Is it Time to Rebid Your Vendor Contracts?
Posted on Wednesday, January 30, 2019 Share
While it's great to have a good rapport with your vendors, it's important to ensure the relationship remains businesslike. Vendors who know there is a threat that they could lose your contract are more likely to focus on staying competitive.
And when the vendor is, for example, a retirement plan third-party administrator or recordkeeper, you've got fiduciary liability to consider. The courts are littered with class action cases against employers whose retirement plans were deemed to be paying excessive fees for asset management and plan administration. That's because in the retirement plan arena, employees — not the company — are typically paying the price through reduced retirement asset accumulation. As the plan sponsor, your fiduciary duty is to those employees, of course.
That doesn't mean you always give your business to the least expensive vendor. But if you can get the same level of service for less or even if you're getting Cadillac service for a Cadillac price but the service is more than your participants need, they may start questioning your wisdom.
Why Seek New Bids?
The point of periodically rebidding service agreements isn't only about making sure you aren't overpaying. Other reasons can include:
Performance commitments: You might discover that other vendors will set higher performance standards for themselves than your current vendor. For example, how long does it take your vendor to return calls, process claims, deliver reports? If you can get better service for a similar price, you may be asked why you didn't pursue those options.
Performance track record: In some areas, such as retirement plan asset management, service providers can't make promises about the investment returns they'll deliver. But if your current investment managers are consistently missing their benchmarks, it's time to consider alternatives.
New capabilities: Your service provider might not be up-to-date with the latest technology advances in the field, while some of its competitors are, and can provide useful service features affordably. There might even be new service options out there that you don't know about, but they might turn up in a vendor's response to your request for proposal (RFP).
Capacity issues: Perhaps you signed on with your current vendor ages ago when you had half the number of employees you have today. You might have outgrown that vendor if their resources are stretched thin and the service quality is deteriorating.
By the way, unless you're thoroughly dissatisfied with your current vendor, it may not hurt to ask them to rebid.
Depending on the specifics of the service contract you rebid, it might be prudent to enlist the help of a consultant. Those who specialize in the service category know the players and their capabilities. They know how to put together an RFP that's detailed enough to give you the data you need without being overly complicated.
Consultants also have access to benchmark data that can help you assess where the bids you receive fall on the spectrum. And they have the benefit of previously working with other employers and know how satisfied, or unsatisfied, those other clients have been with the various vendors who respond to your RFP.
Sometimes it's appropriate to get employee input into the process as well. Their views on the quality of service they're receiving from your current vendor might surprise you, either on the positive or negative side. Also, you can gauge their interest in optional services they can use that might cost more. While you're seeking employee opinions, you might ask if they would value having a financial planner visit the worksite a few times a year to answer questions. If so, add that to your RFP.
Since you'll want to receive several bids in response to your RFP, you might need to take a couple of steps to make your company more attractive to prospective bidders. As noted, if your company is relatively small, a vendor might not see the value in taking the time to respond to your RFP. Not only does the size of your company matter, but the size of the prospective vendors matters also. Smaller companies that have the resources to handle large clients may provide the best service, so you may want to include them when you're deciding where to send your RFPs.
You can also enhance your company's appeal, regardless of size, by asking for multi-year contract bids. That assures prospective bidders that you're expecting the relationship to last a while. That doesn't mean you can't build safeguards into the contract you sign with the successful bidder to allow yourself an early out if the service provider's performance is way off the mark.
When the dust settles, you might conclude that you're better off sticking with your current vendor. That doesn't mean the process was a waste of time, however. That's because you will have gained confidence that you're working with the right vendor, and it doesn't hurt for your vendor to know you're prepared to switch if service quality falters.
Posted in Tax Topics For Individuals, Tax And Accounting Topics For Business
Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.