 Talk To Us Take the Survey Purchase Report FX Calculator E-mail a Colleague |
|
|||||||
|
|
Frequently Asked Questions
General Overview Questions Tell me a bit about “CB Intelligence”? Bank Fee Negotiations What has made the banks be so dominant at the negotiating table? The Negotiating Framework What differentiates companies that do a good job at managing their banking costs? Leveling the Playing Field How do you know whether there are cost savings hidden in your banking agreement and how do you unlock them? Benchmarking: Who Benefits? If principled negotiations and benchmarking take hold, aren’t the banks going to be big losers? Miscellaneous Questions What’s the ultimate payoff for adopting principled negotiating and benchmarking? General Overview Questions Tell me a bit about “CB Intelligence”? CB Intelligence is a Canadian company that’s owned and operated by three Chartered Accountants. CBI’s business is market intelligence about bank pricing practices. Its mission is to make bank negotiations transparent. Companies use CBI reports to benchmark their bank pricing. In a very real sense, CBI makes principled negotiating and fair banking agreements possible. Are there similar companies in the United States? Yes. In the US, using benchmarking in bank fee negotiations is a well established and widely accepted business practice. Phoenix-Hecht, for example, publishes The Blue Book of Bank Prices (http://www.phoenixhecht.com.) The Association of Financial Professionals provides bank pricing data to its members to help them manage the compensation side of their banking relationship (http://www.afponline.org/pub/res/brm/bpd/bpd.html). Given the differences between the US and Canadian banking systems, US benchmarking data is of limited use in Canada. If you’re a company that operates in Canada, your revenues are greater than $15 million, and you have a relationship with a Canadian financial institution, then you’re a potential CBI customer. CBI has found that companies smaller than this don't have the size to generate leverage in fee negotiations. CB Intelligence administers the CBI National Banking Survey. You can check out the survey and CBI at www.banksurvey.ca CBI collects and analyze survey data and publishes this data in a series of benchmarking reports that corporations purchase. Are there any other companies like CB Intelligence in Canada? Yes and no. Stewart & Associates used to publish a survey of bank fees. The last Stewart Survey was published in 2004. Is CBI’s National Banking Survey the same as the old Stewart Survey? The concept is similar but the execution and product is very different. First, the Stewart Survey was a paper based questionnaire. The questionnaire asked respondents to write in details of their bank pricing. The CBI National Banking Survey is internet based and uses a “point & click” methodology. A typical CBI National Banking Survey can be completed in about half an hour. Second, CBI National Banking Survey is national in scope and tracks more variables in greater detail than Stewart. CBI will report bank pricing results on the basis of bank, company size and credit profile, province and industry as well as a variety of physical parameters. Third, the reporting format will be quite different. CBI’s benchmarking reports focus on the results of regression analysis. This lets CBI get at the heart of causal factors that drive bank pricing. In addition, CBI will report results in pivot table format. Pivot tables combine results for a single variable like operating line pricing for all banks in a single table. It also lets CBI report pricing for linked variables like operating line pricing and covenant requirements in a single table. This reporting methodology lets readers focus on what’s important in fee negotiations. Bank Fee Negotiations What has made the banks be so dominant at the negotiating table? At renewal time, banks bargain from strength. When they sit across from their corporate counterparts, they have been dealt face cards. Banks enjoy structural advantages that tilt the negotiating table heavily in their favour. For starters, bank fee negotiations aren’t straightforward. Companies pay a large number of bank fees. Typical banking renewal agreements cover credit facility pricing, operating line fees, current account service charges, cash management fees, interest compensation arrangements, and credit/debit card discounts. When it comes time to negotiate banking costs, the sheer number of costs that need to be dealt with is daunting. Second, banks are shielded from pricing pressures that are commonplace in other supplier relationships. Companies that tender their banking relationship are the exception, not the rule. When companies do tender, they seldom include target pricing – an accepted practice in most other contract reviews. With little threat of nose-to-nose competition, bankers are insulated from price rivalry. Banks are also masters when it comes to bundling. They know that fees are rarely a deal breaker in credit negotiations. Fees and service charges are marketed as part of the cost of obtaining credit. Financial executives and their advisors – be they chartered accountants or lawyers – seldom call the banks on this practice. Bundling establishes ground rules that give the banks a second leg up at the negotiating table. If structure and process advantages weren’t enough, the banks have a third ace up their sleeve. They operate in an industry where switching costs are an issue. At best, banking arrangements are inconvenient to unravel. Few companies believe that borrowing cost and bank fee cost savings justify the effort and aggravation of a banking change. This inertia favours the status quo and tilts the negotiating table even further. Fourth, borrowing costs and service fees are an important component in the banks’ profit model so they take renewal negotiations seriously. They know a company’s