The days of having single vendor program agreements spanning multiple customer segments and geographies are largely over. Many funders have narrowed their areas of expertise to specific regions or specialized customer and industry segments. They’ve withdrawn from markets that aren’t lucrative enough to sustain. Although there are still some funders who can create a patchwork quilt of broad coverage, the single coverage model often requires compromises that vendors and resellers just aren’t willing to make anymore.

As if this narrowing of market coverage wasn’t bad enough, there are new challenges that are shaking things up even more for both vendors and funders. We’re only at the tip of the iceberg in terms of change.

Let’s face it: The comfortable vendor program relationships that have prospered for many decades are in need of an overhaul.

Skate to Where the Puck Is Going, Not to Where It’s Been

This might be an overused hockey cliché but the message is still powerful. Vendor program partners need to be more diligent than ever in staying ahead of the curve. Complacency can result in one or both partners getting broadsided.

Historically, we’ve seen more than a few disruptive influences. Recessions knock funders out of markets. Acquisitions and mergers drive customer exposure limits to the max. And, risk management changes reduce overall credit appetites. We now have new challenges that are creating even more ripples:  

• Customer preferences shifting to pay-per-use/consumption models;
• Managed services that incorporate layers of performance risk;
• Digital technologies that add competitive efficiencies; and
• Accounting policy and other regulatory changes that add complexity and confusion.

There are a lot of great benefits associated with vendor programs. First and foremost, vendors want complementary financial solutions that will help push product to end users. In order to do this, the financing program has to be both relevant and competitive. A financial product that is compromised because of a failure to adequately anticipate and react to disruptors can create major program setbacks. If pushing product is the No. 1 objective to the vendor, you don’t want to be in a position where you can no longer properly support product sales teams. In vendor organizations, where many equipment leasing and financing programs already fight for relevance, gaps that can’t be plugged quickly can create disturbing ripples throughout a product sales organization. When financial product reliability becomes an issue, the impact can take years to repair or, in some cases, it can be irreversible.  

It’s no longer enough for vendor programs to have a mitigation plan in the event of a repeat of past disruption. Today, vendor program partners also need to anticipate and close gaps related to emerging industry requirements. They need to skate to where that puck is likely to go.  

Vendors: Safeguards for Disruption

When we examine past, present or future disruptors in this industry, one of the optimum safeguards for a vendor program is flexibility. The most logical way to add flexibility is to relinquish exclusive program relationships in favor of multi-funder models.

Some vendors create multi-funder programs that still retain an element of exclusivity by assigning sub-sets of customer or geographic segments to specific funders. However, this doesn’t necessarily provide for a quick recovery in the event something stops working with that exclusive partner. For example, if a vendor is faced with a rapidly emerging competitive threat such as the introduction of a sophisticated usage-based offering, the vendor needs to be able to act rapidly to offset that threat by working with a funder who can immediately step up to the requirement. If exclusivity slows down that process because the funder hasn’t prepared for the requirement, exclusivity has outlived its usefulness. 

The most responsive multi-funder model is one where the vendor manages the customer relationship, has a select number of funders who can support a variety of requirements and then chooses the funder based on customer requirements for a single transaction or group of transactions. However, this kind of flexibility doesn’t come without a price:

