Negotiating Vendor Agreements: Timing Matters
With the growth of EMV, tokenization, online and mobile wallets, and other emerging form factors, U.S. credit and debit issuers’ reliance on, and integration with, their respective card networks and third-party processors is increasing. The result is higher switching costs for issuers and a shift in negotiating leverage favoring vendors as contracts near maturity. To mitigate these factors, issuers must monitor vendor performance continuously and place a greater emphasis on the timing of their option evaluation and the negotiation of contract provisions that span the contract lifecycle.
Issuers nearing contract expiration need to allow enough time to manage their go-forward vendor strategy, with an emphasis on protecting flexibility and leverage. We are often asked how long issuers should allow; while individual situations vary, our general guidelines are:
- Issuers that are happy with their current provider(s) and confident they will remain with their incumbent(s) should initiate a renegotiation process at least 12 – 18 months before current contract expiration.
Having ample lead time is necessary to negotiate new and/or complex contract provisions (i.e., indemnification and limits of liability in the context of EMV and tokenization) that are sometimes absent from historical agreements and may require extensive iterations to reach a mutually acceptable outcome. The lead time also enables issuers to solicit competitive proposals as a strategy to increase leverage if the incumbent is providing uncompetitive pricing or contract terms.
- Issuers that may undertake a competitive RFP process, which can provide a view of market pricing and capabilities, need to initiate the process at least 18 – 24 months prior to current contract expiration.
This timing allows the issuer to run the process, perform due diligence activities, negotiate agreement(s), and plan conversion activities if the incumbent is not selected. If adequate time between the vendor selection decision and current contract maturity is not allowed, it may reduce available options, as an issuer will likely pay premium pricing to the incumbent provider during the time period between current contract expiration and conversion. Initiating the process early also benefits an issuer if the incumbent is selected (in either a renegotiation or a competitive RFP), as the agreed-upon pricing may become effective early in select instances.
Issuers’ actual timing will be contingent on many factors, including existing obligations with respect to performance and price levels at contract expiration. Issuers that are protected by service provider commitments that extend post-termination have the most flexibility. Short-term auto-renewal provisions can also help to maintain leverage for issuers.
Issuers that maintain a comprehensive vendor management program to continuously monitor vendor performance are generally best positioned to optimize their vendor relationships and negotiate effective agreements. These issuers are better prepared to engage vendors on meaningful topics (e.g., pain points, capability gaps, relationship improvement, innovation, etc.) at expiration. Developing a negotiation strategy is critical to a successful negotiation or renegotiation process, and it is much easier when vendors are continuously evaluated throughout the course of a relationship. As part of this strategy, issuers should focus on negotiating contractual provisions broadly, as opposed to simply focusing on price; well-structured agreements are critical to maintaining healthy vendor relationships in rapidly evolving market conditions.
For more information, please contact Myron Schwarcz, Principal, firstname.lastname@example.org; or Andrew Gordon, Senior Consultant, email@example.com, both specialize in Strategic Sourcing.
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