When is the Right Time to Start Vendor Contract Negotiations

By: Russ Bourne, Executive Vice President of Client Management, Strategic Resource Management. 

The typical financial institution has dozens of contracts in place with numerous vendors that support its operations (both member-facing and internal). As a result, staying on top of the expiration dates for all of those agreements to maintain an effective renewal process can present a significant challenge. At a minimum, doing so is simply best practice, but in other cases, such due diligence may also be a regulatory requirement or a board mandate.

So how long before a contract’s expiration should the negotiation process begin? The answer depends on many factors, including the service in question and the length of time moving to a different (new) vendor would require. One factor that should not come into play, however, is the level of satisfaction with your incumbent. The deck is stacked in favor of the vendor in many ways, so financial institutions (FIs) must seek out leverage points wherever they can.

In many cases, considering a replacement of an incumbent vendor is a non-starter as it would require a protracted process encompassing both internal disruption and detailed customer communication. Swapping out a core system can easily require two years, not including the additional year that’s typically necessary to carry out an effective Request for Proposal (RFP) process. Any vendor worth their salt is going to have its own tickler list, and an FI should expect to hear from them (on average) roughly 18 months prior to a contract expiration date if the institution hasn’t already initiated conversations. This timing is by design – if negotiations haven’t begun at least two years before the contract expires, an FI’s leverage is limited as the incumbent is quite aware of what an alternative will require. For a more in-depth conversation, listen to our podcast series about best practices for credit union vendor contract negotiations. 

Practice Your Poker Face

This isn’t to say that bankers should always orchestrate an RFP, spending everyone’s time in the process, if they are satisfied with their current supplier. There are other ways to foster an appropriately competitive environment. It’s always a good idea to begin with the incumbent – particularly if you are pleased with the existing relationship. Merely doing the necessary analysis of options often offers an ideal opportunity for a frank, constructive exchange regarding the relationship and pricing.

With so many contracts in play, it’s also advantageous to take a more holistic approach to a contract renewal strategy. Given the ongoing trend of industry consolidation, it’s quite possible an institution has multiple contracts with a single vendor – all with various expiration dates. Moving these deals to a coterminous state both helps to clarify the relationship and improve the bank’s leverage to obtain the best possible deal. Similarly, non-incumbents may already have contractual relationships for adjacent products – again improving an FI’s leverage.

Embrace the Educational Moment

While it can be time-consuming, vendor evaluation can also serve as a valuable education process as an opportunity to better understand a rapidly evolving market. This is where a contract management partner can be of great value in facilitating the process – whether it’s for a full RFP or a more tactical due diligence. A subject matter expert negotiating numerous contracts in a year will certainly know more about industry nuances than an in-house resource diving into the topic once every 3-5 years. With the connections in place to arrange meaningful conversations with properly positioned contacts, such partners can also save time compared to an internal project manager who has a full-time job of a different sort most of the time.

Because switching costs for financial services applications are typically very high, this creates a significant barrier that favors the incumbent. This underscores the importance for FIs to make the best decision – and strike the best possible deal – when vendor relationships are first initiated. Incumbents have various strategies to deter financial institutions from the starting early and doing a comparative review of their position.  Although such proposals are not inherently bad, they’re an implicit acknowledgment that a vendor values your relationship at a rate higher than its stated terms. Armed with that data point, it’s only logical for a financial institution to research the true value of its business.

Continue the conversation by listening to our recent podcast series “Best Practices for Credit Union Vendor Contract Negotiations Part 1 & 2,” where we discuss important best practices for navigating your vendor contract negotiations including the renewal process and how to effectively utilize RFPs to your credit union’s advantage.

SRM Logo new 02.2017

Strategic Resource Management (SRM) is the NAFCU Services Preferred Partner for vendor cost benchmarking and contract negotiation services. More educational resources and contact information are available at www.nafcu.org/SRM

Finding New Ways to Serve the Nation’s Underbanked

By: Lawrence Pruss, Senior Vice President and Payments Expert, Strategic Resource Management.

According to the Federal Deposit Insurance Corporation, approximately 27 percent of all American households are unbanked or underbanked – that’s 50 million individuals.

For purposes of this article, unbanked refers to individuals who don’t have a bank account and underbanked refers to those who supplement their bank account with alternative financial services like check cashers. Both underbanked and unbanked households are typically forced to rely on nonbank financial or high-rate lending solutions such as payday lending, tax refund, and settlement loans.

How did we get here? Why are so many people in the United States outside of traditional banking security in 2016? There are several reasons why, with many people falling into more than one category. This article addresses these issues and provides solutions your credit union can offer to serve the underbanked and help them become members of your credit union.

Case One: During the Great Recession from late 2007­— early 2009, many people with previously good credit had their credit history tarnished. Most financial institutions now exclude these individuals with a record of bounced checks, overdrafts, or delinquencies.

