Contract traps: the contract term.

Oct 14, 2019

Do you ever wonder what is the right contract term (the length of the contract)? The answer: As short as possible.

Part of a vendor management program is the negotiation of fair, risk-balanced contract terms – an overlooked but crucial requirement. Without paying attention to the contract term, you may trap your credit union into a long-term contract that doesn’t work for you.

Credit unions have been conditioned to think vendor contracts should have a three, five, or seven-year term as a matter of course. We challenge that thinking.

When you sign for a longer-term contract, you award the vendor a guaranteed revenue stream – cash – for the duration of the contract and guaranteed revenue is of high value; it’s how vendors survive, which is why vendors will often offer better pricing for longer terms.

Even with big ticket items like data processing, you give up a longer term and you should get something for it. There is no good reason to surrender five years of your cash unless you do. Think about it: If you sign a one-year contract for data processing with one-year renewals, do you think the vendor won’t be interested in renewing the contract? The only benefits of a five-year contract are for the vendor; year-to-year renewals work just as well and you keep the flexibility to change if the performance you need isn’t delivered.

Sure, you’re probably not going to change these systems often, but that isn’t a reason to automatically agree to a long term – unless you get something for it. If you get better pricing, fair contract terms, or discounted services, then it makes sense to agree to the longer term. Otherwise, why take the risk of locking in for years of poor performance?

We often confine ourselves because we follow conventionality – the herd mentality. A good vendor management program includes smart negotiate of key contract terms to secure fairest contract terms in exchange for what you give.

Maple Street, Inc., is the provider of the Vendor Advantage System® and the only complete vendor relationship management system. Maple Street delivers lower expenses, improved vendor performance, and effective risk management, and provides an outsource service so you can focus on what you do best: exceeding your members’ expectations.

This article is not intended to be legal advice.

Contact Mike Crofts at (800) 513-6839.

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