Vendor Contract Management Mistakes Files

You probably think of vendor contract management as something that protects your institution. That’s true, but it does much more than that. It also protects your job.

A casual approach to contract management leaves a lot of room for error. It’s also surprisingly common. In my experience, about 20 percent of contracts at financial institutions are either missing or unsigned. Auto-renewals are another common pitfall, with financial institutions losing track of renewal dates and being forced to stick with an unwanted vendor and/or paying a higher price for an additional term (that could be from 1 to 5+ years).

Sometimes these mistakes are a nuisance, but other times, the consequences are severe. I’m talking about major, career-changing mistakes that impact everyone from the vendor manager all the way to the CEO.

Don’t believe me? Consider these two cases.

Compounding Cores.

You know the old saying that the check is in the mail? In this case, it wasn’t a check that failed to arrive, but the official cancellation notice for a core system. A bank signed on for a new core processor, and its Chief Information Officer was supposed to send an official termination notice to the vendor. Unfortunately, the bank didn’t have a solid process for notification, and proper notice (as required by the contract) was never sent.

As a result, the original core vendor contract auto-renewed. The bank was then stuck with two core processors at an additional cost of $5 million per year. The CIO & vendor owner were promptly fired and the board had an awful lot of questions for the rest of the management team. It may not have been the CEO’s job to send the notice, but he was still ultimately responsible for the mess.  The bank was sold a few years later.

Managing Complaints to Achieve Better Results

Real Estate Regret.

A savvy bank CFO negotiated a great deal for a branch office during the Great Recession in an expensive real estate market. It was an amazing deal, but one that wouldn’t last forever. The terms involved a huge rent hike when the lease renewed. The head of IT was tasked with vendor management, including all contract renewals. He gave the CFO a heads-up just 30 days before the branch would auto-renew at the new, dramatically higher price.

With such short notice, there was no time to come up with an alternative plan. The bank had to either pay the exorbitant rent or close an important branch. The bank took it on the nose and paid the price increase, but not before the IT head was fired, and the CFO’s own job was endangered, and his CEO and board questioned why he wasn’t on top of such a costly and high-profile decision.

Both problems could have been avoided with a centralized, systematic and proactive approach to vendor management. Contracts need to be stored together, and key dates and provisions need to be proactively monitored.

How confident are you in your institution’s approach to contract management? If it seems even remotely likely that you could miss a small detail with huge consequences, it’s time to rethink how you’re approaching contract management.

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NCONTRACTS 2020
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