can get you want out of Core & IT vendors without the torture of an RFP or public hearing with their competitors.

So then, if you are ready to be humble and show your vendors respect, then you have a chance of executing the next steps successfully.

More than ever in the history of American banking, bankers are looking for sensible costs of doing business. They want to pay a fair price to attract and retain solid core clients.