credit needs and limits. They know the competition. They know the deals on the street. They’re masters at balancing returns over a broad range of products and services. Lots of companies have the knowledge to negotiate favourable terms in one area. Few are savvy enough to avoid paying the piper in another. When it comes time for the banks to negotiate their compensation package, bankers get it. The final advantage hails from an unexpected source – the banks’ own customers. Simply put, managing banking costs is not a priority to most companies. Corporate banking concerns typically start and stop with credit availability. The banks benefit from this myopia. In many companies banking fees are an unmanaged cost. In many negotiations, the banks prevail by default. Why don’t financial executives pay more attention to banking costs? Part of the reason is attitude. Borrowing cost and service fee pricing are not top-of-mind cost management issues in most companies. When it comes to banking, most financial executives define their job narrowly. Get the credit line. Get the covenants. Hold service fee price increases to a reasonable percentage. Then file the agreement in the bottom drawer until next renewal. Part of the reason is training. Finance courses and accounting professional development programs simply don’t address the topic. While there are numerous studies on retail bank pricing, little has been written on how banks price their commercial products and services. Managing bank pricing is a subject that’s learned at the negotiating table. Financial executives who consider themselves banking specialists are self taught. For the most part, they are graduates of the school of hard knocks. When it’s time to find out how to negotiate bank fees, you learn by doing. The process is painstaking and protracted. Quality negotiating experience is also hard to come by. Most CFO’s apprentice their trade in smaller companies. They come to these companies to impose financial discipline on unruly operations. For them, bank pricing is neither an area of expertise nor a priority. In bank negotiations, the CFO often isn’t even the lead negotiator. In many small and medium sized companies banking is seen to have great strategic importance. The CEO or owner frequently handles this responsibility directly. Too often, the apprentice is better equipped to handle negotiations than the master. Negotiating experiences in small and medium sized companies often also lack depth. Frequently current account service fees are the only substantive pricing issue that gets tabled. This shouldn’t come as a surprise. Current account pricing is an issue that’s easily understood. It represents a service where internal bank costs are not increasing. It’s one section in the banking agreement where it’s easy to draw the line in the sand. While current account service fees are a visible bank pricing issue, they aren’t a bellwether cost. There’s no evidence to suggest that service fee pricing sets a pattern for price increases in other areas. In most cases, they aren’t even a major component in a bank’s overall compensation package For many small companies, haggling about current account service fees is a convenient and acceptable way to avoid substantive negotiations about real pricing issues. Fee negotiations that start and stop with current account service fees almost always benefit the bank. The final reason that bank pricing is poorly attended is organizational. Many CFO’s cut their teeth in Canadian companies that are subsidiaries of American corporations. In these companies treasury is frequently a head office function. Canadian banking arrangements are a small part of a much larger financial picture. To US finance professionals, Canadian banking practices are unfamiliar. Typically these managers lack the time and expertise to give subsidiary banking arrangements their due. Managing Canadian bank pricing is not a priority and gets lost in the shuffle. So if banks have dealt face cards, does this mean that they will try to profit from their preferred negotiating position? Again, the short answer is yes. This doesn’t mean that bankers are scoundrels or villains. They are simply smart business people who make the most of their negotiating opportunities. In business you get what you deserve and you deserve what you negotiate. Banks are tough negotiators because they understand the importance of fee negotiations and they pay attention to prices. Their customers should expect nothing less. They should be equally proactive managing banking costs. The Negotiating Framework What differentiates companies that do a good job at managing their banking costs? It starts with perspective. Companies that do a good job managing bank prices bring a different set of attitudes and expectations to the negotiating table. They know that price is an important profit driver for banks. They understand that small price increases have a multiplier effect on bank returns and that price leakage can shrink profits just as dramatically. On the retail side, for example, a recent Boston Consulting Group study reported that if banks increased prices by just 1 percent, with volume and costs remaining constant, return on equity would increase 6.8 percent. By contrast, a 1 percent increase in volume or a 1 percent decrease in costs would only raise ROE by 1.8 percent and 2.3 percent, respectively. Price leverage in commercial banking is no less potent and, like retail pricing, potentially cuts both ways. CFO’s in the know understand that for bankers pricing is a key negotiating deliverable. They nod when McKinsey & Company calls pricing “the fastest and most effective way for companies to grow profits.” These CFO’s expect bankers to push the price envelope in fee negotiations. How do companies that do a good job managing their banking costs approach bank negotiations? CFO’s who actively manage bank pricing bring a