Financial Institutions Should Adopt a Longer View of Critical Vendor Contracts

The pace of technology, regulatory, and economic change can be overwhelming in the financial services landscape. Credit union and bank execs are already facing the challenge of ensuring they are allocating resources and meeting financial goals. Among these challenges, navigating the vendor contract footprint can be extremely arduous, resulting in missed opportunities that adversely impact an institution's bottom line and growth potential.

Critical vendor contract reviews, RFPs, negotiations, and renewals can be cumbersome tasks for financial institutions. Contracts can be an inherent challenge for financial institutions, especially when attempting to create fair and favorable terms for themselves and their vendors. This complexity is often compounded by attorneys and other third parties that add archaic terms and clauses to an already confusing process.

It is common for personnel to change during a multi-year contract term. Unfortunately, this can lead to a situation where managers and other stakeholders inherit the responsibility for a vendor platform, product, or service, yet they have no tie to the original agreement and contractual terms. When this scenario occurs across multiple vendor relationships that come with their own amendments, it's easy to understand why this becomes a major hurdle for banks and credit unions to overcome. However, with the proper guidance and strategy, institutions can save significant amounts of money and secure better terms for themselves.

Challenges and mistakes during contract negotiation

After sealing the deal on a five-year contract, it is common for institutions to adopt the "out of sight, out of mind" mentality. This ends up being a mistake, which can have adverse effects. Five years will go by in a flash, and by the final year, the financial institution will have missed the window to take meaningful action. Most vendor contracts have an auto-renewal clause that requires banks and credit unions to give a year or more notice of non-renewal.

One year is insufficient for financial institutions to conduct an RFP process and implementation period. This loss of flexibility can be detrimental, even if the financial institution were to continue working with the provider. All leverage that the institution had regarding pricing or potential adjustments is nullified.

Taking a long-term view of vendor contacts

To avoid this lame-duck period and ease the burdens of vendor negotiations, banks, and credit unions must implement vendor contract strategies that employ a clear, long-term view of the entire vendor contract footprint. This includes expiration dates, key negotiation windows, and a firm grasp of critical co- and inter-dependencies across vendors and various contract types.

Typically, 8 to 10 years out is an ideal time for institutions to begin reviewing vendor contract commitments. Considering the number of complex components and the growing dependency on third-party point solutions to provide an optimal tech stack and customer experience, it is mission-critical for financial institutions to adopt a strategic approach. This means appropriately allocating resources to adapt to shifting market demands and ensuring pricing is consistent with industry standards and best practices. A comprehensive outlook for 8 to 10 years enables financial institutions to strategically view, plan, and execute all their contracts promptly.

Alignment is mission-critical

With the myriad of solutions and providers changing constantly, the intricacy of interdependencies within operational platforms never gets easier. It is rare for a single operational platform to be switched without creating a domino effect that impacts the whole system. Although APIs and middleware assist in mitigating disruptions, they cannot prevent unforeseen interactions that are bound to emerge.

Establishing a long-term relationship with a knowledgeable industry partner with a breadth of experience across the market solutions landscape can help institutions properly align their strategy. This can span the cycle of capability assessment of vendors, typical price benchmarking, negotiating favorable terms, and integrating any new or expanded technology into the stack.  

Having access to institutional knowledge and experience gives institutions an edge. It positions them to receive invaluable insights and guidance, allowing for enhanced agility when responding to changing market conditions and supplier risks. Having a knowledgeable partner in your corner helps keep an eye on maximizing cost savings from contract to contract and identifies potential product options that were not available during the last contract cycle.

Ben Mrva is the Chief Revenue Officer for SRM (Strategic Resource Management), an independent, global firm that helps financial institutions identify cost savings and new revenue potential in their contractual relationships while providing strategy, payments, and technology advisory services.

Want to keep reading? This content is for subscribers only.

Login Subscribe