Spotlight & Company helps businesses calculate the excess costs charged by their financial institutions for processing international payments, and use the calculations to negotiate considerable savings. Not surprisingly, many of our results have asked for additional help in communicating with their financial institution(s).
We’ve witnessed several success cases from clients who extracted outstanding savings from their bank negotiations. We believe there are three steps that all these clients undertook to achieve success.
STEP 1: LET YOUR DATA SPEAK
Without data and corresponding benchmarks, no negotiation can result in success.
A newly appointed CFO of a large Bangalore-based BPO company faced a dilemma with the currency conversion costs his firm incurred. The firm had the financial standings to warrant better terms. Yet, his predecessors were not able to deliver the terms required for success. The cause was simple – almost every prior negotiation assumed the form:
CFO: Mr. Banker. I think you’re over charging me.
Banker: No sir! I give you the best rates!
CFO: But … what about these other sources?
Banker: I don’t know what the sources are. I get my data from a better source.
Etcetera, etcetera …
These intuition-led negotiations lacked the data, strategy, and benchmarks needed to drive success.
The new CFO chose to do something different. He audited multiple transactions, and identified the exact losses over multiple months. The costs and accompanying benchmarks became the cornerstone to the negotiations held by the CFO, and contributed to over 75% in savings for the company on all cross-border treasury transactions.
STEP 2: NURTURE AND CONCENTRATE
Clients often wish to optimize pricing on financial contracts by seeking prices from multiple banks.
For example, suppose your business maintains relationships with 3 banks. The business regularly requires forward contracts to hedge currency fluctuations for your imported goods. Prior to finalization of any transaction, the business solicits bids for the contracts from the 3 banks and chooses the most competitive price. This seems like a highly efficient process on the surface.
Every bank expends a certain amount in costs to service a customer. Let’s assume that number was $10,000 in costs for servicing your account. This would mean your negotiation’s floor is $10,000 – i.e., it would be impossible for you to ask your bank to service you for less than $10,000. If you were spending $40,000 for the services provided by your bank, you cannot expect to save more than $30,000 (maximum savings of $30,000 = $40,000 - $10,000).
If you had 2 banks with similar cost structures, it would be impossible for you to pay less than $20,000 a year to procure your needed banking services (2 banks requiring $10,000 a year from your business to service would equal 2*$10,000 = $20,000). If you spent $40,000 currently on your banking services, you cannot save more than $20,000 after your negotiations. Similarly, it would cost you $30,000 to maintain relationships with 3 banks, and so on.
The intuitive need to increase the total number of banks to procure the best deals would have paradoxically resulted in a lower savings potential. Clearly, it is best to manage all your transactions with as few banks as possible, as this increases the maximum savings potential you can drive towards.
STEP 3: PLAY THE LONG GAME
We have never worked with a client that views their bank relationship as a replaceable commodity. Nearly all of our clients:
- Have long-standing requirements for credit lines with their primary banks
- Would much rather structure a healthier relationship with their primary bank, than seek alternatives
- View the transition costs to switch primary banks, or to on-board a new secondary bank, as unfavorable prospects
Yet, many business leaders vigorously negotiate transaction-by-transaction against their bank. This results in wasted time for the business leader, and a strained relationship for the banker.
To put this into perspective, let’s consider a business’ ERP system. These systems are the operational lifeline of a business. Negotiating invoice-by-invoice on the usage of these systems with an ERP provider is a recipe for disaster.
Instead, business leaders must look at their banking relationship on a 12- or 24-month horizon. This entails 3 steps:
- Review the relationship with your bank once ever year or 2-years
- Structure contracts with pre-agreed pricing targets and thresholds
- Verify the prices received by the bank are correct periodically (once every quarter or 6-months)
This longer-termed view can help businesses optimize time savings, cost savings, and process efficiency.