Ending a business relationship with a third-party service provider (TPSP) does not need to be difficult. However, it is often necessary. The longer the relationship and the higher the annual spend, the more uncomfortable it may be. The product or service may no longer meet your strategic goals, more advanced technology may be available, or the vendor’s performance may no longer meet expectations or contractual obligations.
Regardless of the reason, there are some steps you should take before, during, and after a vendor breakup to ensure a smooth and seamless transition. Above all, maintain professionalism while you take the steps necessary to minimize disruptions, maintain operational resilience, and stay compliant.
Related: 5 Ways to Strengthen Your FI’s Vendor Management Program
Contract management is the cornerstone of business relationships. Since vendor outsourcing may be a significant expense, successful partnerships demand careful planning and oversight at the beginning of the relationship. Strong contracts enable entities to manage risks and safeguard consumer information from unauthorized access, use, or disclosure.
Service level agreements, or SLAs, set clear expectations for a third party’s performance. They also serve as a break-up guide for when a vendor relationship ends. Think of an SLA as a professional prenuptial agreement outlining how both parties will handle the end of the relationship.
Termination is a critical phase of the vendor management lifecycle, as emphasized in the Interagency Guidance on Third-Party Relationships and related regulatory materials. Contracts should define termination notification requirements which may be several months prior to the contract renewal date. It should set measurable performance standards and include escalating penalties for non-compliance. The contract should clearly outline exit expenses such as early termination fees, data export format and costs, and ensure secure vendor cooperation for a smooth transition. Strong SLAs should limit the duration that vendors can retain records, particularly sensitive customer data. Without these contract provisions, the vendor may dictate the terms to your detriment.
If the vendor fails to meet expectations and you need to end the relationship prior to the end of the contract, you will need documented evidence of contract breach, as well as communication records between you and the vendor. Without clear proof of the vendor's performance issues, you may be liable for a termination fee. This fee may also apply if you terminate the agreement for convenience.
It's essential to follow the contract's exact termination procedures — whether that involves a formal letter, an email, or a specific advance notification period — as outlined in the SLA. A standard termination letter is a valuable tool, as many financial institutions manage dozens or even hundreds of vendor relationships.
Download: The SLA Essentials: A Quick Guide
When ending a vendor relationship, especially if it has been mutually fruitful, it's best to call your contact and deliver the parting news directly (in addition to other contractual notification procedures). The vendor will most likely ask what, if anything, it can do to keep your business. Be honest about why you're leaving, particularly if it stems from performance or service issues. Just as you rely on customer feedback and complaints to refine products and services, your vendors can use similar input to enhance their performance and offerings.
While it's natural to feel uneasy about delivering the news by phone, a direct conversation is often less impersonal (and less awkward) than sending a letter alone.
As consolidations continue between business entities, partnerships, and vendors, you'll likely cross paths with the same people again. Preserving those relationships matters, and abruptly cutting off communication can leave a lasting, negative impression.
Related: 5 Business Continuity Red Flags in Vendor Relationships and How to Address Them
Your third party isn’t the only one who needs to be notified when a relationship ends. Ensure everyone in contact with the vendor across your organization is made aware. A failure to communicate can lead to confusion. After all, you don’t want the accounts payable department to continue paying a vendor you terminated six months ago.
Once the news has been shared, confirm the records are updated to reflect exactly how the contract was terminated. Include the notification document, noting whether it was a letter or an email. From there, you can ensure new vendor contracts are added to your internal systems and align with your regulator’s specific contract management requirements.
Related: 9 Steps for Successful New Vendor Onboarding
While no organization is eager to go through the process of ending a vendor relationship, being organized and prepared makes the process smoother. Third-party partnerships are vital to your operational objectives and success. Managing them with professionalism, care and respect — from start to finish — is not just a regulatory requirement, but a reflection of your values and business integrity.
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