Contracts by Quadrant

January 2016: Vol 39 No 1
by Bob Roth

How to negotiate well with vendors.

contracts being signedFew of us see ourselves as good negotiators. We lack confidence negotiating car prices, and feel like we have little leverage when negotiating—or trying to negotiate—our employees’ salaries. The Internet has been a huge help, though. Sites like TrueCar.com list what people actually paid for cars, and Salary.com gives people some perspective on what other people with similar skills, education and experience are making in similar positions. In addition, these sites often provide tips on how readers can be better negotiators.

Credit union executives are no more confident in their ability to negotiate with financial technology vendors than they are in their ability to negotiate car prices or salaries. Unfortunately, there are no sites to help CU execs improve their skills for negotiating with vendors. Data regarding what financial institutions are spending for specific services isn’t as readily available as car prices and salaries. But we can provide some tips, tricks and guidance for helping credit union executives become better negotiators with fintech vendors.

More Than Just Win-Win Situations

We’ve all heard about “win-win” negotiations, but smart negotiators understand that other types of negotiations might be needed in a particular case. The energy a credit union should put into a particular contract negotiation is determined by two dimensions: 1) the nature of the relationship, and 2) the nature of the results.

Operations article graphic The relationship dimension (on the vertical axis) is a spectrum from a weak relationship (when the credit union doesn’t care about the relationship) to a warm relationship (when the credit union has or wants to develop a strong relationship with a particular vendor).

The results dimension (on the horizontal axis in the graphic) ranges from not impactful (unlikely to have a material effect on the organization) to impactful (the end result will have significant impact for the credit union). Applying the two dimensions to a negotiation points to the following four negotiation tactics:

1. Minimum negotiations. In the lower left quadrant—the intersection of weak relationship and weak (tactical) results—credit unions’ negotiation efforts should be minimal. In this quadrant, the credit union feels there is little chance to have much impact on results through negotiation. Negotiations of this type typically consist of price validation and comparison. Of the large number of contracts a credit union will enter into, many will fit into this quadrant and require minimal negotiation.

What to watch out for in this quadrant: mis-categorization of a contract. The challenge for many execs is recognizing when a contract that really belongs in one of the other quadrants is wrongly categorized into this one.

For example, when restarting a credit card program, a credit union may be inclined to spend minimal time negotiating because the initial spend on card processing is immaterial. But because a successful program can become very large over time, failing to put enough effort into the initial negotiation may put a credit union in the hole down the line. Credit unions that allow their agreements to auto-renew are erroneously using this technique, usually without even realizing it.

2. Relationship negotiations. Contracts that fall in the upper left quadrant require negotiations that focus on maintaining or improving the relationship with the vendor. Because the focus is on the relationship, major drivers of the agreement, such as price and business terms, are rarely or lightly negotiated. This approach equates to trusting the vendor’s word when he/she says you have the best deal. Buying new products during a contract term from a trusted vendor without negotiating price is an example of this situation. Credit unions are by nature very relationship oriented and tend to take this approach, often without realizing it.

What to watch out for in this quadrant: underestimating the importance of the results. The new product being purchased in the middle of a contract term may cost far less than the main product or service procured from a vendor, but may be very important to a particular department within the credit union. To counteract the effects of over-relying on the relationship, effective negotiators should increase the focus on results when possible. A CU that has a “special” relationship with its vendor has all the more reason to park that relationship at times and have open discussions about the results it’s trying to achieve.

3. Results negotiations. It is easy to tell when credit union executives are negotiating a contract that falls in the bottom right quadrant. They are tough on the vendors, wanting to extract every ounce of service and every possible dollar. The relationship is seldom discussed. Services are often put out for bid at each renewal. Such commodity purchases as telecom and PC hardware are examples of contracts that naturally fall into this quadrant. With all the pressure from regulators to get more organized about vendor management, more and more credit unions are moving in this direction. The entire relationship with the vendor becomes transaction-driven.

What to watch out for in this quadrant: short-changing relationship opportunities. The problem with this approach is that if everyone took it, the industry model would become unsustainable and short-sighted. What vendor wants to work on 10-year development roadmaps if its entire user community is ready to walk at the next renewal? Credit unions need to maintain healthy relationships with all their stakeholders, including third-party vendors, members and employees. To the extent that all relationships need balance, this quadrant’s approach is not balanced. Focusing on results to the detriment of the relationship won’t work for a 20-year relationship.

4. Partnership negotiations. Contracts in this quadrant involve looking for aligned interests, and negotiations are typically characterized as “win-win.” It should be used for all “material” negotiations (as defined by the Federal Financial Institutions Examination Council), and the success of the vendor should be just as important as the success of the credit union. At the end of the day, credit unions and vendors need each other. Instead of negotiating on price alone, credit unions should attend to all aspects of the relationship. Renewals of such material agreements as core, electronic funds transfer and online banking, and the procurement of new strategic technologies, such as loan origination systems and mobile card self-service, are examples of contracts that fit well here.

What to watch out for in this quadrant: under-estimating the negotiation effort. Major third-party vendor agreements should be treated like any other major project at the credit union and have an executive sponsor immersed in the effort. Contract negotiations in this quadrant take much more effort than those in the other quadrants. They require preparation and working with the vendor in a collaborative manner, including looking with sincerity at its new product offerings.

Significant energy should be put into considering, from a holistic viewpoint, what the credit union is looking for in an extended relationship, including pricing, levels of service, account management, new products, growth plans and development needs.

This type of negotiation shouldn’t just be a cost-cutting exercise—but a reinvestment exercise where spending on existing services will be compressed if the savings can be used to fund new technology. With this type of negotiation, vendor issues should be worked out before turning to competitive market tactics, such as requests for proposals.

Walking the Negotiations Tightrope

Credit unions should avoid unduly focusing on results to the detriment of relationships, and vice versa. Simple procurement exercises will be conducted with insignificant vendors while careful consideration of every factor, including the vendor relationship, is reserved for material vendors. A careful consideration of all your credit union’s third-party vendor agreements and how they fit into the above model can help you reserve time for the larger efforts.

There is certainly potential for harm in overemphasizing relationship over price, or price over relationship. And most of us have, at one time or another, felt the sting of taking the wrong approach in our personal negotiations. Business is no different.

With the importance that third-party vendors play in credit unions’ success, relationships can’t be ignored to the benefit of the almighty dollar. On the other hand, costs have to be considered. With the tight margins in banking today, credit unions can’t survive by paying more than a fair price. Balance—and the appropriate categorization of contracts—is the order of the day.

Bob Roth is a managing director with Cornerstone Advisors, a CUES Supplier member and strategic provider based in Scottsdale, Ariz.