Imagine this scenario ...

You are in a brutally competitive business. Profit margins from your traditional lines of business are eroding, and you are struggling to find new products and services to replace them.

You are focusing on a consultative selling approach with your customers, but cross-selling efforts to date have been less successful than you had hoped. Your customers are well educated, often dissatisfied, and willing to leave you if you do not respond to their needs. Nontraditional competitors have begun successfully pursuing these customers.

To make matters worse, industry consolidation is increasing. Mergers and acquisitions have left you struggling to integrate different systems and corporate cultures. Your employees' skill sets, which have remained fairly static for the last 20 years, need to be replaced with new ones.

Also, technology is advancing at a breathtaking pace, and you need to make sure that the scarce capital dollars you have to invest are spent wisely.

Sound familiar? Well, take heart, because this scenario does not just apply to banking. Data processing service providers are having to deal with the same pressures.

It shouldn't be surprising that bank data processing vendors would have issues that mirror those facing bankers. Their business is inexorably tied to banks', and their success depends on banks' success.

And just as banks started emphasizing cross-selling and relationship management as methods to get and keep customers, data processing vendors have begun promoting the concept of "partnership."

This idea of partnership is so pervasive among vendors that it has almost become a mantra. Open any vendor annual report, talk to any sales representative, or read any marketing brochure, and you will see that they plan to succeed in their industry by "partnering" with their clients.

Well they should. A partner is exactly what most financial institutions say they need to help them steer through the myriad of technology decisions they need to make. And in most cases, they would love their partner to be the vendor who already provides their core systems.

In theory, this union is a marriage made in heaven. But there is a feeling among a majority of banks that the vendors have not become their partners. The vendors may debate this statement, but the banks are clearly unhappy with vendors' follow-through on their promises of partnership.

There are many obstacles to true partnership between banks and data processing vendors. Here are four major ones:

* Bank systems spending has moved away from traditional vendor products. Vendor revenue, to a large extent, still depends on those products.

Although overall spending on bank technology is increasing, banks are spending less on core systems and more on PCs, local area networks, wide area networks, data warehouses, and software other than core systems.

In many cases, investments are being funded by reducing expenditures for the core deposit, loan, central information file, and general ledger systems.

However, most bank systems vendors still rely on core systems for most of their revenue. This difference between bank technology spending priorities and vendor revenue streams explains what has come to be known as "the partnership gap."

Basically, banks are wandering outside the partnership to fill their technology needs and vendors are not responding to this "infidelity" well. Though they certainly are trying to provide the newer products and services banks need, they have not yet made them a significant portion of their revenue, nor have they managed to serve their partners as well as small, local providers.

* Research and development investments are risky for the vendors. New technology initiatives are time-consuming and costly. Whether they involve writing a new system, upgrading an old one, or integrating from a third party, vendors struggle with justifying these investments.

Banks can choose not to buy the product for functional or cost reasons, and have no interest in funding development. On the other hand, vendors must provide these new products and services to fill the partnership gap.

* Customizing legacy systems can be both lengthy and costly. Simple projects such as adding fields to a system, changing the length of a field, adding code to support a new product, or designing a new production report are examples of requests that can require months to complete, due to the complexity of the programming languages used in legacy systems.

These complications have forced vendors to apply a "one size fits all" approach to upgrading systems, where user committees prioritize enhancements to be developed for all clients.

Banks, on the other hand, want a partner that recognizes their individual needs and can adapt systems to meet them in a timely and cost- effective way.

Most banks never have a chance to see the sheer number of modification requests a data processing provider can receive in the course of a year.

However, bankers often comment that they don't understand why system upgrades are so hard to get completed.

* Nobody has specifically defined the meaning of "partnership." The root of many misunderstandings between banks and vendors is the lack of definition. Traditional partnerships have shared responsibilities, shared risk, and shared rewards, but most bank-vendor relationships will never have these qualities.

In fact, most vendors have never met with their bank clients to define what the partnership should accomplish. Without open communication, it is not hard to see how each side could develop different expectations.

Of course, these partnership flaws do not apply to every vendor nor every one of their clients. Several examples of positive, productive, and mutually beneficial relationships do exist. Unfortunately, these relationships are all too rare.

Ultimately, the only way to create the ideal partnership is to define exactly what it will be.

The definition will need to be very specific and it must be agreed upon at the beginning of the new or renewed contract term as part of the servicing contract. Until each party's expectations are communicated and agreed upon, the talk about partnership will be just that.

Part two of this article will run on Tuesday. It will address the specific elements of a successful partnership.

Ms. Seymann is president and chief executive of M One Inc., a Phoenix- based consulting firm specializing in bank management and technology. Mr. Roche is Managing director with M One.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.