The Bottom Line

Vendor Contract Negotiations: In Pursuit of a Win/Win

Posted by Patrick Goodwin, President on Nov 29, 2017 9:00:00 AM

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While the vendor contract negotiation exercise does not need to be an adversarial one, the chances for a happy outcome are increased when both parties feel they are being treated fairly. In fact, that is the goal of most vendors and financial institutions (FIs) we have worked with. After all, vendors have no future without FIs and FIs have not future without vendors. It is in everyone’s best interest to work toward a deal that meets the needs of all the parties around the table.

 The key to negotiating a fair vendor contract is timing, information, transparency and mutual respect. There are a series of best practices that are useful to banks and credit unions as they approach and while they are in vendor contract renewal discussions.  SRM’s recent white paper addresses just how these best practices can level the playing field when negotiating long-term supplier contracts. It’s worth your time to check out the full report. Here’s a quick overview of some of the factors you should consider.

Playing the Long Game

Most FI vendor contracts – particularly those governing IT solutions – run for terms of three to five years, or more. That’s the bare minimum a contracting FI should be considering. For one thing, vendor switching costs are substantial – not only in “out-of-pocket” costs but also the bandwidth of in-demand IT resources.

Because of these realities, incumbent vendors know they have a material advantage over the vendors seeking to replace them. Most FIs will only replace their incumbent vendors in cases of serious service deficiencies, functionality gaps or a wide price differential. These factors are why an important best practice is to negotiate de-conversion terms upfront – for both vendor resources and timing commitments. 

Too many times FIs will overlook this detail or, more likely, approach it without the careful consideration they give to other aspects of the vendor contract negotiation. After all, five years or longer seems a long way in the future when your plate is full in the present. Nonetheless, spending the time needed to clarify the various details that may come into play during a de-conversion ensures a better set of options at the contract’s back-end.

FIs must also consider future growth when evaluating vendor pricing models. Such growth may come in the form of mergers and acquisitions or a new offering (e.g., new services offered through mobile banking) that starts as a niche product before achieving mass adoption. Whatever the reason, there’s a decent chance volume levels in five years will differ from today’s. Be sure your pricing tiers account for this.

Here too the pressures of the present and the lure of a “quick hit” in the form of a signing bonus or sweetheart first year terms can make it tempting to take the “bird in hand” and delay those other concerns to some faraway fiscal year. However, the future tends to always arrive much sooner than hoped for in the past.   

Don’t Shortchange the Process

It’s also essential that vendor contract renewals not be treated as a side project assigned to an already overtaxed resource. This is easier said than done – given all the balls being jungled by most business executives. Tasks that occur at long or irregular intervals such as vendor contract negotiations often wind up a third or fourth priority – best intentions notwithstanding. As other more visible and time-sensitive crises take precedence, the first casualty is often a missed notification deadline and/or an auto-renewal clause. Anything that lessens the time an FI has to negotiate the details of its vendor contracts generally lessens the leverage a FI has available in negotiations.

Once engaged in negotiations with a vendor, it’s critical for the FI’s negotiating team to have available to them detailed and current information about the market landscape for the product in question. Again, this is a tall order. A vendor who lives and breathes in the space will naturally possess more knowledge concerning the current pricing and terms in the contracts being signed with his or her company, as well as the competition. Banks and credit unions need to be prepared to do a considerable amount of homework or to bring in outside counsel with access to the information needed. 

It’s true that rarely, if ever, will both parties get everything they want in a negotiation. With proper preparation and attention to detail, however, banks and credit unions can feel confident they’ve struck the best possible deal, which should also translate to a healthier long-term vendor relationship.  To learn more about these and other factors, download our white paper, Level the Playing Field When Negotiating Long-Term Vendor Contracts.

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Topics: Vendor contract negotiations