Solutions: Offer second-chance checking accounts, debit or prepaid solutions, and credit building tools generally available at local banks or credit unions.

Case Two: A significant portion of the immigrant population is underbanked. They often arrive to our country with a distrust of traditional banking systems, and depending on legal status, avoid traditional banks that require government issued identification. Increasingly stringent Know Your Customer (KYC) and other anti-money laundering regulations have exacerbated this situation.

Solutions: Develop easy account applications and use alternative identification solutions like individual taxpayer identification numbers (ITIN). The IRS issues ITIN numbers to non-citizens who are working in the U.S., but are not eligible for a Social Security number. Develop inexpensive money transfer solutions which can help alleviate high fees typically associated with transfers, and consider alternative lending scores to help qualify these individuals for financial products.

Case Three: Approximately half of the 80 million millennials in America (those between 18 and 29) are unbanked or underbanked. The 2009 Credit CARD Act put strict limits on how credit cards are marketed and issued, and an inherent skepticism of large money-making institutions and Wall Street means many young adults are hesitant to pursue credit cards and other traditional banking products. In fact, more than one-third of that population has never had a credit card.

Additionally, because of their digital communication preferences and desire for fee and pricing transparency, companies that offer clear debit, prepaid, or increasing alternative financing solutions are winning over this segment. Examples include PayPal, Google, and some of the more creative credit unions with “young and free” efforts geared toward the younger generation.

Solutions: Establish your institution as a trusted, tech-savvy brand to build loyalty with this consumer group, locking them in as future, long-term members.

Case Four: While the official unemployment number is at 5 percent, or 7.9 million people, an estimated 30 million Americans are still out of work or underemployed – an audience typically avoided by banks.

Solutions: Develop lending based on an individual’s potential. Many of these individuals have returned to school or pursued further training while being un- or underemployed. This offers a great opportunity for establishing lifelong loyalty for those institutions willing to take a chance on their future success.

The number of un- and underbanked individuals in the United States is larger than the total populations of many countries. As such, it offers a huge opportunity for American financial institutions willing to better understand “why” they are underbanked and then find ways to support them and help them reach their unique needs.

Strategic Resource Management is the NAFCU Services Preferred Partner for Vendor Cost Benchmarking and Negotiation Services.

The 7 Most Expensive Vendor Management Mistakes

By: Patrick Goodwin, President of Strategic Resource Management, Inc. (SRM)

Financial institutions are full of smart professionals—straight shooters who know how to judge character and structure a deal. But even the wisest among them overlook savings opportunities when dealing with third-party vendors.

Pressed for time and facing salespeople determined to sell their services at a premium, these otherwise successful professionals can find themselves at a disadvantage and end up paying for it. From the insidious to the emotional to the downright dangerous, here are the most expensive mistakes credit unions make with their vendors—and how to prevent them.

1. NOT BIDDING OUT EVERY CONTRACT.
It’s a headache and a hassle to bid out every contract—but it gives you the pricing, terms and market intelligence you need to negotiate a fair deal. Begin the bid process within 24 months of your current contract’s expiration to maximize leverage and never tell a vendor that you aren’t entertaining other options. You will lose every bit of leverage you have.

2. REFUSING TO CONSIDER OTHER VENDORS.
Don’t just collect RFPs—consider the possibility that another vendor might be a better fit. Credit union executives have a fiduciary duty to the board and shareholders to run operations as efficiently as possible. While most of our clients stay with their existing vendor, they take the time to ask if a new vendor might help them achieve their goals in a changing marketplace.

3. RFP MISMANAGEMENT.
Are you asking the right questions of third- party vendors? My experience suggests you aren’t. This is the biggest mistake I see financial institutions make, and they have no idea they are doing it. The vast majority of institutions won’t get what they need to accurately compare pricing and terms because they are asking the wrong questions.

For example, don’t just ask vendors for pricing. Give them the pricing model nomenclature you want to use. Avoid surprises by making sure the RFP requires vendors to itemize what they will and won’t charge for.

4. NEGLECTING THE AUTO RENEW CYCLE.
It’s the most common mistake I see. A financial institution doesn’t have a contract management system in place or the person who first negotiated the contract loses track of deadlines and suddenly a contract is renewed for two or more years. I’ve even seen auto-renews for the full length of the original contract—as much as 7 years—if there isn’t 180 days’ notice. By the end of the renewed contract, the institution would have pricing that is 14 years old!

Avoid this problem by putting contract management policies and procedures in place, using software or by hiring a third party to stay on top of contract expiration dates. Contractually limit auto renews to 12 months and be sure to cap fee increases.

5.FAILING TO NEGOTIATE DECONVERSION COSTS.
You’re focused on joining up with a new vendor, not thinking about the day the relationship ends. Yet some day you may want to leave your vendor. If the cost is left up in the air, the charges will be at the discretion of a potentially punitive vendor.
Address this head on by talking to your vendor about deconversion costs during contract discussions. Vendors are very open to negotiating this fee at the beginning of a relationship and are often willing to cap it at a fixed amount since it won’t cost them anything up front.

