Vendors come in all shapes and sizes. In our industry of stock compensation, there are broker vendors, recordkeeping and plan management vendors, advisers (such as legal, plan design, accounting and tax), and consultants. The above can also be morphed into multiple combinations (such as broker-recordkeeping-plan management vendors who consult) as well. We’ve been on a slow but steady migration for years towards the use of third-party vendors to manage stock administration tasks. Some say that stock administration is 10 to 15 years behind 401(k) – look at those trends and you’ll see where stock compensation is headed. Virtually all 401(k) plans are outsourced these days, so if we assume that trend will overflow to our industry, then we aren’t too far off from relying even more heavily on third parties. In today’s blog, I’ll explore some of the emerging practices in vendor management.

Numbers Don’t Lie

In the 2011 NASPP/Deloitte Domestic Stock Plan Administration Survey, 68% of companies reported outsourcing all or a portion of their stock plan management. Of those companies that did report an outsourcing component, the majority (67%) outsourced more than 50% of the function (excluding ESPP), with 41% of them outsourcing 75% or more of the function. That trend appears to be continuing, and I’d expect those numbers show an increase in future surveys. While the survey questions focused specifically on outsourcing, my informal opinion is that there is a parallel increase in the use of other vendor types, such as legal, tax, consulting and similar resources. With increased reliance on third parties, practices in managing those relationships begin to emerge.

A Few Tips

There are a variety of aspects to the vendor relationship, from the early days of selecting the right vendor, to ongoing management of the relationship. I can’t cover everything here, but I’ll share few tips:

• Meet Your Key Contact: Your day-to-day point of contact is one of the most important components of your relationship, and a determining factor in the success of the partnership. It’s perfectly okay to ask for a bio and to meet (at least via phone) the person who will service your plan in advance.
• Conduct Periodic Reviews: You give your employees performance reviews – why wouldn’t you do the same with your other partners? It doesn’t have to be as formal as a written multi-page summary, but it can be a structured point in time when you exchange feedback. A secondary purpose of such a meeting is also to discuss the vendor’s roadmap for product development and service offerings and align it with your own planning and strategy.
• No Vendor is Perfect: It sounds like a straightforward statement, but I often run into companies that seem to expect perfection. The reality is that each service provider has their strengths and weaknesses, and none are perfect. The key is is to align with a vendor who is strong in the areas most critical to the success of your plan. If you have high maintenance executives who need loads of personal service, you may need a vendor well equipped in that regard. If you have a huge global presence requiring lots of complex tax withholding and management, you need a vendor strong in that area. One suggestion is to list out the key needs you have for your vendor relationship, and then rank those needs on a scale of 1 to 10. Chances are, not everything is a “1” or a “10”, but some will land there. The items ranking a “10” will drive your primary focus in choosing the right partner, and it will trickle down from there. Writing it down on paper really helps to establish clarity and further identify the areas that are of most importance (yes, they’re all important, but what’s most important?)
• Jumping Ship is Not Easy: Moving to a new service provider is not typically an easy process. Certainly there are times when it’s necessary to move – such as when a vendor is lacking in a key service offering, or when relationship issues reach the breaking point. In many cases, though, hiccups can be resolved when each side commits to further a resolution. Sometimes new features can be implemented, changes in personnel may be necessary, or other actions can be taken that will enhance the working interaction for both parties. Changing service providers often involves significant time, money and resources, and should be considered as a last resort when the move is contemplated in connection with service issues.

NASPP Resources

We do have several resources available to NASPP members to assist in managing your vendor relationships. First, we have our new Vendor Management portal. The portal features tools (such as sample RFPs), presentations and webcasts, and other articles on the subject of interacting with your stock plan third party relationships. The subject of this month’s Compliance-O-Meter is Vendor Management, so take a few moments to compare your views on vendor relationships to the industry and get some tips on how to enhance or evolve those vendor related practices.

-Jennifer