Are vendor relationships costing more than your contracts let on?
It’s a distinct possibility. Read on to find out why.
All That Glitters May Not Be Gold
You as a business want to retain great talent. And, even more, if you put resources into training someone, it’s best if they stay! You’re not alone in that feeling. Across industries with high turnover (ex. Tech, Media, Finance, or High-growth Startups) there’s a term for how HR tries to retain top talent: Golden Handcuffs
It’s not a statement jewelry piece (you’re thinking of UM’s “turnover chain”). Golden handcuffs are a bundle of incentives (typically financial) that aims to discourage employees from leaving.
Preventing Talent Loss
Here’s a common scenario. A software engineer at a Silicon Valley tech firm receives an offer from a different company. Excited to expand their skillset while working on a new project, they consider departing. Besides, the salary is even better!
However, their current company has that pair of golden handcuffs connected well. Not only do they lose any company equity accrued (stock options can get valuable!), they also have to pay back their sign-on bonus.
So what do they do? Break the golden handcuffs and start anew at another firm? Since the practice is so common, the new firm has to offer extremely generous terms beyond salary. This ensures incentives continue getting more and more beneficial.
In this case, it’s seen as a cost of business, both on the acquisition and retention sides. But this concept isn’t limited to employees, and here’s where one party isn’t thrilled by the arrangement.
Spoiler: That party is you.
Contract negotiation is a dutiful process. With a range of variables to consider and different interests to satisfy, we get that it’s not easy. Once you’ve decided a service is beneficial for your institution and account holders, you have to agree upon:
- Scope of work
- Legal terms
- Contract length
- Straight cost
- 6-month trial?
- Commit to a 5-year agreement and reap immediate savings/benefits?
It’s that last item we’re discussing today.
Contracts are a necessary part of doing business. They protect all parties while providing a clear outline of everyone’s responsibilities and expectations.
In our relationships, we use them to:
- Provide assurance to the institution that the product will always meet their expectations
- Ensure our performance-based programs receive a minimum level of promotion by the institution
At times, it can be stressful and frustrating to negotiate a contract, but once in place, it gives everyone a clear picture of the relationship.
Assuming all other aspects are settled, how do you decide upon the length? Both short and long-term contracts have their advantages. They also have cons. And that’s not even mentioning “evergreen clauses” (auto-renewing).
Whether it’s a web design agency, a value-added checking provider, or your new janitorial service, there’s probably a contract to discuss. We’re here to help you choose the best terms for your institution and account holders, without getting unwittingly bound by golden handcuffs!
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1. Lower risk term-length with a definitive exit path
If you enter into a contractual agreement with a vendor that isn’t working out, you have an exit path. A 6-month contract limits the negative impacts or limitations experienced far more than a binding 5-year agreement.
This “easy-out” may help you start a relationship with a new vendor, with fewer concerns of emergent issues. Pay-as-you-go or performance-based services with flexible contracts and penalty-free cancellation options might also be a path forward.
Disclosure: Most of our products are performance-based.
2. Great for one-time projects
One-off projects or short-term initiatives don’t need long-term contracts. Consider the scope of work you want completed. Will it take years or months?
A simple project, with clear deliverables and timeline for completion, is perfect for a short-term contract.
3. Increased flexibility and agility
This is the top advantage of short-term contracts. If you want to be a fast-moving operation, this will help you stay agile and avoid getting caught in golden handcuffs.
The ability to quickly take advantage of new opportunities, experiment with new products, and test out new advancements in the market is invaluable to your business. It’s just hard to do if you’re locked into multi-year contracts with most (or all) of your vendors.
1. Short contracts = short timeframe
Projects on a short-term contract have to move quickly. Thus, your team will, too. Consider the staff time and resources needed to ensure the effort moves forward as expected.
Before committing to a short-term contract, make sure you can provide your vendor the support they need. Also, ensure your vendor will be able to complete the project to your expectations in the time allotted.
For example, let’s say you’re moving to a new mobile banking platform. You want to do it in 3 months. Ha! We all know it won’t be done in twice that. But let’s imagine this magical world is our reality. In that single quarter, you’ll need to:
- Set aside time for employee training
- Ensure existing systems integrate without issue
- Create resources to communicate updates to your account holders
Once reality sets in and 3 months turns into 6 (or more!), you may have some unpleasant surprises. That short term you originally loved now means you are responsible for additional fees as you exceed the contract period to complete the project.
If you choose a short-term contract because the relationship won’t need to last very long, think realistically. Improvements always take longer than anticipated.
2. Have to re-evaluate contracts often
Short-term contracts mean that you’ll be evaluating vendors more often than if you committed to a long-term agreement.
That’s precious time spent researching vendors, completing demos, negotiating price, and onboarding or implementing a new service or solution.
And then there’s compliance. Anxiety over staying on the right side of regulators could mean you’re overpaying for vendor services.
Not to mention your legal team. Their work doesn’t come cheap, and short-term contracts mean you’re using them more. Along with lawyers, other administrative burdens emerge.
Finally, the customer perception. If the service impacts your account holders, you have to consider how to keep their experience consistent and/or regularly improving as you change providers. Even software updates that add desirable features may frustrate users as they need to relearn their routine.
