4 Steps to Take Before and During Negotiations to Improve Your Outcome
Recently, our firm assisted a client on the renewal of a core contract that could approach $130 million in total contract value if the financial institution hits its growth targets. Below are a few war stories and major hurdles that the client cleared with its vendor in order to sign this significant renewal. Although most core contracts never approach this size, there are several lessons that may help in your bank or credit union’s next major negotiation.
1. Know the motivations of your vendor counterparts.
The first question we always ask is: “Who will ultimately approve the final deal at the vendor?”
It is very likely that the deal is not being approved by the account or sales rep with whom you are negotiating. Is it their boss, the CFO or someone else? If your deal is large enough, meet with all the vendor stakeholders at the beginning of the negotiation and again when you reach major negotiating hurdles. Discuss time frames and expectations during that meeting as well.
The second question we ask our vendor reps is: “How are you paid if this deal goes through?”
This may sound like a personal question for the account rep or sales rep, but you are not asking how much they will make. Rather, you are subtly asking what you can do to improve their motivation. Are they commissioned on new products added to the contract or some share of deal profitability? Are they paid on the total value of the contract or something like first year order value? Once you know their motivators, you can structure a deal that the salesperson can feel good about. You will also have built an internal advocate at the vendor to help you get things done behind the scenes.
Lesson: Build your negotiation strategy and aim to improve your end result by first understanding who you are negotiating with and how they are compensated at the end of the deal.
2. Do your research.
If you are renewing a contract, it helps to know what the vendor sees when they look at your contract. Are you paying at a higher or lower rate compared to other financial institutions of a similar size? If you are overpaying, you need to know that when you go into the negotiation.
This is where you may need outside help. Professional negotiators often spend a good deal of time and money building pricing databases, and this is particularly helpful when dealing with a vendor. In a previous career, I managed pricing and contracts at a large fintech company, and you can believe I had a team of analysts that built price curves and rate tables to let me know whether a deal was good or bad.
In the case of the $130 million contract, the vendor and our client had been negotiating for several months by the time we partnered with the financial institution to assist in the negotiation. The client was able to leverage our data to help decide the range it should be willing to pay for various services, and it moved the negotiation along more smoothly than the previous months. Just the realization that they had negotiated a fair deal gave both parties the confidence to move the deal to a conclusion.
Lesson: Information is power at the negotiating table.
3. Follow the money.
The most important bargaining chips you have as a buyer are:
- the length of the contract you are willing to sign;
- the number and value of the new products or services you are willing to buy; and
- the growth of your financial institution since you signed your previous contract.
Each of these items represent new revenue that did not exist in the prior contract. It is natural that larger customers get volume discounts and so naturally pay a lower rate than their smaller counterparts. If you have grown since your previous contract, you should see a concession from the vendor for that growth.
In this negotiation, we had regular strategy sessions with the client about the right timing to offer up bargaining chips in order to gain a concession from the vendor that the client felt was important. By doing this and anticipating the vendor’s position, both parties were able to reach a win-win scenario.
Lesson: If you can determine the elements that the vendor finds the most appealing early on, you can better plan the order of your asks to improve your results.
4. Consider vendor revenue impact.
Because this deal was so large, it had the ability to impact the financial statements of the vendor. Remember that many vendors are publicly held corporations, and their quarterly earnings are paramount. A large deal can influence a vendor’s ability to hit planned financial targets.
During our strategy sessions, we discussed with the client the impact of moves like credits and one-time fees on the vendor and the client’s own finances and how they would be amortized.
As anticipated, the final vendor request prior to concluding the contract was a significant shift in the way that discounts and credits were being offered, in order to help improve the vendor’s financials. Some of the credits became contingent on the client hitting growth targets. This put some of the credits at risk in the client’s mind. We discussed the move in our strategy discussions and were able to come up with alternative scenarios that would help the vendor achieve the same financial benefit without as much risk to the client.
Lesson: Make sure you are taking the vendor’s financial motivations into consideration as well.