Taking Control of your Destiny: Effective Contract Negotiations and Vendor ManagementIowa Bankers AssociationFebruary 12, 2014Jack Vonder Heide

Agenda

• RFP Process• Due Diligence• Negotiations• Contracts• Vendor Management Environment• Quantitative vs. Qualitative Vendor

Management

RFP Process

RFP Process

• Split the process into an informal request for information followed by a more formal request for proposal.• Get as much information from as many

potential vendors as possible during the first phase.

RFP Process

• Don’t lock yourself into awarding the contract to the lowest bidder or to awarding a contract at all.

RFP Rules

• Once you determine the rules for your RFP, stick to them.

Learn from Other Banks

Learn from Other Banks

Due Diligence

Due Diligence

• How long has the vendor been in business?•Who are the principals of the company

and what are their backgrounds?• How is the company funded?• Are audited financial statements available?• Is the vendor or any of its principals a

party to any lawsuits?

Due Diligence

• How long has the sales person been with the company?• How many jobs has he/she had in the last

seven years?

Due Dilligence

• Does the vendor do business with other banks and other regulated entities? Do they understand the compliance environment?

Due Diligence

• How many banks are currently using the product in a production environment?

Negotiations

Both Parties Should Benefit

• Negotiating a contract that is a money-loser for the vendor is not in the bank’s best interest. Service levels and future enhancements could be jeopardized.

Negotiations

• Learn everything you can about the people and the company on the other side.

Negotiations

• Ask open-ended questions and listen. Let them talk. Do not interrupt.

Negotiating by Telephone

• It’s easier to say “no” over the phone.

Negotiating by Telephone

• You can’t see the other person’s eyes or body language.• You don’t have someone’s undivided

attention.”

Negotiations

• Try to get the other side to tell you “what’s most important to them” at the beginning of the negotiation. You give the appearance of caring about their needs while getting them to show their hand.

Negotiations

• Information is power. Do not give away information that will hurt your position.

Authority

• Never bring more negotiation authority to the table than the other side brings.• “We’ll have to get back to you” is a

common tactic.• Always find out who will be at the table

and what authority they have. Then you bring an equal or lesser level of authority.

Negotiations

•Mix in critical points with things you are prepared to give away.

Negotiations

• Never give without getting something back.

Negotiations

• If you know one weakness of the vendor, they will assume that you know more.

Negotiations

• Booking a deal in a particular quarter is often of paramount importance to a vendor. If you discover this need, you can often get major concessions in return.

Negotiations

• No member of the negotiating team should publicly disagree with another member.• You team should have a single, unified

voice.

Negotiations

• Beware of back channel communications.

Contracts

Avoid Pressured Decisions

• Request a copy of the vendor’s contract at the beginning of the evaluation process.

Contracts

• A good contract is one where both parties take the time to communicate about the deal, reach an agreement and then write a document that clearly memorializes their understanding.

Lawyers

• There are comparatively few lawyers who understand the technology world well enough to write a great contract.

Contracts

• Usually, the vendor proposes a contract that is heavily slanted in their favor.• The vendor’s liability is severely limited

while the buyer’s liability is unlimited.•Many contracts contain provisions that do

not meet the requirements of applicable law or regulatory guidelines.

Contracts

•Many banks sign vendor contracts without legal review and without requesting any changes as they assume it is all “boilerplate” contract language.• If a vendor pressures you to sign a

contract, tell them your board requires contract review.

Warranties

• Be as specific as possible.• “We warrant that the system will be free

from defects for one year” is too general.• “The system will process X workload

within Y minutes on day Z during prime shift” is much better.

Governing Law

•Many vendor contracts require that lawsuits be filed and tried in the vendor’s home state.

Master Agreement & Schedules

•Many vendors use a “master agreement” of terms and conditions with a “schedule” for each new transaction.• A common tactic is to negotiate terms and

conditions for the master agreement when the size of the first deal is very small.

Contracts

• Poorly written contracts lead to lawsuits, soured relationships, unforeseen expenses and loss of productivity.

Contracts

•When putting together a contract, assume that none of the parties sitting around the table will be here one year from now.• Clearly document all understandings.

Contracts

• Give a draft of the contract to someone who knows nothing about the deal and ask them to explain it to you.

Litigation

• Litigation is expensive.• If you win a lawsuit, you may not be able

to collect your judgment.

Letters of Intent

• A letter of intent can be a binding contract. These need legal review.

Common Tricks

• Automatic contract extension unless cancelled in a specific timeframe• Interim rent• Right of substitution• Rent shifting• Lack of detail on specific costs like delivery,

setup, consulting, maintenance, upgrades and termination assistance.

Common Tricks

• You sign first, we sign later.• Termination penalties• Low cost for machine (i.e. printer or

copier) and sky-high price for supplies• Contract term for a feature runs longer

than the remaining term for the base product.

Follow-Up

• Do not dissolve the team after the deal is done.• Have monthly meetings to gauge progress

and compliance.• Immediately bring issues to vendor’s

attention.• Give formal termination notice to preserve

your rights.

Vendor Management Environment

Third Party Vendor Definition

• “any person who provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.” Dodd-Frank

OCC Guidance – October, 2013

• http://www.occ.gov/news-issuances/bulletins/2013/bulletin-2013-29.html

Vendor Management

• Greater reliance on third parties by banks• Regulations regarding data privacy and

security• Increased focus on data safety due to

publicized data breaches when information resides outside the bank

Industry Standards Needed

• “An industry standard would require a qualitative approach that goes beyond traditional metrics such as Service Level Agreements and production targets. The industry standard would provide guidelines with a uniform vocabulary that can be used to develop comprehensive vendor management programs as well as industry benchmarks.” American Banker

Vendor Management

• Group vendors into categories and assign each category a subset of risks that need to be assessed.

Vendor Management

• Request copies of your vendors’ contracts with their vendors if your bank’s data is stored elsewhere.

Vendor Management

• Be proactive with regulators and let them know what you are working on before examiners come onsite.

Vendor Management

• Does your purchasing department spend too much time managing vendors that pose little operational risk to the bank vs. those whose lack of performance could have a much greater impact?

Vendor Management

• Keep all vendor contracts in a central location.

Quantitative vs. Qualitative Vendor Management

Quantitative

• Financial reports• SAS 70s• Disaster recovery tests• Complete list of providers• Archive of contracts• Expiration dates• Completed questionnaires

Qualitative

• How is the vendor helping the bank meet its strategic and operating goals?

Qualitative

• Has the vendor met it commitments and managed the relationship with your bank well?

Qualitative

• Do conversations center around what is going wrong and how the vendor plans to fix problems?

Qualitative

• Has the bank done everything it can to manage the relationship and work toward a positive outcome?

Qualitative

• Do new releases meet expectations? Are they delivered as promised?

Qualitative

• Are service level agreements measured and reported? Who in the bank is responsible for following-up?

Qualitative

• Does the vendor have the same sense of urgency as the bank in solving big issues?

Qualitative

• Are new products recommended with your individual bank in mind or are you getting a “one size fits all” sales pitch to meet a revenue objective?

Qualitative

• Is your sales person highly regarded within the company? Do they regularly visit you and bring in others who can add value?

Qualitative

• Does your sales person regularly review your invoices with you and do they suggest ways to manage expenses?

Qualitative

• Does your sales person encourage you to attend user conferences and training sessions? Do they offer CEOs the opportunity to interact with their peers from other banks?

Questions?