Questions to Ask Before Vendor Contract Negotiations

Successful contract negotiators know when to hold ’em and when to fold ’em.

While there is clearly a need for financial institutions to approach vendor agreements armed with tactical knowledge and supporting analytics, there is no substitute for employing methodical action throughout the entire contract negotiation process. In the end, when it comes down to dollars and cents, a little common sense and a lot of shrewd intuition will go a long way.

What is a Vendor Agreement?

Simply put, a vendor agreement is a business contract between two parties covering the exchange of goods or services in return for compensation. Vendor agreements establish the business relationship conditions between banks and their technology solutions providers and include details on each party’s obligations under the contract. These agreements allow involved parties to understand what is expected and the consequences if those expectations are not met. 

Creating a Successful Negotiation Roadmap

The first step on the path to a successful contract negotiation is to make the unknown known. One way to accomplish this is to create short lists in the early stages that can collectively serve as a roadmap to guide the process and identify any gaps in information needed to make educated decisions along the way. Here are a few examples of lists that can help support this initiative:

• Must-haves versus nice-to-haves. This list enables the bank to clearly define its objectives and rate its options in terms of priorities. While the lowest price possible for a three-year term might be ideal, the institution may be willing to agree to a five-year contract depending on upfront incentives, fixed pricing, or other favorable contract terms that present alternative benefits.   
• Desired target outcomes. The vendor’s opening offer can serve as a foundation for the institution to develop targeted outcomes based on budgetary constraints coupled with strategic priorities. This exercise can also help the institution identify negotiation gaps that can steer it toward the best negotiation strategy for the project.
• Concessions and alternatives to “no.” Identifying concessions or second-best options the bank is willing to allow (e.g., term flexibility, add-on functionality) can position it two or three steps ahead of the vendor during negotiation and get a potentially negative situation back on positive footing without any material cost. 
• Discussion points that support the bank’s position. Mitigating factors that will help drive the vendor to consider the institution’s situation include budgetary constraints, timing issues, competing vendors, deal urgency, the institution’s current “standing” with the vendor, and future growth opportunities. 

Keeping Vendor Agreement Negotiations Positive

Anyone who has been involved in a contract negotiation knows the process can get contentious. The best FI negotiators gain an understanding of the priorities and motivations of the vendor’s representative(s) prior to negotiations. This knowledge helps prepare the institution to build trust, project empathy, and create a positive environment to smooth over any rough patches that may arise. Obtaining advance answers to these questions will help keep the negotiations on an upbeat footing:

• What is the relationship history? The negotiation process is an excellent opportunity to recognize past successes with the vendor and also consider areas of the relationship that may need improvement such as training, system optimization, team engagement and service levels.
• Who are the players, what are their priorities, and what, if any, are the limits on their decision authority? Sometimes, there’s an elusive player in the background calling the shots. It is important for the bank to know if it is negotiating with the ultimate decision maker.
• What does the vendor’s position look like compared to market? A vendor bringing a hot new product to market with a backlog of orders might not be as anxious to compromise as one that is presenting a legacy platform. Other factors that can influence the vendor’s position are financial strength, ownership, and growth target pressure. 
• What does the vendor want to accomplish from the negotiations? Is it close to fiscal year end? Does it represent a legacy product that drives cash flow? Understanding the vendor’s needs can help when steering the conversation. 
• How does the sales rep get paid? We all work to get paid. Knowing how the sales representative is compensated can help determine how best to leverage him or her as a resource when they communicate your offer.

Hold or Fold on Negotiating Vendor Contracts?

“Splitting the difference” is an approach used by many negotiators to accommodate differences of opinion that arise during negotiations. It’s basically an arms-length method of reaching a quick solution while avoiding conflict. After all, what could be fairer than showing a willingness to give up half if the other person will, too? But in reality, splitting the difference is sometimes considered a lazy negotiating strategy and can be the quickest path to a bad deal.

Answering five questions prior to accepting a compromise will help the bank decide if the stakes are worth it or if the institution might benefit more by expending the extra effort it would take to negotiate a contract that involves fewer sacrifices.

1. How much will the institution be giving up if it agrees to split the difference?

2. If the vendor rep will agree to sacrificing half, how much more might s/he be willing to give up?

3. How might a compromise impact the initial goals of the negotiation?

4. How might it impact the long-term relationship?

5. Does a compromise leave either party feeling like it got a good deal? A bad deal?

Effective negotiation requires methodical action throughout the entire process. Understanding any information gaps in the preparation, bringing adequate knowledge to the table to smooth over rough spots, and never settling for less than the targeted goal when closing a deal are all crucial drivers of a successful negotiation that ultimately results in a win-win deal.