Make the most knowledgeable decision as to the type of practice used when selecting a consultant to assist you in your contract negotiation. This an investment you are making, and your technology contracts are large dollar investments. Typically bank will have millions of dollars invested in technology solutions.
The purpose in bringing in a consultant to negotiate your contract, is to establish the boundaries for all parties concerned. First, the Bank does not have to deal with the vendor, especially if the negotiations begin to get contentious. The consultant acts as your advisor so the negotiations will not impact your relationship with the vendor. The consultant should be a subject matter expert in contracts, as well as your business. Former vendors negotiating contracts might sound good, but they are not bankers and will miss the impact of terms and service levels.
Pricing Methods When it comes to pricing the top three methods for contract negotiations are “fixed based”, “percentage based” and hybrid between the two which is a flat fee with a bonus paid upon reaching predetermined goals and objectives. The fixed fee option generally includes both price negotiation and contract business terms it is usually done as a total fee amount or by the hour at a set fixed rate. The other method is a percentage based, which may or may not include contract language review. Percentage based fee is dependent upon how much the consultant saves you in one time fees and/or ongoing costs. The savings (either annual or entire life of the contract) are multiplied by a percentage. The savings are determined using a predetermined agreed baseline and may include services, new services, discounts and savings from new products and one time fees.
What can affect pricing and discounts? Is it a new contract relationship or renewal? Competition from another vendor soliciting the business will affect the pricing. The length of the contract and the number of times the contract has renewed affects how your current pricing relates to the vendor’s current market pricing.
Longer contracts tend to have additional discounts. Shorter contracts trend have premiums. The mix of products that are included in the contract can affect how much of a discount the vendor is willing to provide. Adding new products increases the value of the contract.
Your relationship with the vendor, good or bad, has an indirect influence on the discounts that the vendor will offer. Here are some considerations: If the relationship is good and the vendor feels that there is no risk to losing the business, discounts will be smaller. If the vendor feels the relationship has soured and the Bank has made overtones or has engaged a third party to assist in reviewing other vendors, discounts may be lower.
Why a fixed fee? Percentage fee engagements can easily cost the Bank anywhere from 5 to 10 times more than a fixed fee engagement. But is one better than the other? No, but fixed and percentage generally achieve the same pricing objectives. One is not better than the other. What is important is that you hire a consultant who is both knowledgeable in contracts and in your business of banking. Every contract is a three legged stool – Price, Terms & Service Levels. Make sure you hire an expert who can advise you in all three areas.