Financial institutions and their vendors have been playing tug of war with their terms, conditions and pricing since, well, forever. Both sides in the game are strategically trying to get the best deal for themselves. And why not?
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:
- Term expiration – When the term is approximately 18 to 24 months out, the vendor and FI know that alternative options can be exercised. Too much or too little term prior to opening negotiations and the vendor has more leverage because the threat of a viable alternative is diminished greatly.
- Termination fees – Early termination penalties are often very stiff and typically stop an FI from looking at market pricing early in the term, decreasing its negotiation leverage position. The higher the termination fee, the harder it is to exercise alternative options. There can be a point where the termination fee is so high that all parties involved know the threat of converting to another provider is a bluff. Late in the contract, the termination fees drop and the leverage shifts.
What to Do
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:
- Gain market knowledge – Market knowledge will help an FI understand the position it is in before it makes a seven- or eight-digit spending commitment. There is usually a semblance of savings included in the bid offer. A typical unsolicited bid may not offer discounts on existing services but wipe out a large one-time cost of a project that the FI didn’t budget for. This situation may be appropriate if pricing is already at market, but it may also be vendor justification to maintain higher-than-market pricing.
Change the perspective – As a negotiator, the perspective or baseline that is used to assess a proposal is critical. With an unsolicited bid the FI’s first perspective is what the FI is paying today. However, this is the worst possible baseline to have because the market may have commoditized since the last time prices were negotiated. Annual price adjustments may have inflated the pricing above market. The FI’s contract may not have been negotiated down to market originally or at subsequent renewals.Appropriate perspective in any negotiation is that of current market pricing. Knowing that the vendor is at its floor and also knowing the pricing position of the vendor’s top two competitors is the best perspective an FI can hope for. Imagine shopping for a new car and knowing exactly what the dealer paid for every vehicle on the lot. Now that’s perspective!
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.
-Rackley
How do you spell leverage?
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.
