End Long-Term Contracts And Automatic Renewals With Maple Street
Ways credit unions and community banks are wasting money
Credit unions and community banks waste millions of dollars every year. The easiest, fastest way to stop wasting your money is your vendor management program.
As a part of this series, Maple Street’s pros explore ways your institution could be wasting money and what you can do to fix the problem.
Wasting money mistake #773: Long-term contracts and automatic renewals
Why are long term contracts and automatic renewals like quicksand? Both can seem like you’re on solid ground, but with one misstep, you can be sucked under – resulting in potential losses of millions.
A common mistake when dealing with vendors is signing a multi-year contract without getting anything for it. You did your research and the price is right – why not lock it down? After all, vendor prices always go up year after year. WRONG.
In many instances, prices go down over time. This has been true for debit and credit card processing transactions for quite some time and has now become common for digital banking platform transaction costs and account processing transaction costs. If you jumped at a 10-year term rate a few years ago, you’ll lose the opportunity to renegotiate the pricing down the road. The long term insures you’re going to pay the maximum price for the maximum time, turning what seemed like a good deal into an awful deal.
Not only could a long-term contract sucker you into paying more money, you could regret it because you’re stuck with a vendor that doesn’t provide good service or delivers technology that isn’t keeping up with your demands. Technology is changing rapidly. If you’re stuck in a long-term contract, you won’t have the opportunity to look at different options and adopt new technologies. Or if your vendor provides poor support and doesn’t deliver what you expected, you have no recourse but to wait until the long term finally ends. You’re stuck and rapidly sinking compared to your competitors that opted for shorter terms.
Another way credit unions and community banks can get sucked in is by giving up value for nothing in return through automatic renewals. Vendors will often give you discounts and other incentives if you sign a 3- to 5-year contract because you’ve provided them a guaranteed revenue source for that period of time. However, that’s not true of a longer renewal term.
If a contract automatically renews for a term of more than one year, you’re now locked into a long-term contract where you won’t get the benefit of new pricing, or the benefit of pricing that has been decreasing overtime (while yours has been increasing). By opting for automatic rollovers, you give up the opportunity to renegotiate the contract at current prices or to renegotiate better service and performance levels.
And let’s not forget the vendor will often increase the price year over year. With five percent increases, by the end of a five-year contract you’re paying more than 25 percent of where you started. And the longer the term, the worse it is!
How to fix this money-wasting mistake
The most prevalent reason credit unions and community banks end up paying their vendors too much without anything in return is because they don’t start their negotiation soon enough. Without sufficient time to negotiate, you’re boxed into having to make decisions last minute. If the vendor gives you any kind of discount, you’ll consider it a “win,” even though you didn’t get the best price possible.
By starting the process early, you’ll be able to adequately research the current market and have a competitor waiting in the wings if they don’t provide the price and terms you want.
Another solution is to leave the DIY projects at home and enlist a professional negotiator. Maple Street’s skilled negotiations team has access to all of the latest stats and figures in the industry and endless experience saving clients big money. To date, we’ve saved our clients over $132 million.
Maple Street’s Vendor Advantage System®
One tool in our negotiators’ box is the revolutionary Vendor Advantage System®. This system is a
proven advantage in vendor negotiations that ensures you get the contract you need at a price that’s fair. Not only does it reduce expenses manage risks, it improves vendor performance, so you’ll get exactly what you paid for.
Get laser focused on managing your vendors now!
Request a meeting with a professional vendor management expert today