distinctive perspective to banking negotiations. First, these CFO’s know that bank pricing is as important for companies as it is for banks, though for a different reason. In most bank negotiations, the payback for managing bank pricing isn’t a one time cost saving. Up-to-date bank pricing establishes a base line for future increases and sets up multiyear returns. The result may not quite be an annuity, but it’s close. Bank cost savings are generally assumed to have a 10x multiplier effect on shareholder value. A $50,000 cost saving opportunity that yields a $500,000 shareholder value increase is an opportunity of real substance. The shareholder value yardstick gives bank pricing much needed visibility and highlights the real cost of letting fee negotiations slide. What role does information play in bank fee negotiations? CFO’s that do a good job managing bank fee negotiations recognize that in any negotiation it’s not unusual for one party to be better informed than another. Economists call this condition information asymmetry. In banking negotiations this information gap is the ultimate source of competitive advantage. Banks recognize that companies negotiating bank fees normally don’t have access to comparative pricing information. They know that relying on reasonableness tests and personal experience to validate bank pricing limits a company’s options at the negotiating table. Companies that don’t take the time to properly prepare their fee negotiation case reap what they sow. Banks charge a large number of fees for a broad range of products and services. Understanding which items have significant cost saving potential, which items need to be priced as a group, and which items are negotiating give-aways is no simple task. Sometimes the savings that accrue in bank fee negotiations are small and accumulate across a whole range of bank services. Sometimes material cost savings are concentrated in specific areas. CFO’s that don’t prepare, pay the price. If a company is serious about managing its banking costs, failure to prepare for banking negotiations is not an option. Leveling the Playing Field How do you know whether there are cost savings hidden in your banking agreement and how do you unlock them? To unlock the bank fee cost savings you need to do two things. First, you have to admit that you need help. To level the playing field you need comparative pricing information and a negotiating strategy that neutralizes the structural advantages that the banks enjoy in fee negotiations. The strategy is principled negotiating. The tool that gives this strategy its resilience in banking negotiations is benchmarking information. What is principled negotiation? Principled negotiating, as it applies to the negotiation of banking agreements, is a hybrid negotiating strategy. It doesn’t view negotiations as a collaborative process where interests meet. It doesn’t advocate soft bargaining or worry whether banking agreements “enlarge the pie.” Principled negotiating says bank negotiations are “win-lose” affairs. It recognizes that they are, at heart, exercises in claiming value. As a strategy, principled negotiating steps outside the “win as much as you can” box. It introduces the notion of fairness into the negotiating equation. In principled negotiations, banks are still free to set prices to generate satisfactory returns. However, this doesn’t give them licence to disadvantage their customers. Principled negotiating says bank pricing is only equitable if it meets an independent fairness standard. For the banks’ customers, this means pricing consistency. A company should expect the same pricing from a bank that the bank offers its strategic peers. Why should companies and banks adopt principled negotiations? Principled negotiating offers three important benefits to banks and their customers. First, it encourages both parties to set realistic expectations about what they’re entitled to. Principled negotiating is hard on merits and soft on posturing. Second, by insisting that negotiations reference an independent fairness standard, it protects both parties from being taken advantage of. Finally, it respects the banking relationship. Principled negotiating holds out the prospect of a tradition of fair dealing. If realized, this is an extraordinary asset. It’s one that creates ties that bind. It’s one that gives substance to the banks’ claim that customers are their partners. Why is benchmarking information an important element in principled negotiations? In banking negotiations, benchmarking is the agent that makes principled negotiating work. Benchmarking lets banks and their customers meet the fairness test. It decides pricing disagreements by referencing a standard that is independent of the negotiating strength of either party. Benchmarking also gives the strategy of principled negotiation its transparency. With benchmarking, both parties know when pricing is equitable and when it’s not. With benchmarking both parties know what the other side is due. Can you provide an example of how benchmarking can help companies get pricing right? Medium size companies and large corporations use Bankers Acceptances (BA’s) to fund a portion of their working capital financing. BA’s have an absolute price advantage when compared to operating line pricing. Benchmarking is the best way to determine whether a proffered “standard stamping fee” is, in fact, standard. Benchmarking is also the best way to determine whether the relationship between operating line pricing and BA stamping fee is properly integrated. Stamping fees can be set so that the gap between BA pricing and operating line pricing is narrower than it should be. This is a form of premium pricing which advantages banks and disadvantages their customers. Savings that accrue to companies that get BA pricing right add up. A 20 basis point stamping fee difference translates into a $10,000 cost saving for a