3. Smaller scope of work
Short-term means huge scopes are off the table. Unless the project creates massive lock-in or the vendor has enormous faith in their product/service superiority. (Sidenote: We know of a VSC program with a rolling 30-day cancellation notice. No long-term contracts there!)
Look at your goals: Can they be achieved in the short-term or will they evolve over time?
One-off projects with a fixed-price are perfect for short-term contracts. Of course, once the time is up, that’s it. Any changes will cost in time and money.
For example: We know a lot of institutions undergoing a rebrand. In our opinion, this is not the place for a short-term contract. The only time this makes sense is if you don’t plan on using that vendor for ongoing support or development.
We performed a rebrand in early 2019 and nearly a year later, we discovered assets in need of updating. With our (relatively) small digital presence, it’s manageable. For institutions with thousands of website pages, hundreds of paper forms, brochures, and packets, across multiple physical locations, it’s going to take a while to make it all consistent.
Make sure your vendor will be there to help along the way.
1. Time: Invest and build large scope-of-work projects
Spending years working with the same vendor has its benefits:
- Develop a strong working relationship as you both have time to deeply understand each other
- Preferential treatment: As a high-dollar, long-term customer, you help ensure the vendor’s stable revenue stream and may reap benefits for this relationship
2. Better forecasting: Plan costs and strategies years in advance
If you change (or even consider changing) vendors every year or so, it’s hard to have long-term predictability. You’re also spending a lot of time, money, and effort re-evaluating vendors and fees, while chasing renewal dates.
Long-term contracts help you better forecast costs and make plans well into the future.
Things will come up during every project. Your roadmaps will need adjustments. Timelines will change. However, when you’re settled into a relationship, you can budget and plan accordingly since you have price predictability throughout the contract.
1. No flexibility if it isn’t working out
So you’ve signed a 5-year agreement with a vendor who turns out to be terrible. They miss deadlines, overpromise and underdeliver, while providing awful customer support. However, they meet the bare minimum terms, if not the spirit, of the contract.
What can you do?
Well, depending on the agreement, probably not much. That’s why it’s essential to educate yourself as much as possible ahead of time, then vet potential vendors, before agreeing to a long-term contract. (If only you had a place to learn about a range of topics in an unbiased, honest manner!)
In this scenario, you may spend more effort trying to get out of the misguided contract instead of the original goal!
2. Hefty price tag
Long-term contracts can be expensive. Make sure any cost reductions you get as a reward for signing actually result in savings. Also, if there’s no way out, and future issues will cause real problems, it may be smart to avoid the lengthy agreement.
3. Cannot keep pace with market/tech changes
Technology becomes obsolete fast. In fact, that sentence is outdated. New market options evolve just as quickly.
Think about your core or LOS. In working with many financial institutions, I can guarantee you’re unsatisfied with one of them. Did you expect it to be more easily extended or future-proof? To cost less to attach systems to them? Of course, these providers understand that the contract term is almost irrelevant, since they know how much work is involved to switch.
However, if the implementation is less of an “all-hands” operation, you don’t want to get just as stuck with “cool now, useless later.” Even more frustrating, it can get expensive if you have to invest in other solutions to make up for gaps in the vendor’s service offering.
The fintech landscape is changing quickly. It’s essential you remain able to address emerging competition and deliver market-leading experiences. That means not being stuck in a long-term contract and “missing out” on the new thing everyone wants.
Thoughts on Signing Bonuses (ie. Bags of Cash)
New services can disrupt the market. They may provide more options, profit opportunities, or entirely replace an old service. If your vendor cannot or will not evolve to help you meet that customer desire, you may find yourself stuck in the past.
While hefty sign-on bonuses might seem like a good trade-off for a long-term contract, consider the potential future cost of missing out.
For instance, we now offer an improved Vehicle Service Contract program with 100% profit-share. Some quick math finds you can earn as much as 300% more income.
If you’re locked into a 5-year contract with another vendor, those potential net earnings might be out of reach.
So, which should you choose?
Ultimately, it comes down to the nature of the problem you’re hoping to solve by bringing in a new vendor. Consider the pricing methods of each contract type and your long-term business goals.
Keep your customers top of mind. How will frequent vendor changes affect the customer experience?
One-off services don’t need long-term contracts. Do it. Pay it. Move on. But major initiatives require long-term relationships, which means a long-term investment.
Our recommendation? Next time you go to sign on the dotted line with a new vendor, consider the following:
- If this relationship doesn’t work out, how will it affect our customers?
- What do we have to gain (or lose) with this relationship?
- Are we investing in something that’s new to the market (and might get outpaced by other tech)?
- What are the pros and cons (pricing, services, etc.) of trying out a long-term vs. short-term contract with this vendor?
Prepare Here to Avoid Golden Handcuff Remorse
In the most basic way, our Learning Library aims to keep you from getting trapped in golden handcuffs. We share the information you need to perform top-notch due diligence, while even sharing “Best of” lists for providers.
And we are always looking to learn from you as well! Did you have an especially great or poor experience with a vendor? Was there some unique insight you gained about a common service? Share it with us so we can spread the word!
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This article was composed with the assistance of Ballie Ward.
Blogger. Speaker. Part-time Jedi.
Focused on helping your bank or credit union grow in the face of emerging challenges.