A few hints for those about to embark on the great adventure: negotiating a market data services contract. By Rafah Hanna, managing director and founder of DataContent Limited.
A good friend of mine once gave me some sound advice: “know more than your bookie.” Sounds obvious, but many folks still go into negotiations at a disadvantage because they don’t fully understand their requirements, options or negotiation tactics.
What do you need to look out for? Below is the DataContent Rough Guide to the strategic sourcing of market data.
Policy & Procedures
Your first priority: ensure that you have an effective, well-communicated data management policy. Centralizing the management of market data will afford many opportunities for rationalization, both today and in the future.
Defining and implementing a series of bespoke content strategies, if done in conjunction with your user community, will help avoid future issues and ensure acceptance and support from your customers as well as your own staff. One example of such a strategy is the extension of high-end desktop services, used for sales, trading and funding professionals, to operational areas, such as risk management, compliance and settlement, or to support functions such as research. These users do not really need the same breadth of coverage or functionality, yet in most cases they can benefit from deeper data reach and increased automation. It is also far easier to negotiate a lower price point for these services if they are not the standard desktop offering. A bespoke content strategy can significantly reduce the price per user and increase productivity.
Divorce the Brand
Don’t let your users tell you the solution they want when they should be telling you the requirements. It could be that the product they ask for is the best fit for their needs, but never assume! Instead, understand what the requirements are, how they wish to use the data, whether the requirements likely to change, etc. When you have a good understanding of the business need, selecting the product or service is relatively simple. This process will also help you decide on the criticality of the service and hence the bargaining power you have with the supplier.
In reviews, interviews and Needs Analysis studies conducted throughout 2002, DataContent has found that, on average, a staggering 40 percent of market data products and services are not being utilized in a manner that would justify their price tag. Clearly there are vast opportunities to reduce costs and improve service by moving to a more relevant product.
A product’s hidden costs also need to be factored into your selection process. Firewall implications, server hardware requirements and bandwidth needs are all relevant in the product analysis.
Other elements include whether you plan to integrate a datafeed into a proprietary system or database. If you have to spend money on IT integration, make sure these costs are factored into your cost benefit analysis and that a sufficient ROI exists to cover them.
Don’t automatically go for the lowest price tag, either. Consider the extra in-house resources and processes that may needed to ensure that the data is the most timely, accurate and relevant. The cost of dirty or delayed data could well consume any perceived savings from using a particular product.
Conversely, you might see unexpected savings by spending more. For example, it could be feasible to use the information provider to supply resources for the integration and development effort. If the aggregator can eliminate many in-house data management functions, paying more than just the “raw” data costs can actually save money.
Major Commercial Issues
The commercial requirements of each contract will vary greatly. However, one key factor should be sought in all negotiations: flexibility.
The goal is to achieve flexibility in all terms and conditions, including contractual terms, termination, usage and pricing.
Make sure the contract does not tie you to a specific business entity or geographical location. While the requirements might be for North American equities today, it could easily be of value to corporate finance in Europe tomorrow.
Depending upon the requirements of your application, it is essential that the contract covers all of your usage rights. Internal distribution and external redistribution of content have very different implications for a contract’s structure. Hence it is imperative that all business requirements are understood clearly before you embark on the project.
A ‘favored nations’ clause will also ensure that your pricing remains competitive over the life of the agreement. Avoid price increases, whether automatic or linked to uncapped measures such as the Consumer Price Index or inflationary measures. Also remove ‘evergreen clauses’ or automatic renewals.
A practical service level agreement that can be monitored and understood, with links to financial penalties for failure to perform, provides the supplier with a very strong incentive to remain committed to the cause long after the sale has been booked.
With the right flexibility, you can protect yourself against both the known and the unknown. You can reduce the management costs associated with the services being purchased. And if you know you have the flexibility to meet future changes in your business requirements swiftly and efficiently, it is not necessary to spend vast sums of money monitoring and tracking the various agreements in place.
DataContent Ltd. (www.datacontent.com) is a market data consultancy specializing in the auditing, analysis and formulation of information strategies, business development and product marketing.