How to Maximize Value in Vendor Relationships

Posted by Myron Schwarcz on Apr 11, 2018 9:00:00 AM
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-It's not just about price.-

(Hint: It’s Not Just About Price)

Obviously, every financial institution (FI) wants to get the best possible deal from their service providers. The definition of “best” can vary markedly by FI, however. We’ve found that before entering the vendor contract negotiation process, a cross-functional team is well advised to invest the time to determine what it most wants from the relationship.

As basic as it may sound, it’s remarkable how many FIs don’t take this fundamental preparatory step and equally surprising what insights can be gleaned from such activities. In vendor contract negotiations involving commodity-type products, it may simply come down to price. But when contracting for differentiated and/or customer facing services, many additional factors come into play.

An FI’s market positioning and go-to market strategy also enters the equation. For those placing a premium on customer experience, service levels or enhanced functionality may well supersede price as a determining factor. High-touch clients may demand dedicated account management support and be willing to pay more for it.

Acquisitive banks – or alternatively, those open to being acquired – should also consider building additional flexibility into their agreements. This may require tradeoffs in other areas such as price, contract governance, other vendor commitments. Working as a group, management must determine which of these items take precedence and build a contract negotiating strategy to fit their goals.

A Single Team on a Single Page
Some believe, “The businesspeople should be left alone to run the business,” and not be burdened with distractions like vendor contract details. While this may seem like a logical approach for the actual negotiating process, it’s important for leaders throughout the organization to have an active role during negotiations. As the ultimate users of a third-party service, business owners must be able to communicate their needs, evaluate vendor proposals, and determine the applicable trade-offs. While there is tremendous value in leveraging procurement teams, legal counsel and oustside advisors, they alone generally won’t be able to optimize a service provider relationship without active business participation.

Don’t underestimate the value of institutional memory – the departure of key personnel over the life of a multi-year relationship is inevitable, and an FI cannot afford to have its primary source of knowledge walk out the door. As we detailed in an earlier blog, it’s a great idea to create a cheat sheet of contract highlights while the ink (and memories) are still fresh.

Distributing such a document can also help by deputizing additional monitors to note when relevant contract milestones have been achieved. Many vendor contracts include various benefits – additional capacity or functionality, greater account management support, end-of-period rebates – that must be formally claimed by the customer once certain (usually volume-based) criteria are met. You’d be surprised how often these available extras slip away unnoticed.

Service After the Sale
Conditions do change, of course, and there’s no rule that prevents mid-contract alterations. It’s always a good idea to shop around before agreeing to add-on services from an existing vendor. If your bank or credit union brings something new to the table, such as an acquired unit’s business, be sure you’re receiving appropriate value in return. And most importantly, be very careful about signing contract amendments as they can easily cause inadvertent changes to the meaning of existing language.

The “best” deal is in the eye of the beholder. Following these fairly basic steps, however, will maximize the chances of securing a relationship that’s best for your bank or credit union.

Topics: Vendors & Contracts

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