How to keep a closer eye on your bank’s contracts

Consultants bring specialized skill sets that can be valuable in areas where bank leaders don’t have experience, such as negotiating contracts and vendor management. Here’s why hiring the best consultant team could keep expenses low and better equip your bank to handle the industry’s curveballs.

By Elizabeth Judd ■ Illustrations by James Steinberg

In 2016, when First State Community Bank in Farmington, Mo., hit the $1.6 billion-asset mark, the time seemed right to consider hiring consultants to negotiate its vendor contracts. “As you grow, the dollar size of these contracts grows, too,” says John Denkler, the community bank’s chief administrative officer.

Today, First State Community Bank has $2.5 billion in assets, and Denkler realizes that pricing is just one aspect of what banks need to negotiate with vendors. Equally important is “having appropriate language for the legal nuances and negotiating a service-level agreement,” he explains.

As technology becomes both more critical and more complex, community banks everywhere are seeking help negotiating vendor contracts. Relatively common scenarios—such as a disruptive technology taking the banking industry by storm or a fintech company acquiring another—can leave bankers in the lurch if a vendor agreement has not been written to accommodate them, says Patrick Goodwin, president of Strategic Resource Management (SRM) in Memphis, Tenn. “It’s important to have certain outs written in the agreement so that, if technology changes, you can change a component of the agreement without facing a major penalty,” Goodwin says. “With a digital banking platform, the core might have a platform that looks good today, but a better alternative may come out in the future.

“You want to make sure the language is written to give you the ability to go to an alternative provider within the terms of that agreement.”

For many community bankers, many of whom have mastered a dizzying array of different aspects of the financial service world, negotiating contracts is one area best outsourced. “The sharpest bankers in the country,” says Jim Schartman, executive vice president of Check Printing Contract Consulting in Cleveland, Ohio, “are not experts at negotiating vendor contracts. They greatly benefit from having the expertise of a full-time third party that protects their interests.”

How consultants help community banks

Determining the right price for a vendor that does core processing or one who runs an online banking platform is no easy feat. “If you want to buy a house, you go to There, you have all this pricing intelligence,” Schartman says. “But there is zero marketplace pricing intelligence in check printing contracts and in many of these other bank contracts … The vendors understandably do it this way to protect their margins. So, let the buyer beware.”

He notes that some vendor contracts even explicitly prohibit banks from discussing pricing with other financial institutions, which makes the wall of secrecy that much more impenetrable.

In recent years, paying vendors properly has become an even more critical question for community bankers, because vendor relationships have come under regulatory scrutiny.

“For any decision in excess of $250,000 or two years in term, the regulators are going to want you to exercise a high degree of due diligence and document it,” says Dan M. Fisher, president and CEO of The Copper River Group in Fargo, N.D. He adds that most regulators expect community banks to bring in a knowledgeable and experienced consultant and competitively bid all major contracts. “Due diligence doesn’t mean your current vendor says they’ll give you a good deal if you renew your current contract for five years. That doesn’t work anymore.”

Beyond sound pricing and a transparent vendor selection process, community banks sometimes find themselves scouting esoteric skills that they don’t have internally. “Sometimes we’re trying to do something new, or we need someone with a particular skill set that you really can’t afford to have on board all the time, but when you need it, you really need it,” says Jim Donnelly, executive vice president and chief commercial officer of $4.5 billion-asset Bangor Savings Bank in Bangor, Maine. “Sometimes you really need a skill set for 30 days, not for 12 months.”

Michael Pugliese, a managing partner in charge of U.S. consulting at London-based Capco, agrees. “A lot of the activity we’re seeing in the community banker space is digital transformation,” he says. “Because community bankers are jacks of all trades, they are looking to hire for skill sets they don’t have.”

A seasoned consultant can also help a community bank get the most out of its vendor relationships by negotiating provisions in addition to price. “Often, the terms of the contract can be more important than the price,” Goodwin says, “and understanding the fine print in those agreements is extremely important.”

Scott Sommer, CEO of Cornerstone Advisors in Scottsdale, Ariz., notes that “many banks are really inattentive to how they manage the benefits they get from technology,” but nearly no bank has an effective vendor management strategy. He says a skilled consultant will show bankers how to make the most of overlooked benefits, such as the opportunity to participate on a vendor’s board or attend user meetings or regular training sessions.

Too often, Sommer says, bankers grow dissatisfied with their vendors not because of shortcomings in a product but because “the vendor relationship is broken.” Consultants work with many different vendors, so they can help community banks better manage those relationships.

Selecting the right consultant

Consultants come in many shapes and sizes. Some negotiate all types of vendor contracts for community banks, while others are extremely specialized.

In the latter camp is Schartman, who negotiates for community banks in just one arena: check-printing contracts. “If most of my clients have 50 priorities, check printing is not one of the 50. It’s something that’s on cruise control, many times,” he acknowledges. And yet vendors commonly mark up their prices three to four times more than their actual costs, making this vendor relationship worth getting under tighter control.

