The Bottom Line

How Vendor Contract Management Can Help You This Budget Season

Posted by Ben Mrva on Aug 30, 2017 12:30:00 PM

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For anyone working at a company with a calendar-based fiscal year, the August dog days of summer also mean the advent of the annual planning cycle. Odds are that department heads are being asked to “do more with less,” or at least to increase output at a faster rate than costs. As anyone with budget responsibility is well aware, it’s no easy task to fund reasonable pay increases for valued employees let alone accommodate growth in other expense areas.

Most financial institutions (FIs) earmark an increasing share of their budget dollars for third-party providers, often as a means to tap into the latest technologies and product functionality. Many of these relationships are governed by long-term vendor contracts. At first glance, it may appear the costs related to utilizing these third parties are predetermined by the contracts already in place; however, this is not the case. Revisiting longer term vendor contracts associated with critical services can unlock potential savings. To unlock these savings, FIs must utilize best practices in vendor contract management and know the right questions to ask at the right time.

Pay Less Now, or Pay Less Later

A good discipline to practice at the beginning of budgeting season is to take a look at any vendor contracts due to expire over the next 18-36 months. This should already be standard procedure, but budget season offers a great opportunity to get caught up. Many vendor contract agreements require 12-18 month notice to avoid auto-renewal, and most de-conversions/vendor replacements take even longer than that. Without appropriate lead time, any opportunity to consider alternate providers lacks the leverage to make it a credible negotiating tool.

In addition, it’s worth consulting third-party benchmark data and/or domain experts to determine how your FI’s vendor contract terms stack up to the prevailing rates. The market for financial services technology is remarkably dynamic, with prices on a downward trend in most cases. A favorable deal struck even 1-2 years ago may already be above market. Card agreements are a good example of this given the way regulatory realities have fundamentally altered card economics. Some card networks have shown willingness to make some effort to compensate the impact of these changes through items like assistance on card replacement/reissuance costs. 

Utilizing benchmarking data early enough in the life of a contract can give a FI the information it needs to explore the possibility of renegotiating above-market contracts by offering to extend the term of such a contract at a lower cost. This approach works particularly well with good vendor relationships where there is typically no intention to make a change in suppliers.

The promise of a long-term revenue arrangement is an attractive option for your third-party provider. Conversely, if presented with objective evidence showing that the rates in the contract are above market, most vendors realize a refusal to engage could put their relationship with the client at risk. The overall costs associated with switching FI technology vendors are notoriously high; both parties have strong motivation to maintain healthy, long-term relationships.

Trust, but Verify

It’s not unusual for vendor invoices to fall into a rote approval pattern. If the balance due is in line with the run rate, the general feeling for most is that it must be correct. However, periodic audits that reconcile the amounts on these invoices to the contract terms can provide multiple benefits. It doesn’t reflect lack of trust, or suggest that the vendor is “pulling a fast one.” It is instead a “best practice” any business person should understand to be prudent.  If the FI didn’t notice a volume threshold or other discount kicking in, it’s easy to understand the vendor overlooking such contract terms as well. In such cases, FIs may be entitled to cost reductions without renegotiation and perhaps even receive a credit for past overpayments. As an added benefit, such auditing demonstrates an appropriate level of third-party diligence – an area of regulatory focus.

Given increasing demands to fund security and compliance initiatives while staying ahead of market trends and preserving the bottom line, FIs cannot afford to overlook the possibility of uncovering hidden cost savings in their existing vendor contracts.  Many times focusing on this particular area can yield some fairly easy wins.

Topics: Vendors & Contracts