We recently released “Rising to the Challenge: SRM’s Seven Rules for Optimizing Vendor Contracts,” a report outlining ways banks and credit unions can ensure they receive services at fair prices and terms from third-party providers. As we enter 2023, these vendor relationships will receive even greater focus as FIs aim to defend their bottom lines and sharpen their internal processes amid an uncertain economic environment.
A recent blog explored creating a cross-functional project team and leveraging outside data and expertise. Let’s delve deeper into some of the nuances of the negotiation process.
It’s Never Too Early to Avoid Being Late
Our first rule of vendor negotiations is deceptively simple and remarkably important: Start early. A well-designed RFP process — a valuable learning exercise even for banks and credit unions with no intention of switching vendors — can take several months. Vendor migration can take longer for FIs that determine a switch is needed.
Leverage for an FI decreases as the expiration date nears. If the renewal topic remains unaddressed just weeks before expiration, it’s a loud and clear signal to the vendor that that book of business is not at risk. They’ll have little motivation to make concessions on pricing or other terms. Even in solid relationships, a transparent message like, “we’re happy with your service, but it’s simply good diligence to look at the market to understand our options” can lead to constructive outcomes and greater vendor flexibility.
If an expiration date has already drawn too close to allow for a comprehensive RFP process or other negotiation, most vendors will grant a short-term extension under existing terms. Although this approach helps FIs retain some negotiating leverage, it’s a sub-optimal option. Scale economies and the prevailing technology curve often move renewal terms in the FI’s favor. Therefore, every month (operating under outdated terms) represents a lost opportunity for savings.
Keeping Your Options Open
Additionally, banks and credit unions need to know their rights. This begins with notice periods — many FIs are surprised by the lead time required to file an “intent to terminate” the vendor agreement to prevent it from rolling into auto-renew status. Given the long-term nature of these contracts, employee turnover, standard promotion cycles, and an endless array of daily duties on managers’ plates, it’s easy to overlook the details. It is also an excellent argument for implementing contract management software or engaging outside experts to identify opportunities and highlight necessary actions.
It’s even easier to overlook other events that might trigger negotiation opportunities or cost savings. Mergers and acquisitions — involving the vendor or, at times, the institution — might open the window for a contractual reset. Attaining certain volume thresholds can also activate new, lower-unit price tiers. It’s amazing how often all parties can overlook such events and how much they can serve as leverage in future negotiations.
The Bottom Line
Working with vendors is a business relationship. Even if an FI is happy with an existing provider, the renewal process offers a significant opportunity to reset, tweak the rules of engagement, and confirm pricing remains in line with the present market. Our latest report provides more details on optimizing vendor contracts.