Because of these tremendous markups, Schartman says “to provide our customers a risk-free opportunity,” he charges his clients a percentage of negotiated savings. He notes that for the typical community bank with 30,000 checking accounts, savings over five years equal roughly $500,000. “Many of my clients double or triple their check program fee income without increasing fees,” he says.

Many experts believe that knowing precisely what a consultant does and then understanding and communicating your bank’s own needs clearly are key to hiring the right consultant.

Donnelly, for instance, suggests narrowing the number of consultant candidates to somewhere between three and five, and then making sure they all understand the scope of the project.

“We don’t want a consultant to diagnose the universe and tell us what they’d like to do, rather than what we want done,” he says. “If you want an SUV and you buy a smart car, you’re not going to be happy when you go off road.”

“We don’t want a consultant to diagnose the universe and tell us what they’d like to do, rather than what we want done. If you want an SUV and you buy a smart car, you’re not going to be happy when you go off road.”
—Jim Donnelly,
Bangor Savings Bank

Full-service consultants

That said, many community banks are pleased to learn that consultants do far more than simply negotiate contracts. Ideally, consultants become invaluable partners on a range of projects.

“We look for consultants that are not just concentrating on a particular contract, and when they’re done with that, they’re gone,” Denkler says. “We’ve been aligning ourselves with individuals who bring to us a partnership.”

He notes that the very act of working with outside consultants has improved his colleagues’ negotiating skills. While he would not incur the expense of hiring a consultant to negotiate a very small contract, he and his team have upped their negotiating game and are securing better vendor contracts at all levels.

Denkler has found that working with a handful of consultants, rather than a single one, can be a good idea. In fact, he sometimes asks his two main consultants to submit a request for proposal (RFP) for new work as a way to keep expenses in check. “We’ve made it clear to both of them that you’re not the only one,” he says. “We don’t want someone to become too complacent and think, ‘Oh, I’ve got your business wrapped up.’”

Finally, bringing on consultants to negotiate contracts can take some internal finessing, especially if a chief technology officer or chief operating officer has been handling this task for quite some time, Denkler says. Although his internal executives were initially skeptical of the idea of bringing on a consultant, he says that, within a few months, they saw the value and endorsed the change.

Many community banks are finding that consultants are invaluable in helping them anticipate future possibilities, such as the changing vendor relationship in an M&A scenario. A good consultant will be aligned with a community bank’s business objectives, whether those include remaining independent, acquisition or growing via new product lines or by expansion into new areas.

Goodwin notes that when assessing any deal, both sides will look at vendor contracts and the various liabilities within these contracts should a merger or acquisition take place. He adds that in some cases, liabilities in vendor contracts have even caused a promising deal to be quashed.

Sommer points out that a good consultant can not only help a community bank with a current deal; but can also help them put in place a vendor management system so that vendor relationships run more smoothly over time and parties don’t miss key deadlines. Indeed, good consultants can help community banks hone their technology road maps, helping allocate technology dollars for the next three to five years.

Ultimately, the biggest benefit that community bankers reap from working with a consultant is peace of mind. Denkler adds: “By working with consultants, we’re making sure that we can go to our board and say, ‘We’ve got people who are keeping their pencils sharp and helping us negotiate the best contracts possible.’”

“By working with consultants, we’re making sure that we can go to our board and say, ‘We’ve got people who are keeping their pencils sharp and helping us negotiate the best contracts possible.’”
—John Denkler,
First State Community Bank

5 questions to ask yourself when hiring a consultant

When your community bank is hiring a consultant, it’s important to make sure you have all the information you need to make an informed decision. Here’s a checklist of questions to ask:

  1. Have you identified which individuals at the consulting firm you will work with? “I would never ‘buy’ the firm, I’d ‘buy’ the people that the firm is providing to accomplish your goals and objectives,” says Michael Pugliese, a managing partner leading U.S. consulting for Capco. “Be focused on the people the consultant is going to provide for your specific project.”
  2. How long has the consultant been in business? Longevity in this space matters, says Patrick Goodwin, president of Strategic Resource Management, so make sure the consultant has been negotiating many contracts for several years.
  3. Is the consultant independent? “I’d make sure the consultant is not being paid by any vendor whatsoever, because that might taint who they advise you to do business with,” Goodwin says.
  4. Does the consultant have an effective RFP process asking the right questions? Many community banks proactively make it known that they will bid out all key vendor agreements. “If vendors know you have that policy,” Goodwin says, “then it’s not going to put stress on the relationship if you do ask for an RFP [request for proposal].”
  5. Are you willing to take the consultant’s advice? Jim Donnelly, executive vice president and chief commercial officer of Bangor Savings Bank, notes that too often a bank will bring in a consultant because its efficiency ratio is “out of whack,” only to be given advice about reducing headcount that the bank may find unpalatable. “You can’t get mad at the consultant when the advice isn’t what you want to hear,” he emphasizes. “You have to be ready to act on what you learn.”

Elizabeth Judd is a writer in Maryland.