The Bottom Line

CURRENT ECONOMY REVEALS STRONG NEGOTIATING HAND

Posted by Strategic Resource Management on Jan 16, 2014 9:00:00 AM

When the late Victor Kiam declared in a television commercial that he liked Remington shavers so much that he bought the company, the legendary businessman was being a little disingenuous. A more accurate, though admittedly less colorful, statement might have been that his negotiating skills would enable him to cut the nearly bankrupt company’s expenses, boost earnings, and make it profitable again.

Not everyone is a born negotiator like Kiam — or like my father, someone who views every day as an opportunity to negotiate. He thoroughly enjoys the back-and-forth banter, the give-and-take, and the challenge of cutting a deal. I didn’t inherit that gene, and negotiating was not something I came to naturally. But early in my financial services career, I realized that I had better learn how to do it well because my success would depend on negotiating mutually beneficial deals with customers, vendors, and partners.

As an expense control mechanism, negotiating has become indispensable in today’s economic environment. In fact, opportunities are at an all-time high right now to negotiate better pricing for costly information technology (IT) software, systems and services across all key vendor relationships.

TALKING TO VENDORS

Many financial institutions have deferred for several years any decision to convert to a new core processing system or other significant IT infrastructure investment due to concerns about expense control. Research indicates that only 3 to 4 percent of financial institutions are doing system conversions. This trend did not start with the economic crisis, but it has intensified as banks focus on expense control.

On the vendor side, the shrinking pool of new sales opportunities drives a greater focus on retaining current clients and preserving existing revenue streams. For the few opportunities that do arise, vendors are making price concessions in order to win the business. The result has been steady downward pressure on fees for outsourced core processing and discounts for in-house solutions.

During the past few years, we saw outsourced processing fees steadily decline due to term and relationship discounts, and discounts for core software have also been significant. These pricing adjustments are substantial and represent real savings for the institutions that take advantage of them. Given the overall cost of IT, even a relatively modest 15 – 20 percent reduction in processing costs can have a material impact on expenses over the life of an agreement. And that level of savings potential is only the tip of the iceberg for some organizations where savings in excess of 40% are possible.

WHAT IT TAKES

The process of negotiating an agreement for IT systems or services can get exceedingly complex, and you may go back and forth with dozens of scenarios and various iterations before reaching agreement. To succeed in this process, strong negotiators keep several principles in mind. The following are a few of those principles along with words of wisdom from some born negotiators:

1. Realize that a successful negotiation yields an agreement that benefits both parties and preserves or creates a good relationship

Contract negotiating is not a zero-sum game where one side wins and the other loses. Vendors have to make money, you have to ensure beneficial terms for your bank, and the two objectives can coexist. A winner-take-all approach to negotiating only breeds distrust, which can permanently harm the relationship.

“My father said: You must never try to make all the money that’s in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won’t have many deals.” — J. Paul Getty

2. Understand that the other party is acting in its own interest

It is up to you to make sure your requirements are met, and you should fight hard for fair concessions.

“In business, you don’t get what you deserve, you get what you negotiate.” — Chester L. Karrass

3. Do planning and research

To have a basis for comparison, you need to gather information not only about costs but also about key functionalities. Vendor demonstrations are one way to obtain the information, but there are other ways as well. Try talking to your peers or visiting other financial institutions to see prospective solutions in action. You may be able to find comparative data or user comments online. You may also turn to outside help to provide you with information.

“Information is a negotiator’s greatest weapon.” —Victor Kiam

4. Approach each negotiation anew

Some negotiators underestimate the complexity and exertion of negotiating because they successfully negotiated a contract several years ago. Things are different now: the market has changed, vendors have changed, and your financial institution has changed. An overconfident negotiator is often a weak one.

5. Use your leverage wisely

Every time you enter into a negotiation, you begin with a certain amount of negotiating capital. Don’t waste that capital on things that don’t matter. Instead, decide what really matters and drive for concessions in those areas. Figure out what matters to the other party.

6. Walk away from bad deals

Just because you have invested countless hours and effort into the negotiations, don’t make the mistake of accepting a bad agreement. You can always use the experience to find a good deal, and they are out there.

“Necessity never made a good bargain.” — Benjamin Franklin

7. Know when to seek help

Today’s IT-related contracts and pricing structures are complex and often ridiculously confusing. It’s very difficult to know whether the pricing and terms you’re being offered are in line with the market. Talking to peers in an option, but most are reluctant to share specifics about our contracts (and are often prohibited from doing so legally), or exaggerate past successes. Often, the best money you save in a negotiation begins with the money you spend in finding the right resource to assist you in navigating the process. Using a professional firm with detailed knowledge of the market, the vendors, and the areas where the most significant savings are possible can result in meaningful, tangible savings for you and peace of mind that the contract you ultimately ink is the best one available to you.