If you work at a bank or credit union and are the worrying type, there is no shortage of things to occupy your mind. However, it’s not what you know that should make you worry. Most often it is what we don’t know that creates more challenges.
For example, there’s a decent chance that for most financial institutions (FIs), vendor contracts are not the source of concern they should be, especially if the supplier is a company you feel does a good job for your institution. Given the numerous issues that must be addressed in the course of business at a bank or credit union, the axiom “if it isn’t broken, don’t fix it” often serves as a default. This may make it easy to rationalize letting contracts automatically renew with incumbents who are providing satisfactory levels of service.
The truth is that auto-renews are often allowed to occur regardless of the institutions satisfaction with the vendor. At many banks and credit unions the responsibility for vendor contract management is assigned to someone who already has an adequate list of responsibilities competing for their time and attention. After all, banks and credit unions are not immune to the general push to achieve more with less.
However, there is considerably more at stake than many might suspect; according to research done by the International Association of Commercial Contract Management (IACCM), not observing best practices – for example, automatically renewing a contract without receiving competitive bids – could cost a bank or credit union as much as 9.2 percent of their bottom line. Our experience at SRM is that FIs that integrate best practices into their contract management add millions of dollars in value to their bottom line.
Compromising Leverage and the Importance of Data
Banks and credit unions are finding that contracts are not only increasing in number but also tend to have more complexity than in the past. That is why it is important for FIs to allow for the lead time necessary to evaluate the current contract and prepare for the next. Contracts vary in terms of the amount of time required to do an adequate job of evaluating and implementing the options available. Core processing contracts should be evaluated 24-36 months prior to termination. Others – e.g., card branding, ATM/debit, digital banking contracts – should be reviewed a minimum of 18-24 months in advance of expiration.
This best practice and others related to vendor contract management are designed to give an FI optimal leverage in negotiations with vendors. The reason leverage is important for a bank or credit union is that vendors typically have a number of advantages over the FIs they serve. For example, vendors know considerably more about the state of the market as it relates to pricing, incentives and terms than most FIs.. FIs that do not have access to that data are basically equivalent to the consumer that shops for a car with only a 2015 Kelly’s Blue Book in hand.
In addition, the vendor salesperson on the other side of the table negotiates for a living. He or she may close a dozen or more contracts a month. Most bankers do not negotiate for a living and, consequently, are not as cognizant as they should be of the various ways to ensure they maintain a strong negotiating position. A common example of this is the failure to bid out every contract renewal, even if there is no intent to replace the incumbent vendor.
Another strategic negotiating error we often see manifest is when FIs rely solely on the incumbent vendor for information. Not taking the time to validate the information provided with other sources will result in a view of things that is slanted in favor of the vendor who provided it.
A Self-Esteem Problem?
There are forces afoot reducing some of the advantages vendors have. Due to consolidation, there are far fewer FIs than there were five years ago, a trend that is likely to continue. This results in more vendors chasing a smaller number of available clients. Younger firms are hungry to win business, while incumbents cannot afford to lose existing clients. Yet FIs, perhaps intimidated by the effort required and disruption involved in a change of vendors, often act as if they hold little power. The resulting money left on the table can be staggering, and much of it could be claimed without swapping out providers.
Think of it like the current real estate environment (in most cities, anyway), where not enough houses are being put up for sale. Or better yet, the NFL free agent market in where a scarce supply of quarterbacks can set off bidding wars for signal callers who were previously deemed no more than average. Similarly, a bank or credit union with a $100 million debit card portfolio needs to realize there aren’t many prizes available to vendors, and use that knowledge with the certainty that they can do “just a little better than the last deal.”
Enlisting a firm like SRM with domain expertise, access to current benchmarking data, and the negotiating strength that comes of having successfully completed more than 700 deals – helping clients realize $2.2+ billion in value along the way – lightens the FI’s load and can streamline the process for all involved.