August 2013: Samaha Associates’ Managing Consultant, Adam Denbo, featured in Credit Union Journal article “UMassFive College’s Lesson In Vendor Negotiations.”

UMassFive College’s Lesson In Vendor Negotiations
AUGUST 19, 2013

HADLEY, Mass.-Many well-intended senior executives are often unarmed when negotiating or renewing IT contracts, meaning the credit union frequently overpays. But when done right, even mid-sized credit unions can save as much as seven figures on an enterprise-wide negotiation.

“The biggest mistake executives commit is starting the negotiation process too late,” said Adam Denbo, managing consultant with Samaha Associates. “Vendors know that time is on their side.”

With most IT contracts running three to seven years, Denbo said CUs should begin the review process approximately 18 months or more before the contract is set to expire. “If the process is started at six months, there is no way to make any meaningful change. This goes for all contracts whether it is your core, ATM provider, mobile or other technology related contracts.”

Among credit unions that heeded this advice was the $377 million-asset UMassFive College FCU, Hadley, Mass., which has 30,000 members and 102 employees. “We hadn’t done a full data systems review in over 25 years and figured, if not now, when?” said Chief Operations Officer Richard Kump. “We knew this was a considerable challenge, so we began our consultant search nearly three years before our core contract was due to expire.”

In doing so, Kump said every contract was reviewed, including core, debit, credit, home banking, mobile banking, loan operating systems, collections, GL, item processing, courtesy pay, among other actions items.

“Before partnering with Samaha Associates, we faced several challenges in negotiating data service contracts. Chief among them was our lack of familiarity with market pricing. We simply didn’t know what a good deal looked like,” said Kump.

The Vendor Dilemma

Credit unions, consultants and vendors are all integral parts to a successful operating system; however, without knowledge and experience, credit unions can literally miss the boat on saving opportunities.

“We assigned a project leader, but took a team approach that included several senior level managers, and Samaha had us include many subject matter experts,” said Kump. These experts came to be known as “SMEs” and ranged from mid-managers to hourly employees. “It really ended-up being a very strategic approach to analyzing competing service providers.”

Whether a credit union handles negotiations internally or works with a consultant, the end goal is the same: to save money while not sacrificing services. “Everything, absolutely everything, has to be included in the contract. If there are gaps in vendor offerings, they have to be filled,” said Denbo. “When the ink dries on that contract, there is no room for additions without more costs.”

A common contractual element overlooked is the exit strategy, noted Denbo. “This aspect is so often forgotten, because often times the senior management is concentrated on the here and now and not looking at the future because they know they might not be there when the contract expires.”

One of Samaha Associates’ clients, which had a one-person IT department, was recently forced into a core deconversion. Since the contract wasn’t initially reviewed by a consultant or an attorney, the credit union was forced to pay the vendor a $50,000 penalty fee.

‘Mutually Beneficial Bilateral’ Deal

Denbo, former president/CEO of California Agribusiness Credit Union, has experience with negotiations from both sides of the table. During his tenure, an ATM network debit program was canceled. The vendor called for an $80,000 termination fee. Working with an outside consultant, Denbo was able to reduce the fee to approximately $26,000.

“If you’re not careful or informed, there are some stiff penalties in these contracts that are overlooked,” said Denbo. “A mutually beneficial bi-lateral agreement has to be reached.”

Denbo said IT managers who handle contract negotiations almost always break a cardinal rule. “When you sit down at the table, you never speak first. Let the vendor start the process because the number in your head is likely different than theirs. You have to be in the position of the counter-offer.”

While holding one’s tongue is always a good negotiation tip, it is the “fine print” that catches many executives off guard. “If your consumer price index (CPI) increases, there can be a hidden item in the contract that results in increases,” said Denbo. “There are also hidden penalties for asset growth, which could increase annual maintenance by 10%.”

Saving Big Bucks

Kump and his team had settled on Samaha Associates after interviewing two other consultants. When they decided to move forward, the core contract renewal seemed so far into the future. “Even though we gave ourselves three years, we still had to sign a short extension with our core processor to give us more time,” said Kump. “So, if you are going to do a complete systems review-and do it right-start as early as you can conceivably consider and then add six months.”

Kump concedes that the time frame, even in hindsight, sounds “crazy,” but noted that an enterprise-wide event negotiation has significant impacts on all annual business plans. “One of the key lessons learned was that you have to be willing to walk away from your existing vendor, and they need to see, hear and feel that commitment. Otherwise, your leverage is significantly diminished.”

Another lesson learned was clearly identifying the role of the consultant. This includes making certain the scope of the work has been identified and which services might lead to extra costs. “Our contract with Samaha was very specific in both the scope and cost of the engagement, which was critical in such a vast undertaking,” said Kump.

Looking back on the experience, Kump said the way in which the credit union approached contracts was significantly different. “We weren’t aggressive in our contract negotiations for many years, channeling the extra human resources into growth, new products and services and other significant initiatives.”

At the end of the process, Kump said “everything” was negotiated resulting in huge savings. “We kept our core to five years, but shortened or lengthened other contracts depending on price and the potential shelf-life of the particular sub-system or product. All told over the life of the numerous contracts, our net savings easily topped the seven-figure mark. Not bad for a mid-sized credit union. I am fairly certain that if we had not hired a consultant, our net savings would have been cut in half or worse.”