6. GROWING TOO EMOTIONALLY INVESTED IN A VENDOR.
Sales representatives do an incredible job building relationships. They take you and your staff to lunch or the golf course. They remember your birthday.  When it comes time to renegotiate your contract, many financial institutions are uncomfortable putting the contract out to bid because they don’t want to hurt the rep’s feelings or worry that they won’t get the same level of service.

That’s exactly what your vendors want you to think. Vendors don’t want you to go through the bidding process because they don’t want you to have competitive market intelligence—but they’ll easily forgive you. That’s because vendors want to retain you as a client. They aren’t going to dump you just because you considered other options.Avoid the drama and perceived hurt feelings by setting policies and procedures regarding what gifts employees can receive from vendors. Set policies requiring that major vendor contracts are put out to bid so staff can blame the policy for the RFPs. Let someone who can keep emotions out of the decision handle negotiations.

7. MISCALCULATING GROWTH.
Too often financial institutions negotiate long-term contracts without taking the time to forecast where the institution will be in three, five or seven years—or they misjudge how much the institution will grow. If a contract is designed around incorrect assumptions, it can blow the budget or prevent the institution from reaching its goals. I often see clients outgrow contracts in just three years.Contracts should be designed with growth parameters that give an institution the flexibility to accommodate growth. If you’re not sure how much flexibility you can push for, find someone with the experience to know.

Contracts should be designed with growth parameters that give an institution the flexibility to accommodate growth. If you’re not sure how much flexibility you can push for, find someone with the experience to know.

These are just seven of the most expensive third-party vendor management mistakes, but there are many other ways to get tripped up. Make sure you have the right policies, procedures and knowledge in place to ensure you’re getting the best value and terms for your institution.

Strategic Resource Management is the NAFCU Services Preferred Partner for Vendor Cost Benchmarking and Negotiation Services.

How to Speak the Millennial Language

By Larry Pruss, Senior Vice President, Strategic Resource Management

With millennials making up nearly 25% of the US population, it’s vital to know how you can engage this generation with your message and attract them to your credit union.

If you know how to connect with them, millennials represent a huge opportunity for your membership, educational content, and sales teams.

So how do you do this? I’ve compiled my top five tips on how to leverage a millennial engagement strategy.

1. Be Authentic

Don’t get stuck in the ideas of traditional advertising; Millennials don’t trust it. Millennials are more interested in “authentic” leadership, education, and expertise. Think about using content platforms that come from peers, like blogs and social media.  They prefer words that could have come from the mouths of their peers, as these messages warrant comfort and trust.

Millennials’ attitudes and behavior are largely inspired by people they know in person or online–or even strangers who share their interests on social networks.

2. Create Visual Content

Millennials are constantly on their phones being flooded by visual content.  So why not communicate in the same way that they communicate with the people in their lives?

They are also social, and much more willing to share their struggles and successes. If you want to reach them you need to be part of the conversation. Communication cannot be one way.

3. Personalize Content

Millennials want to feel like your content was created with their interest (not their wallet) in mind. When this is the case, they are more organically introduced to purchasing your products or services. Without ever being “pushy,” your educational content helps build strong brand-consumer relationships. People appreciate honesty, and brands with transparent campaigns win.

4. Be Interactive

Millennials need to feel as though they are being heard. In order to keep them involved, ask for their feedback.  You can do this by letting them rank your products and customer service.  This approach makes them feel like they have helped to develop their product so that they are more invested.

Some credit unions are doing this with credit cards; allowing the person to select their pricing, rewards, fees, and personalizing the card stock.

For more ideas on revenue enhancement strategies, listen to a recent podcast here.

5. Highlight the Experience

Millennials are attracted to “experiences” rather than things. Have you noticed how car advertisements have moved away from the car to more about the journey? This is millennial advertising.

They are also more “cause” focused than other cohorts and (all things considered equal) will pick a service provider that does something good for the world. Thus, leverage your focus on community service in your communications with them.

Be aware, that many millennials watched their parents struggle during the Great Recession and are very weary of getting over-extended. So they need to feel that you have their back, and are not just interested in making a buck off them.

Here is where the credit unions have a big advantage over the banks which are more clearly profit focused. Make sure you are educating these millennials about the difference between banks and credit unions.

For an in-depth explanation of other missed revenue enhancement strategies that credit unions should be leveraging now, listen to Larry’s full podcast here.

You can also see Larry at NAFCU’s Strategic Growth Conference on Wednesday, March 9 where he will moderate an informative panel discussion: “Earn it Without Burning It: How to Make and Save Money.”

Strategic Resource Management is the NAFCU Services Preferred Partner for Vendor Cost Benchmarking and Negotiation Services.