The Remedy Blog

Core Vendor Contract Renewal – Don’t Delay…Timing is Crucial.

I often ask myself, why do banks or credit union executives wait so long to negotiate their core vendor contracts? Beginning the renewal process at the “right” time can be one of the most important decisions of the overall process. Most vendors will allow an early renewal, within reason, but I am quite certain a lot of banks are not aware of that timeframe and do not fully understand the value of renewing early. What is the appropriate timeframe? Keep reading.

The process of a core contract renewal is daunting to most people in the industry. Consider it a lot like the “old school” method of buying a car. The vendors have most, if not all, of the information and that can be very intimidating based on the size of these organizations and their corporate procedures. Even the most skilled negotiator at a community financial institution is in over his or her head during this process. Knowledge is power. You do not need to be a certified negotiator for work through a renewal successfully.

The items to focus on during core contract negotiation are:

• Timing – Are you within the window of time to renew? Will it be rushed or normal renewal?
• Rounds – How many rounds/times you can go back to your core vendor?
• Pricing – Are you paying what your neighbors or competitors are paying?
• Terms and Conditions – Are the T&Cs in your favor?
• Vendor Relationship – Working relationship with account rep/other vendors? How will this affect other operations at the bank?

C-Level executives at multiple banks recently told me that they have been occupied by FDIC audits, IT reviews, PPP loans of 2020 and 2021, etc. The first quarter of any year is quite challenging to begin a renewal for a bank planning to go through the process on their own due to these annual events. Therefore, they tend to kick the can down the road a few months and end up significantly inside the 24 month window. That could be a big risk for their financial institution. The window of time that is ideal for contract negotiations is 18-24 months out from the core contract expiration date. During a renewal with less than 12 months remain, a bank loses a lot of leverage including the threat of moving to another vendor no matter if it is implicit or factual. The vendor knows appropriate timeframes to complete processes and will use timing to their advantage.

The Remedy Contract Negotiation team is tracking an industry average of 4-6 weeks per response for vendors to respond to requests for change to a contract or pricing reduction request originating from the customer. This response time used to be 2-4 weeks. We are not sure why the increased delay by the vendor but these delays add up. Also, they are in favor of the vendor, not the bank. For example, if you have 5-6 requests, that could be 6+ months of vendor delays for just basic requests/changes. Assuming the vendor has more negotiating power than the customer, the closer you get to your renewal date, a bank or credit union CEO starting their renewal too late is painting themselves in a corner due to this vendor latency. That CEO likely will not get what she deserves when compared to market prices and T&Cs.

The other option is to use a consultant to work the process for the bank. Let’s go back to the metaphor of being in the market for a car. If you use a consultant, you will not have to go to the dealership, your consultant goes for you. This saves you a lot of time throughout the process allowing you to focus on the day-to-day business, growing the bank, etc. Throughout the process, if your consultant is on top of things, you will only spend about 4-6 hours over a 3-6 month period on the phone with your consultant. A good consultant informs the vendor what you are willing to pay knowing the price is fair and reasonable without overreaching risking the loss of credibility. The consultant continues to go back and forth throughout the pricing and contract phases providing updates along the way. Keeping you informed of the ebbs and flow of the process and getting your input on any strategy adjustments, if necessary. With clear communication and time on your side, your consultant can put a lot of money back in your pocket by cutting you expense.

So, buying a car, if your only job is to test drive it and your consultant takes care of the paperwork, negotiation and waiting on the salesperson to speak with their manager, would you? I would. Remedy Consulting is that consultant that takes the hassle off your plate so you can focus on operations and includes the customer when strategic decisions need to be made.

If you are within your 24 months window, reach out to me for more ideas or assistance with your upcoming core contract renewal.