• Shift in Program Investments to Vendor: Vendors who have partnered with funders under exclusive program arrangements have generally seen higher levels of funder investment in the program in the form of profit sharing, administration, dedicated resources, marketing and other activities that jointly promote a branded product. When a vendor moves to a multi-funder model, the cost of scaling these programs shifts to the vendor. This can be problematic for the program unless the parent recognizes the importance of financing and is willing to make internal investments.
• Speed: Managing transactions under a multi-funder model can require more time to negotiate contract terms, credit approval and pricing. Time is an enemy when it comes to the sales cycle. The advantages of adding multi-funder flexibility can be completely dismantled if customer response time slows down. When this happens, it can destroy strong relationships that might have developed between product and financial sales resources. More importantly, customers who are looking for answers might select a more responsive vendor or financing partner.
• Standardization: Each funder has discreet funding processes. Managing multiple processes can become a burden for either the vendor’s or funder’s administrative organization when the lack of standardization leads to greater inefficiencies and errors.
• Customer Inconsistencies: There will be situations where customers might contract with more than one funding partner for the same vendor. Unless inconsistencies in processes, terms and conditions, billing, etc. have been resolved, customers can become confused. On the flip side, when vendors attempt to create standard practices, customers can be denied the use of more advanced automation and self-service tool kits that might be available with some funders but not others.
• Referral vs. Assignment Process: The level of desired control over customer relationships can dictate how contracts are structured. Programs that command the highest level of transactional control are ones where the vendor utilizes their own paper in negotiating contracts and then assigns the paper to a downstream funder. Although this process can significantly reduce some inconsistencies in dealing with multiple funding partners, it adds incremental requirements for internal resource support.

None of the challenges mentioned above are insurmountable. Many successful vendor programs are run with the aid of vendor bid desks, which determine the best funder for each transaction. Sometimes these programs evolved from highly capable captive models where internal funding was simply replaced with external multi-funders. In other situations, these programs may have evolved more gradually from exclusive funder models. In both cases, the vendor retains significantly more control in being able to take rapid tactical action when needed.

Funders: Improving Responsiveness

If vendors are going to be looking for logical ways to safeguard their programs against disruptive influences, it’s equally logical that funders will be looking for ways to improve their ability to respond to vendor demands more effectively.

A few options that should be top of mind for funders include:

• Speeding up technology development: State of the art technology is imperative today. Funders who have development capital, expertise and the ability to execute quickly are rare. Without that, they need to collaborate with those who do. Conversely, fintech companies, which actively develop solutions to streamline operational costs, are often challenged in their ability to find a sufficient customer base to recover their investment. There’s significant mutual advantage with healthy collaboration between these two organizations.
• Leveraging new relationships to manage incremental risk: Credit risk is familiar territory for funders. Concentration risks and other more traditional default risks have evolved to where vendor portfolios are sold off to accommodate new portfolios. However, there are incremental risks from emerging usage and managed services models that require a fresh perspective. Some contracts demand absolute cancellation flexibility while others include a myriad of service providers with unquantifiable performance reliability behaviors. For vendors who are asked to assume recourse by a funder, it can negatively impact sale revenue recognition. For funders who are asked to assume both cancellation and performance risk, it comes down to the unpredictable nature of the default risk and whether or not that risk can be balanced against asset recovery mitigation activities. Historically, funders have managed assets that are at the end of their useful life. Having early returns from cancellations requires investing in a much more sophisticated logistical model that can potentially move assets around under short term rentals until their value is fully recovered. Fortunately, there are newly emerging niche partners who have made substantial logistical investments to accommodate the shift to customer usage behavior. Funders who are eager to respond to these new requirements should be championing efforts to establish relationships with these non-traditional residual partners.
• Reevaluating terms and conditions for accounting changes: Lessee accounting changes have rocked the leasing world. It’s not been as bad for lessors. However, with the scrutiny being placed on all things related to leasing and sale revenue recognition, auditors are finding opportunities to challenge some vendor program agreement terms and conditions. Being proactive in looking over these agreements could prove to be of significant value to both funders and vendors. The last thing a funder wants is for their vendor partner to be told that terms used for the past decade now disqualify sale revenue treatment.

Conclusion

Vendor programs bring tremendous value to both funders and the vendors they support. Without them, many product vendors would be forced to invest in complex financial processes that aren’t core to their business rather than relying on a funder’s expertise and program capabilities. Many of these program relationships have remained unchanged for 10 or more years. It’s a testimony to the strength of the partnership and its overall program performance when that happens. However, even if a partnership is rock solid today, vendors need to be extra cautious in making sure that these relationships can still stand the test of time. Disruption is inevitable. Being caught off guard shouldn’t be.