According to a Yahoo Finance article published in May, community financial institutions are overpaying in one of their largest categories of non-interest expense — outsourced core processing and IT services. But there is good news, according to a report from the Business Performance Innovation (BPI) Network, institutions are reducing these costs by restructuring their vendor contracts based on national pricing data.
In this Q&A, Rick Wieczorek, CEO of Mid-Atlantic Federal Credit Union, discusses tips for restructuring contracts with your core and other key providers. His $275 million credit union, headquartered in Germantown, MD, has restructured a number of vendor contracts over the past several years. It seems the credit union’s efforts are paying off. According to FirstLook data in Search & Analyze, on CreditUnions.com, Mid-Atlantic’s operating expenses declined by 7.10% over the past 12-months versus increases ranging from 3.97% to 5.45% among asset, state, and national peer groups.
When is the right time to begin discussing an existing contract with your core?
Rick Wieczorek: That’s a good question. Don’t assume that if you have a few years left on your existing contract, you can’t negotiate. Everything is negotiable. Don’t wait to begin the conversation. In my experience, the sooner you start the better.
What is the most important advice for a credit union that wants to restructure a key contract?
RW: From my perspective, the most important thing you need to do is seek the advice of an outside firm to help negotiate the new contract. They know, by working with a lot of credit unions throughout the country and doing this type of negotiation on a regular basis, the types of deals other institutions are getting. This is especially important for smaller and mid-sized credit unions as the larger organizations tend to get better deals.
What are some of the questions you should ask during an existing contract?
RW: One of the key items to track during an existing contract is the service level agreement (SLA). There may be various SLAs that cover different aspects of your agreement, and it is important to understand what your provider is required to do and hold it accountable throughout the contract term. If a problem pops up and your staff just works through it without understanding the contractual relationship, you might be missing out on getting credits or resolving service issues with your provider.
Beyond SLAs, what else do you expect from your core provider?
RW: I firmly believe our vendor should subsidize our participation in annual training events and its annual meeting. For as much as we pay, those things should either be included or the vendor should offer assistance in some way to encourage the appropriate staff from the credit union to attend.
In addition to understanding national pricing trends, what else should credit unions consider when restructuring a core contract?
RW: It is important to understand the exit fees that are involved if you decide you need to get out of your contract. Take time to really figure out what an early exit would cost your credit union, especially if you are signing a long-term, five-year agreement.
In the case of larger companies that have multiple cores, ask about future plans for your core. How much is it going to allocate to your core going forward? What does the future budget look like for your core system?
Lastly, ask about alternatives such as the cost difference to host the system with your provider versus in-house. Ask if co-sourcing with another credit union is an option. What kind of pricing could you get if you worked collaboratively with other credit unions that use the same core?
How do you make a new contract appealing to your core provider as well as to the credit union?
RW: For us, having a person that is completely dedicated to understanding all the aspects of the system and serving as a liaison between the credit union and the provider has been important. It’s a commitment to embracing the core and considering other products and services our provider has to offer. For example, using the core’s data centers instead of keeping the system in-house.
Do you think it’s important to look at other options even if you’d like to avoid a conversion?
RW: Yes, absolutely we should always be looking. In fact one of the things we’re going to do is start attending other vendor conferences each year just to get an idea of what they are doing.
And none of this should stop with the core, by the way. Credit unions can use the same approach with other key vendors such as home banking and credit card processors.