The Dos and Don’ts of Contract Negotiation

The Dos and Don’ts of Contract Negotiation

Contracts for essential services lie at the heart of a financial institution’s business and greatly impact what it can and cannot do and what it offers to its customers. Because these contracts in large part drive the FI’s business, it’s important to get the contract negotiation right. Any time a contract is up for renewal, the terms and conditions should be closely reviewed, preferably by outside experts who have deep experience with contract negotiations and how they impact an institution’s profitability and success. By using outside help, financial institutions can gain access to valuable experience and industry best practices they wouldn’t otherwise have.

PRI consultant Paris Disper leads contract negotiations for core systems, card agreements and digital platforms with the key target of maximizing competitive pricing with growth incentives for her clients. In this blog, she discusses the common “dos” and “don’ts” financial institutions should consider when negotiating contracts.

“I have a quote from Victor Kiam that I keep in mind every time I go into a negotiation,” Disper said. “‘A negotiator should observe everything. You must be part Sherlock Holmes, part Sigmund Freud.’ It’s that combination of investigation and psychology that makes this process fascinating and fun.”

Disper says the simplest definition of contract negotiation is the process of coming to an agreement on a set of legally binding terms. And while an FI’s contracts are important as foundational drivers of its business, people should not be intimidated by the process. It’s something we all do every day.

“Our daily lives revolve around the practice of negotiation by turning threats into opportunities. Whether we’re negotiating with the cable company, a family member or car dealership, coming to mutually acceptable agreements is part of our make-up,” Disper said.

5 common “dos” consider when negotiating contracts:

1. Do maintain a central repository of existing contracts. If an FI is not paying attention, their contracts could easily roll over for decades without a review of the terms and conditions! Software can manage renewal dates and help a financial institution avoid being locked into multi-year contracts that no longer serve its needs.
2. Do focus on the high value variables. Instead of arguing over every nickel and dime and an endless list of gives and takes, focus strategically on what is most meaningful to your organization and prioritize your asks.
3. Do collaborate rather than compete. Building a relationship of trust will help create win-win situations more often.
4. Do know when to walk away and that walking away is an option. “If it’s not the right deal for you, knowing that you can walk gives peace of mind,” Disper said. 
5. Do set and communicate a stretch goal. Let the vendor know upfront the items you’d love to have and would be excited to see in the contract.

 5 common “don’ts” consider when negotiating contracts:

1. Don’t wait until the last minute. Be acutely aware of timeframes and renewal dates. There is a limited window to negotiate, and internal preparation is crucial before reaching out to begin the process. Going into negotiations unprepared puts you in a deficit position from the start.  For important contracts like core, digital and EFT, that means beginning the evaluation and negotiation process 24-36 months before contract expiration.
2. Don’t make financial considerations the only motivation. Disper suggests avoiding the continual mindset of “I have to get it for $1 less,” which narrows the negotiator’s perspective and can cause them to short themselves and their organizations in the end.
3. Don’t gloat publicly and always remain professional. Even if you believe you got the upper hand on the deal, never discuss it externally. Remember that both parties want favorable terms to minimize their financial, legal, and operational risk. “The goal is not to beat either side up, but to negotiate terms that set up a win-win situation for both parties. Contract negotiation is a critical element to the long-term profitability of the FI.” — Why Does Contract Negotiation Matter to Financial Institutions, PRI
4. Don’t assume that win or lose are the only options available. “Change your perspective. Remember that you have just as much opportunity to win this deal as anyone else,” Disper said.
5. Don’t overlook hidden items and fees in existing contracts and new drafts. Close loopholes and ensure there aren’t surprise items written into the contract that were not discussed.

Starting with good preparation is key to successful negotiations, Disper said. Knowing your organizations end in mind and having a solid idea of the strategies and priorities of your counterparts will help you craft a win-win solution that will benefit you and your institution’s profitability for years to come.  

Resources:

Why Does Contract Negotiation Matter to Financial Institutions? – Profit Resources, Inc

How to Prepare Well for Contract Negotiation – Profit Resources, Inc

Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to propel growth and improve profitability.