company that has a $10 million operating line and uses BA’s to fund 50% of this requirement. What about foreign exchange (“FX”) pricing? Transparency in FX pricing is notable by its absence. Banks, as a rule, don’t offer fixed mark up FX pricing and they don’t disclose margins. It’s a business where information asymmetry reigns supreme. FX mark ups vary by institution, transaction size and volume. Many companies report that they trade at “spot” and assume this represents good pricing. It doesn’t. Spot is a settlement convention that says nothing about the spread over the interbank rate that a company is charged. FX pricing is a second area that routinely yields cost savings for companies that are vigilant. If a company can save 25 basis points by insisting that its bank meet the FXFix standard, FX $10 million will yield $25,000 of annual savings. That’s a quarter million dollar shareholder value opportunity. Benchmarking: Who Benefits? If principled negotiations and benchmarking take hold, aren’t the banks going to be big losers? At first glance, banks appear to have much to lose. Where they have leveraged their advantaged position into premium pricing, savings that result from benchmarking will accrue to their customers. Given the multiplier effect that pricing has on bank returns, this is problematic. No bank wants to see the profit erosion. At the same time, no bank wants to shore up results by disadvantaging its customers. Margin shortfalls may be a transition cost associated with the growth of benchmarking. Problematic or not, pricing adjustments are a short term issue. Long term, benchmarking will make the banks winners too. Benchmarking data will enable them to publicly justify their pricing policies – an important consideration in a regulated industry that’s concentrated and reporting record profits. The last thing they need or want is the corporate equivalent of Ing Direct’s “Save Your Money” campaign or Capital One’s “Hands in Your Pocket” ads. It will also remove much of the suspicion and grumbling that’s part of conventional fee negotiations. This can only strengthen the relationship between banks and their corporate customers. Benchmarking has the potential to change how banks sell. When banks are pitching new customers, benchmarking data provides a more believable and compelling rationale for switching. For years investment dealers have used the results of the Brendan Wood or the Euromoney magazine surveys to promote their organizations. Benchmarking data opens the same door for Canadian banks. Whether it’s borrowing costs, FX, cash management fees, or overall client satisfaction, being able to say 'We're Number 1' is a powerful marketing statement. Benchmarking has a similar yin and yang quality for CA firms. Credit negotiations are an important value added service for CA firms with mid-market clients. With benchmarking, they have the opportunity to add price to their service offering. CA’s can help their clients secure that all important line and negotiate more competitive rates. This is a potent combination. For chartered accountants charged with new business development, benchmarking is a powerful sales tool. Finding unrealized cost savings in a prospective client’s banking arrangements is a persuasive door opener. Making sure that these shortcomings trigger “make good” demands is time honoured sales tactic. Firms that ignore bank pricing will ultimately face an unpalatable situation – respond to client demands for compensation or risk losing them. Over time client expectations about bank pricing will come to mirror their expectations about tax services. What about corporations and their CFO’s? Benchmarking data will let corporations see, for the first time, the banking deal they are due. “First quartile” companies that have both size and attractive credit profiles will use benchmarking data to leverage the best pricing that’s available. Companies on the cusp will use benchmarking to negotiate price concessions that are contingent on performance. As the banks’ pricing hegemony starts to fray, more and more companies will look for better prices from their banks. Cost reduction consultants will force the issue in many companies. For them bank pricing anomalies are easy pickings. For CFO’s the shareholder value yardstick says benchmarking will deliver substantially more than one-time bank fee cost savings. It will establish expectations about the level of bank pricing they’re expected to deliver. It will also demonstrate that the banks are held to the same negotiating standard as other suppliers. And, where necessary, it will justify change when change is needed. When it comes to bank pricing, Desi Arnaz said it best. Financial executives that can’t deliver a properly priced banking deal will have some 'splainin' to do. Miscellaneous Questions What’s the ultimate payoff for adopting principled negotiating and benchmarking? Principled negotiating and benchmarking will deliver a better banking deal, more efficiently, than any other negotiating strategy. Long term, this new approach to banking negotiations will be win-win for corporations, banks, and their advisors. Why should a company invest the time to complete a bank benchmarking survey? CBI’s National Banking Survey represents a small investment of time – for most companies about half an hour. For those who are unfamiliar with bank pricing, the survey is an excellent introduction to the subject. CFO’s who are new to bank pricing are always surprised by the number of fees banks charge and the price ranges that exist. More generally, the quality of benchmarking data in a market the size of Canada depends on high levels of corporate participation. More respondents mean better results. Participation could be the difference between having a tool to manage your banking costs and being a price taker at your next banking renewal. In the simplest of terms, survey participation helps