It happens often in today’s incredibly busy world and can seem innocuous: a lending business and service provider missing the deadline to renew their contract. It will happen eventually and what’s the harm in a short delay if needed?
In truth, outdated vendor contracts can be extremely risky, especially for organizations like banks and credit unions. In multiple ways, out-of-date contracts can hurt an institution’s bottom line. This blog will explain those direct and indirect costs associated with outdated contracts.
You could be putting your portfolio or institution at risk
If your contract is outdated, the services provided by that vendor are not guaranteed. Though it may seem as though business is moving along as usual, at any point that vendor could deny service (and would have every right to, contractually).
Consider some of the services and tasks that you outsource. What would the implication be if a vendor suddenly stopped providing those services? Let’s look at a real estate tax monitoring and escrow processing vendor as an example. If they were to stop servicing an institution, borrowers’ property taxes would not get paid, their accounts would be delinquent (likely without their knowledge), and they would be at risk of losing their homes.
Few vendors would deliberately leave a customer in a bad position like this, but when a contract is out of date, it’s a risk that financial institutions can’t afford to take.
You could be leaving money on the table
When your contract expires, your former pricing agreements are void, leaving you open to higher rates. If you initially negotiated your pricing or got a deal, you’ll likely lose those pricing advantages once your contract is out of date.
Plus, while you spend time with an outdated contract, you could be missing out on pricing incentives and end up paying even more by the time you do re-sign the contract. Finally, keep in mind that the provider may have new or improved services that you aren't aware of and thus can’t take advantage of, due to your expired contract.
How to avoid these risks
The easy answer to avoiding the risks and costs discussed in this article so far is to always keep vendor contracts up to date, which means monitoring regularly to ensure nothing slips through the cracks.
But keeping contacts up to date is only step one. In order to mitigate the various risks of working with third-party service providers, financial institutions must diligently manage their vendor relationships. Consider these vendor management best practices:
- Create policies and procedures around the outsourcing process
- Include risk assessment and due diligence in the vendor selection process
- Monitor vendor relationships ongoing and reassess risks regularly
- Maintain proper documentation, including SLAs and non-disclosure/confidentiality agreements
Get more details on the importance of keeping up-to-date vendor contracts (and the risks of not doing so) in this essential resource.
