The Bottom Line

Managing Vendor Relationships During Contract Negotiations

Posted by Ben Mrva on Apr 5, 2017 12:00:00 PM

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The negotiation process for expiring vendor contracts at a financial institution (FI) often poses unique challenges. For example, those that have an existing relationship with the incumbent supplier need that relationship to remain constructive, especially since it will be ongoing once the contract is signed.  This can prove particularly difficult when negotiating topics like pricing must be addressed.

Although issues of this type usually are seen at smaller FIs, where vendor contract negotiations often fall outside of a manager’s primary responsibilities, even large institutions with dedicated purchasing teams tend to run into challenges. A standalone sourcing department will have limited insight on how the dynamics of niche markets and the value of an FIs business should be factored into the negotiations.

Consider the Alternatives

The financial services industry has always been – and will always be – a relationship business. While strong vendor relationships are critical, FIs also need the ability to step back and assess their partners’ motivations. After all, the top priority for each party is its own bottom line.

Over time, we find that incumbent relationships tend to become overvalued. This is understandable when service levels are solid and communication is good, particularly given the high cost of switching vendors. Nonetheless, FIs unwilling to consider alternative providers risk missing advancements that could benefit their credit union or bank. In rapidly-evolving fintech areas like payments, digital banking, robo-advisory and identity management, an assessment by an independent third party with expertise in the area is too valuable to forgo.

Speaking With Vendors – Not For Them

When digesting a stack of presentations from prospective suitors, most FIs lack the industry-wide exposure necessary to validate vendor claims, particularly in emerging technology areas. An experienced, neutral outside party can help cut through the clutter, navigating the “sales-speak” to ask questions that shed light on the features that have proven relevant to the marketplace.

There are best practices that third-party firms can help an FI apply to this process. For example, it is a best practice to keep the communication lines open and free between the FI and the vendors competing for the business.  This ensures that the communication between these two parties do not get scrambled by going through a third party.  Obviously, vendors prefer this approach since it gives them the ability to best position their offerings.  It also is best for the FI as the relationships with the selected vendor (and usually the other competitors) will be ongoing once the selection process is over. 

There are signs that a request for pricing or proposal process may not be running as smoothly as it should.  For example,  if vendors begin to remove themselves from the exercise it could indicate that something needs to be addressed that may result in limiting a bank or credit union’s choices. It is usually the goal of every FI in this situation to get a complete view of the industry landscape and to select the best fit. In an effective process, it should be possible to remove vendor names from the presentations and review them solely on the merits of technology platform, pricing, etc.

Since neutrality and expert facilitation are key components to a successful bid process, a good partner to assist in this process should place each contender in the position to put their best foot forward in a transparent manner. As the FI either begins or extends a long-term commitment, the in-house vendor manager can then take the reins on the relationship without any baggage from the negotiations.

Topics: Contract Negotiation