you help yourself. What cost savings should a company expect if it adopts benchmarking for its next renewal? It depends. Circumstances determine how much benchmarking pays off. There are three sources of bank fee cost savings in most companies. Some cost savings are a function of treasury arrangements. There are multiple interfaces between a company’s treasury system and the bank. In companies where these interfaces are poorly managed, remediation usually pays big dividends. For example, something as simple as financial instrument selection can substantially reduce borrowing costs Some bank cost savings are straight forward price plays. If, for example, FX pricing isn’t competitive, the cost savings associated with benchmarking can be substantial. The final cost saving driver is history. In many companies, bank pricing is predicated on yesterday’s volumes or credit assessments. Updating pricing to reflect today’s activity base or credit assessment can yield substantial savings. In small and medium sized companies that haven’t looked critically at their treasury systems or bank pricing, cost savings of $25,000 would not be unusual – double this if a corporation has a significant FX program. Other things being equal, cost savings are scaled. Benchmarking returns increase as company size increases. Can benchmarking help a company if it’s not financially strong? A company’s ability to leverage better pricing depends on its financial condition. Companies that are struggling financially have little bargaining clout. Although benchmarking has limited utility for companies that are underperforming, it still has value. Benchmarking will tell the company what pricing is competitive for a company in its circumstances. And, it will give the company the information it needs to target better pricing arrangements that “kick in” when turnaround results materialize. What happens if there are no benchmarking savings? In benchmarking programs this is inevitable – though it’s not normally seen. Most treasury systems have pricing issues that merit further investigation. For companies that manage their banking relationship well, benchmarking is as much a scorecard as it is a cost reduction tool. These companies use benchmarking to confirm the competitiveness of their pricing arrangements. There’s great value in this application. It removes uncertainty in banking negotiations and lets both financial executives and their banker counterparts demonstrate that negotiations didn’t leave money on the table. Benchmarking becomes an inexpensive and transparent way to validate the outcome of bank negotiations. It also lets the CFO demonstrate, with independent and ubiquitous data, that the banking relationship is under firm control. With benchmarking there’s one less financial management problem to worry about. What does CBI say to CFO’s who claim they have bigger fish to fry than chasing borrowing cost and bank fee savings? Executives who think this way are using the wrong yardstick. Benchmarking zero bases your fee structure. Cost savings that result from this exercise offer a multiyear return. $25,000 in annual cost savings may not be an annuity, but its close. CB Intelligence estimates that bank cost savings have a 5x multiplier effect on shareholder value. A $25,000 cost saving opportunity that yields a $125,000 shareholder value increase is an opportunity that doesn’t come along every day. Some executives are going to be concerned about data confidentiality and leery about completing a questionnaire on the internet. How does CBI respond to their concerns? This is a good question and CBI has given a lot of thought. For participants taking the survey, the survey is hosted on a secure server. That’s why there is an “https” in the survey URL. The server is maintained in a secure facility to control physical access to the equipment. Access to the server from the internet is also controlled. The only way in to the survey is through the CBI website, past two firewalls. Finally survey information is stored in two data bases – one for contact information and the second for survey data. The key linking these two data bases is encrypted. More generally, CB Intelligence has a strict privacy policy. We will not sell, share, or otherwise distribute the names of our survey respondents or customers to any third party. We will not authorize third parties to market ancillary products or services to survey respondents or customers. Finally, all survey data will be aggregated for purposes of protecting the anonymity of individual Survey respondents. On the matter of credit card information confidentiality, our policy is simple. We do not retain credit card information. What about CBI products and pricing? CBI’s 2009 Survey of Canadian Bank Pricing provides an overview of bank negotiating practices along with bank price benchmarking data and commentary. It is priced at $895 plus GST. For companies who don’t have the time to work through this report, we offer the Custom Survey Report option. Priced at $3,495 it includes a formal written report detailing the company’s banking cost and service fee positioning profile as well as negotiating recommendations. CBI’s last, and most comprehensive option, is a Treasury Review. Companies that select this option receive a full review of their bank pricing and treasury systems. Treasury Review assignments are undertaken on a contingency fee basis and require a $5,000 deposit. Why is it important that companies participate in the survey? The success of the CBI initiative depends on a large number of companies participating in the survey. The more respondents, the more reliable and robust the data. Participation could be the difference between having a tool to manage your banking costs and being a price taker next renewal. By participating in the survey, a company helps CB Intelligence while at the same time, helping itself.
|
||||||
|
||||||||
