But when a vendor makes an unsolicited offer to a financial institution, it can make an FI’s “Spidey sense” kick in. What’s behind this unease? The offer typically includes a reduction in run rate or some sort of signing bonus. It often means found dollars that can be delivered to the bottom line. Sounds great, right? So what about it feels wrong?
Let’s face it—pricing for the technology products that financial institutions use these days is cloudy, opaque, and has a wider range than in any other industry we know. In our client engagements, Cornerstone Advisors has seen countless incidences of one FI paying double, triple, even quadruple what another FI pays for the same service.
A savvy bank officer may receive an unsolicited bid offering a 5% discount, negotiate it to 10% and feel good about it. But what the savvy bank officer didn’t know is that the vendor still had an additional 30% discount in its pocket to give … but only if the vendor felt it had to give it.
When a bank signs an unsolicited offer, the vendor has the advantage, and that advantage could translate to the bank paying well above market for a very long time. It’s all about paradigms and leverage.
Paradigms – A vendor often makes an unsolicited offer to an FI long before the contract’s renewal date—and well before the FI is thinking of opening up renewal negotiations or starting a market selection search. This is no accident. Remember the “best deal” strategy? The vendor is betting that the contract’s high early termination fees have prevented the FI from exploring alternatives to exiting the contract before the renewal date.
A financial institution can often be talked into moving forward with an unsolicited bid because what the vendor is offering seems, at face value, better than what the FI currently has. However, the question an FI should be asking itself is not, “How much better is this offer than what was attained the last time we did this?” but rather, “How far from market is this offer?”
Obtaining an external market perspective allows the FI to measure on a completely different scale, one that can translate into very positive results.
Leverage – A key concept in contract negotiations is leverage, which boils down to an FI’s ability to successfully negotiate its needs into a contract, including improved pricing, better terms and more flexibility. In a two-party contract there are always opposing agendas. The vendor wants to keep pricing above market, have terms that are favorable to the vendor, and keep obligations to deliver as low as possible. FIs, on the other hand, go to the table with goals that include obtaining pricing lower than peers, terms favoring the FI, solid commitments of delivery from the vendor, and flexibility in vendor choice.
Leverage exists in every negotiation. Either the vendor has leverage or the FI has it. Unsolicited bids are an effort by the vendor to gain leverage and are typically proposed at a time when FI negotiation leverage is low but increases as the expiration date nears.
The amount of leverage an FI has is based on two key factors:
The FI that does receive an unsolicited bid and whose Spidey sense alarm bells are going off can take steps to ensure the FI does not sign up for a long-term contract paying above market prices.
Here are two ways to help silence those alarm bells:
Gonzo Gutcheck: An FI with best-in-the-land pricing is not going to receive an unsolicited offer from its vendor with improved pricing or a long-term lock. That’s the irony of an unsolicited bid: it signals to us that there are savings to pursue and that the vendor has already opened up the negotiation for us.
Banking executives armed with market knowledge and perspective will see unsolicited bids for what they are and take advantage of the opportunity to negotiate a winning contract.
You’ll want vendor pricing data from the Cornerstone Contract VaultTM on your side when you negotiate your next contract.
Backed by the combined experience of negotiating more than 2000 contracts with over 50 different vendors, the experts at Cornerstone Advisors can help you get the most competitive contract with the very best pricing and terms.
Contact us today to learn more.
2 thoughts on “Beware the Unsolicited Vendor Offer”
Great article but it does not give the FI the tools it needs to gain that market perspective you talk about. Are we to call our competitors and find out how much they are paying for a product? No. Point me to where I can get this information instead of just telling me we have a problem.
Joni, thank you for your comment and I agree completely. The key emphasis of the article is to a) gain market knowledge, and b) change the perspective. When addressing “how does one do that,” there are two tactics Gonzo bankers can employ. One is to “do it yourself” and gain market knowledge by doing RFP after RFP with competitive solution alternatives. This works for some situations but is difficult to execute for all situations as contract renewals are far more prevalent than converting to new products. Also, obtaining competitive RFPs for all situations can be counterproductive if the RFP process is leveraged solely for this purpose. It takes far more effort to gain a competitive pricing proposal and comparative alternative analysis than just sending out a bid request. The other approach is to gain market intelligence by bringing a qualified, independent third party to your side of the table that is armed with market pricing knowledge (https://www.crnrstone.com/services/contract-negotiations/). Let me know if you would like to continue the conversation for your shop.