Leveling the Playing Field with Vendors

No bank can meet the expectations of its customers without significant help from the third party vendors that supply it with labor, software, hardware and services. Considering the role the vendors can play in a bank’s ability to deliver service to its customers, it is reasonable for a bank to view its vendor relationships as strategic partnerships. However, the level of consolidation in the vendor community has made many of these vendors very powerful, and it is important for banks to establish and improve these strategic relationships in a way that levels the playing field between the bank and the vendors.

The contract embodies the relationship between a bank and its vendors. Cornerstone Advisors has negotiated hundreds of vendor contracts for clients and we very often see that the contract terms, as drafted by the vendor, are weighted heavily in the vendor’s favor. The following are our suggestions to help banks level the playing field before and during the contract negotiations.

Do the Math

First, we recommend compiling a short list of the most strategic vendors and scheduling regular sales and service update meetings. Months and even years before a contract is up for renewal is not too soon to start spending quality time with vendors talking over important issues. As banks evaluate their existing agreements, asking the following questions will help them determine how to get the most value out of the relationship:

  • Do we have someone attend our key providers’ user conferences?
  • Have our key business analysts been properly trained in how the systems work?
  • Do our sales representatives treat us like a partner and keep us up to date on what the vendor is doing – or do they act as order-takers?
  • Do we know our vendors’ strategic roadmaps and has our input been solicited?

Whoever in the bank “owns” a relationship with a key vendor today should fully understand the financial side of the relationship. This includes line item pricing and the behaviors of the items that drive the invoicing. To really gain traction with the vendor, the bank needs to know the invoice better than the vendor does – and do its own math. Why would we let a vendor do all of the proposal math when we wouldn’t let a small business do its own interest calculations for a loan? It is important to remember that every dollar given to a vendor is a dollar that may need to be taken from a customer in fees.

There are three drivers that work to the vendor’s benefit over time: cost of living adjustments, organic growth and additional services. During the course of a contract term, each of these will work to magnify the others and drive the overall revenue stream up for the vendor. How well the bank handles these drivers will dictate how much the relationship tilts to the vendor’s advantage over time.

Once the bank understands these drivers, there are techniques to help out on each. For cost of living adjustments, increases can be tied to an index such as the Consumer Price Index. For growth, we recommend negotiating in rates that decline as the bank grows. Finally, there are new products. In the constant search for “sticky” customers and profitability, banks are susceptible to buying that next “great thing.” Bulk buying and competitive pricing are the secret sauce to keeping the new product spending drivers under control.

Getting a team of officers at the bank together to meet with a vendor impresses upon the vendor that the relationship is a big deal and worthy of their time. We advocate using formality where it makes sense to really lay out the organization’s thoughts in a letter before approaching the vendor. The following are examples of questions to ask in preparation for the letter and the meeting:

  • What is important if we are going to enter into or extend a relationship with this vendor?
  • What do we expect out of this vendor that we are not getting?
  • Are there things that we can add to the relationship that the vendor would perceive as a win-win?

Beating up on a vendor may be fun (for some) but it is seldom effective. The best way to achieve results is to be credible. Asking for free services or discounts way outside of industry norms convinces the vendor right up front that the bank does not know what the industry norms are. The bank should open up negotiations without being specific on pricing requests and let the vendor drive the early part of the negotiations. After it receives pricing, the bank should do its own math to evaluate the cost of the services over time relative to the value received. Pricing requests should be developed for follow-on negotiations based upon market pricing.

Banks should make a point of building relationships with their key vendors’ national management teams. The national team is usually on display at the vendors’ user conferences. These individuals rarely change. The sales person du jour is a good resource for operational issues and product info, but ties with national management will pay off when the chips are down. In today’s vendor market, many organizations are experiencing significant turnover in their sales field staff. If the local sales representation is lacking or problematic, it is paramount that the situation be remedied by working with the representative’s management.

A bank chooses its key vendors because it recognizes an alignment between the bank’s and the vendor’s interests. Unfortunately, the vendor can sometimes gain the upper hand during the course of a relationship. Hopefully, the tactics described above will help level the playing field and develop win-win situations between the bank and its vendors.

Mr. Roth is a managing director at Cornerstone Advisors, Inc., a Scottsdale, Ariz., based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at [email protected].