In Part 1 of this blog, Why Does Contract Negotiation Matter to Financial Institutions, Tony Baumgardt, PRI debit card consultant, explained that contracts, in fact, drive the FI’s business and embody the relationships between the FI and its vendors. Contract negotiation is a critical element to the long-term profitability of the FI.
How can the FI best prepare to come to the negotiation table?
“I’m a proponent of being prepared for contract negotiations in favor of setting specific goals,” Baumgardt said. “If you reach your stated goals easily, you run the risk of leaving something on the table or create a situation with unintended consequences. If you set goals too high, you’re likely to be disappointed and upset with the vendor for not getting you what you think you should.”
Instead, Baumgardt recommends adopting a broader perspective. The bottom-line goal of any contract negotiation is simple: Spend as little as possible while increasing revenues as much as possible. From there, it’s all about preparation.
Preparing for a complex contract negotiation process requires the ability to dive deep into the details and fully understand the competitive landscape. A partner like PRI brings value by accelerating the FI’s learning curve.
“With us on your side, you have an experienced partner who will call out the pitfalls and bring attention to the positive aspects of the deal and how each will affect the client in the long-term,” Baumgardt said.
Well in advance of sitting down at the negotiation table, the FI should take a bird’s-eye look at desired outcomes. The Harvard Business Review article, What’s Your Negotiation Strategy, recommends asking the following when going into any negotiation:
- What business outcomes do we seek through this negotiation?
- Who cares about those outcomes?
- Who can do something to bring about those outcomes?
- How can we engage, directly or indirectly, with parties that share some of our interest in achieving those outcomes?
After the FI has evaluated desired outcomes, it’s time to get more granular in contract negotiation preparation. Some important decisions to make as you prepare include:
Who will steer this process?
Determine whether an internal support group or steering committee is needed. Also discuss whether outside expertise should be brought in.
What information about our business should we know?
- Know what you currently pay for vendor services. Understand how specific vendor actions or changes affect other parts of the deal.
- Know revenue and expense inputs.
- Know the competitors in the product/service space for which you are contracting.
- Know the terms and conditions in your current contract and ask questions about anything you do not understand.
Who can we talk to?
If possible, talk with industry peers to gain insights into their experiences. Know what’s a good deal and what is not. With an outside expert like PRI, the FI can lean on broad and extended industry experience, while specifics remain confidential.
How does this product or service align with the business strategy of our organization?
Reviewing the strategic alignment between the business strategy and product/service that the FI is contracting for allows you to set the value for the services. The FI may be willing to pay more than anticipated if there is a direct correlation. If there is no alignment, the question is, “Do we really need this?”
What do we want from the contract negotiation?
Knowing what the customer wants will help the vendor deliver a good starting offer for review. Common things desired by the FI in a contract negotiation include:
- Reduced expenses
- Increased revenue
- Upfront cash
- All the above!
What do we want to see in the contract terms and conditions?
- Which terms do you want to keep?
- Which terms do you want changed?
- How do the terms and conditions fit into the negotiation process?
- Is the pricing and terminology appropriate?
With so many moving parts and complex decisions going into a contract negotiation, hiring outside expertise is often a cost-effective way to ensure the FI gets the best representation at the table. The objective advice of a third party can help the FI determine the cost benefits of enhancing a current vendor relationship or whether it’s time to take a new approach. Preparation is the key to getting the best deal that will contribute to the FI’s profitability and success over the long haul.
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.