It's not me, it's you – How to break up with your tech vendor

At the outset, banks must thoroughly vet potential tech vendors, assessing their track record, technological capabilities (including the ability to improve and innovate), financial stability, and alignment with the bank’s strategic goals. Banks should also consider parties' relative bargaining power and availability of alternative vendors in the market to facilitate competition and avoid lock-in risk.

Building flexibility into a contract, such as adjustable terms, early termination rights, service modifications and exit assistance, comes at a cost. Despite the price, flexibility can provide significant value by reducing longer-term risks and enabling faster responses to changes. It can also help avoid penalties, reduce downtime, and maintain competitiveness. Banks should clearly articulate the value they place on flexibility and be prepared for associated costs in negotiations.

Pricing mechanisms can be used to secure greater flexibility in a tech procurement agreement. For example, upfront payment for implementation may increase a vendor's willingness to accept early termination rights, compared to where costs are to be recovered from subscription fees down the line. Performance-based pricing can also be a good way to align the interests of both parties, ensuring banks only pay for the value received. Equally, a clear methodology for the costs of exit assistance should prevent unpleasant surprises at the end of the relationship.

Rather than entering into long-term agreements, banks should consider whether they can enter into short-to-medium term agreements, with the right to renew. This mechanism can offer banks the best of both worlds, though this is often subject to significant negotiation.

A common concern is the need for escrow arrangements. Banks must plan for business continuity risks if a tech vendor stops providing the services (eg, due to the vendor's breach, its insolvency or ending software support). Tech vendors often resist escrow, especially for large, multi-tenant solutions with readily available alternatives. However, escrow may be more justified for niche, private instance or on-premises solutions.

Migration can be an expensive exercise. In some cases, a tech vendor may be incentivised to pay out the contract rather than assisting with migration (subject to liability for breach being limited to the liability caps). A bank should consider whether the liability caps in a tech agreement provide sufficient headroom to cover its damages in the event that migration is not performed.

Despite good intentions, disputes relating to exits may arise. Banks should plan for dispute management between parties and, if needed, in courts or arbitral tribunals. This impacts available remedies for breach and their enforceability. Service vendors often counter claim against banks as a defence to performing exit and migration assistance obligations.