“Trust, but Verify” – When Managing Vendor Contract Negotiations

Posted by Michael Carter on Oct 25, 2017 9:00:00 AM
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Ideally, a good business partnership should result in a “win/win” for all parties involved. Vendor relationships are no exception. No vendor will last long if their approach is predatory toward their clients. 

That is not to say that financial services (FinServ) vendors are not in business to make a profit, as are most of their clients. Still, a best practice to consider in any partnership, including vendors, is captured by a phrase from the Reagan era – “Trust, but verify.”

A white paper recently published by SRM describes seven best practices that banks and credit unions should incorporate into their negotiations with FinServ vendors. These seven best practices are essential to navigating what can be both a complex and emotional process to a conclusion that meets the needs of both parties.

Neutralizing the Home Field Advantage

When stepping back to think about contract negotiations, the extent to which the ground rules favor the vendor is surprising. The exercise almost invariably starts with the seller’s contract template, and while incremental adjustments to this form are certainly expected, only the largest of financial institutions (FIs) have the clout to insist on beginning with their own in-house form. For most FIs, using the contract template of the vendor is the equivalent of playing a football game on your opponent’s home turf. 

The vendor’s home field advantage only gets stronger from there. Vendors negotiate contracts for a living – something that probably cannot be said for their counterparts at the vast majority of FIs. Even for FIs fortunate enough to have a resident contract “wunderkind,” the vendor’s representative will by definition be more plugged into the nuances of the specific vertical, including intimate knowledge of current market pricing. This is especially true in the rapidly evolving FinTech space. This is a bit like the home team having weeks to study game clips and practice customized plays. Knowledge is power.

Other Nuances

FIs do have one significant advantage at their disposal – the power of the checkbook. Vendors – especially the sales representatives and account managers they employ – are highly motivated to get a deal done. However, other elements of a situation may impact the process. 

For example, an incumbent supplier is fully aware of the switching costs and operational disruption faced by any FI considering a new provider. On the other hand, even if the relationship with the vendor has been acceptable to date a FI can be well served to always take a look around at other options as this can help motivate the incumbent who knows well that it’s less expensive to keep a customer than to attract a new one.

As you can see, there is no shortage of factors to consider in even relatively “vanilla” contract negotiations.  That’s why, in addition to incorporating the seven best practices discussed in the white paper, seeking counsel from a firm that has marketplace data and expertise in the related area is key.  

Good vendors want a win/win deal with their FI clients. Those vendors do not oppose their clients seeking all the help they need to help them in the process. One vendor I spoke to said that “…having a firm that truly facilitates – as opposed to disrupting and blocking – the flow of communications and information often means the deal gets done faster. 

To learn more about these and other factors, download our white paper, Level the Playing Field When Negotiating Long-Term Vendor Contracts

Download White Paper


Topics: Vendors & Contracts

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