The Bottom Line

The Power of the Bid in Vendor Contract Negotiations

Posted by Patrick Goodwin, President on May 3, 2017 9:00:00 AM

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All banks and credit unions rely on third party vendors for products and services to support the backbone of their operations. These relationships are typically governed by long-term agreements and when those vendor contracts are up for renewal, the common reaction is to sign an extension with the incumbent. Assuming service levels have been acceptable, switching costs – especially for anything connecting with a financial institution’s core system – tend to be so onerous that there’s rarely any appetite for the hassle and resource diversion that accompanies a de-conversion.

Nonetheless, credit unions and banks would be remiss to overlook the benefits of a competitive vendor contract negotiation bid process. One obvious factor is price – in our experience, financial institutions (FIs) can expect to realize additional savings of 10-20 percent when they solicit bids, simply by neutralizing some of the incumbent advantage inherent to the process.

Learning What You Don’t Know

Cost savings are only the tip of the iceberg, however. The bid process can double as a much-needed educational exercise to take the pulse of the marketplace, learn about technology trends and take a glimpse into the future direction of various vendors. It’s also an inroad to discovering what you don’t know – it’s surprising how often an incumbent provider’s sales rep can become complacent by not keeping existing clients informed on the vendor’s latest innovations. At minimum, you stand to learn more about what your incumbent has to offer.

Bidding doesn’t have to be synonymous with undertaking a Request for Proposal (RFP). Such exercises are quite time consuming for both the client and prospective vendors. On the plus side, RFPs afford the best opportunity for information gathering and to pose questions tailored to your situation.

A less onerous option is a Request for Quote or (RFQ). In this scenario, the FI lays out its specific situation and invites prospective vendors to submit pricing, without much of the additional legwork that accompanies a full RFP. The level of desired detail is a matter of FI preference, although less detail also means less of a learning opportunity. SRM advises that if a FI feels a full RFP process is preferable, then the institution must be willing to consider switching vendors. Service providers can become understandably frustrated if dragged through an unwinnable exercise, and may be less responsive in the future when their participation is more keenly needed.

The More the Merrier – Within Reason

Effective vendor contract negotiations bid process typically includes roughly five solid candidates. That number can go as high as 12, however – particularly in the credit union world, where a wealth of CUSOs serving as resellers greatly increases the field of alternatives. It’s also wise to include any vendor already serving the FI in adjacent areas. In our experience, such players will eventually catch wind of the exercise and ask in, prolonging the process. Besides, their existing knowledge of the FI will likely lead to worthwhile perspectives.  

It’s About (a Lot) More Than Price

At the end of the day, a decision to change vendors is more often driven by service issues that the FI has concluded cannot be fixed, not by price. Often service problems are rooted in poor communications – an independent sourcing partner can serve as an informal mediator in such cases, helping to resolve the issue. A sourcing partner can also make sure you’re asking the right questions of prospective vendors and help optimize the price/service equation that best suits your FI’s needs.

Topics: Vendors & Contracts