Advice And Strategies For Effectively Engaging In Vendor Contract Negotiations

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When a credit union engages a vendor in contract negotiations for a new technology platform, the process often becomes muddied, lines are blurred and terms of service become unclear. Without proper due diligence, oversights on behalf of the credit union often result in costly after-conversion upgrades and maintenance.

Credit unions pursuing new technology platforms often approach the negotiating table stripped of the necessary tools to succeed. In order to avoid pitfalls, it is wise to consider engaging an objective third party consultant to oversee this all-important process as these professionals handle numerous conversions each year.

The negotiation of an expensive, multi-purposed contract is designed to facilitate the needs of a credit union and its members. Therefore, there is but one opportunity to master the art of negotiation.

First Steps

The decision to implement new technology–whether it’s a new core-processing system or ancillary products–is a significant undertaking. To further complicate the issue, consolidation within the financial technology industry has resulted in less competition, reduced price advantages and forced conversions from “sunsetted” products.

The Boston-based Aite Group released a study “Trends in Core System Replacement: the Necessary Evil” concluding that during the current three-year period, 1,100 financial institutions are engaged in a replacement mode of their core systems. Aite estimates that during 2006, 92% of all U.S. core system replacements (approximately 325) were completed at credit unions and small banks.

The first step toward negotiation officially starts when a credit union begins the task of identifying existing operating issues and shortfalls. Next, the search and selection process of a vendor and operating system commences, a multi-tiered process including discovery process, negotiation, agreement, implementation, and conversion.

Vendor and System Selection Process

Before undertaking the search and selection process, a credit union must identify existing issues and concerns. Questions should include:

* How is the credit union hindered by existing operating systems?

* What is the organization’s overall strategy and what core system variables are required to achieve outline goals?

* Do you want to improve your core system, contact center, ATMs, card portfolio, Internet banking, bill payment, or other processes?

Without a sound starting strategy, some vendors will try to dominate the process by determining rules and setting expectations. As a consequence, credit unions are removed from the decision-making process.

Therefore, the strength of a negotiation platform is comprised of the elements of an organization’s business model. A credit union should know the variables and constructs of its business better than a vendor. To this end, it is the credit union’s responsibility to become an active participant.

Interviews Instead of Demonstrations

Whether it is a core or third party, the selection process is a comprehensive process where credit unions are encouraged to proactively conduct interactive meetings with vendors. It is the role of a third party consultant to synchronize participating parties, a process that allows a credit union to discover a system that will meet ALL its requirements.

The latter is achieved by abandoning the demo process and opting for exhaustive, exploratory interviews. The goal of the interview process is to understand the vendors and their product interface and user-ability.

With these critical steps taken, two or three finalists will emerge. After pre-selecting a finalist and a runner-up, the entire process should repeat including a second-round testing respective products, services and support. At this stage, a credit union should identify pricing points from three regional competitors.

From Contract to Conversion

Once a system is selected, the credit union must take the necessary time to methodically prepare for the negotiation process. This approach will not be easy as sales representatives are encouraged to expedite the process. Therefore, it is critical that the credit union sets the timeframe for the negotiation and employs a balanced understanding of project management, contract negotiation, and systems integration.

While some vendors are often quick to close a deal, credit unions, too, are faced with time constraints. Therefore, credit unions often rush the negotiation process. As a result, critical support components such as conversion assistance are often overlooked.

Negotiating Tips:

* Identify your leverage early on.

* Who has the most to lose from the deal? 

* Construct concise and specific questions.

* Determine a timeframe.

* Set limitations and adhere to them.

* Avoid committing to positions that restrict further negotiation.

* Walk away from a deal that is not good for you.

Once an operating system is selected, a critical phase commences: introducing respective legal teams.

Despite an attorney’s merits, he or she is not normally versed in core conversions and, thus, cannot appreciate the tactical terms and conditions comprising a sound agreement. Attorneys, however, are excellent at determining the legal elements of an agreement and should work in concert with the credit union throughout the process.

Without knowledge of technology, methodology, and best practices, unwilling and costly mistakes will be made with repercussions rippling far past the negotiation table. Each ripple has a dollar value that increases with distance.

Therefore, a contract between a credit union and vendor should include: timelines and implementation activities and responsibilities; services performed by the technology provider; performance standards indicators outlining minimum service level requirements and provisions for performance failures; cost accountability; costs for development, conversion, and recurring services; and the credit union’s right to modify existing services.

When moving through the selection process for a major project, the ultimate objective is to negotiate the best deal. When a credit union is searching for the right technology partner, it should render the process predictable. A fair agreement in line with an outlined strategy will preserve expectations.

In the final analysis, negotiation is indeed an art form; a process rewarding the party dedicated to researching and investigating sound solutions. And whereas art appreciation is subjective, the result of a negotiation is binary: you either win or you lose.

Sabeh F. Samaha is CEO of Samaha & Associates, a consulting group that works collaboratively with Financial Institutions. For info: 909-261-767, sabeh.samaha or


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