July 23, 2019
Lessons From a $130 Million-Dollar Core Contract Renewal
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Recently, our firm assisted a client on a renewal of a core contract that could approach $130M in total contract value if the bank hits their growth targets. I queried our team to pull some lessons from the experience.
Although most FI’s core contracts never approach that size, below are a few war stories and major hurdles that the client cleared with their vendor in order to sign this significant renewal. There is a lesson behind each that may help you in your next major negotiation.
Know the motivations of your counterparts at the vendor.
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 rep or sales rep you are negotiating with. Is it their boss, 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 timeframes and expectations during that meeting as well.
The second question we ask 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, but rather how are they motivated. Are they commissioned on new product 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, and you will have built an internal advocate at the vendor to help you get things done behind the scenes.
Lesson: Once you know who you are negotiating with, and how they are compensated at the end of the deal, you would be amazed at how that will help build your negotiation strategy and improve your end result.
Are You Overpaying?
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, then you want 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 updating their pricing databases, and these are particularly helpful when negotiating with a vendor. In a previous career, I managed Pricing and Contracts at a large Fintech, you can believe that I had a team of analysts that built price curves and rate tables to let me know whether to consider a deal a good or a bad one.
In this scenario, the vendor and the bank had been at the negotiations for several months when we partnered with the bank to assist in the negotiation. The bank was able to leverage our data to help them decide the range they should be willing to pay for various services, and it moved the negotiation along more smoothly than it had in the previous months. Just the realization that they had negotiated a fair deal for both parties gave them the confidence to move the deal to a conclusion.
Lesson: Information is power at the negotiating table
Follow the money
The most important bargaining chips you have as a buyer are:
Each of these items represents new revenue for the client 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, 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 their 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 prior to the first discussion, you can better plan your asks
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 so their quarterly earnings are paramount. A large deal can influence their ability to hit financial targets for the 18 months that vendors typically plan for.
During our strategy sessions, we discussed with the client the impact to both the vendor and the bank’s financial statement of moves like credits and one-time fees, 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 credits were being offered. This put some of the credits at risk in the client’s mind. Since we predicted the move in our strategy discussions, we were able to come up with alternative scenarios that would help both parties achieve the same short-term scenario without as much risk to the client.
Lesson: It is generally a financial person at the vendor (whom you may never meet) that has the final say on the deal. Make sure you are taking their motivators into consideration as well.
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