Regardless of your business size or industry, vendor management (VM) plays a crucial role in the success of your organization. Applying vendor management best practices will help you build strong relationships with vendors while protecting your business from potential threats.
What is Vendor Management Anyway?
Vendor management is the process of controlling costs, reducing risks, and creating a mutually beneficial relationship between your business and its vendors. Vendors can range from wholesale suppliers to software providers, consultants, and anything in between.
The process includes vendor selection, contract negotiations, service guarantees, and other aspects related to successful vendor relationships.
In terms of data security, you want to make sure that your vendors are taking appropriate steps to protect your company’s information. This is another crucial aspect of vendor management.
How Vendor Management Best Practices Work
Vendor management is a broad term, and it means something different to every business. For some organizations, vendor management might involve relationships with cleaning suppliers or influencers. For others, vendors might be SaaS providers or outsourced data centers.
But regardless of your specific use case, vendor management best practices can be applied to all of these scenarios.
Before you can implement vendor management best practices, you need to have a firm grasp of the big-picture vendor management process. Vendor management typically involves several different stages, including:
- Vendor Sourcing
- Contract Negotiation
- Vendor Performance Monitoring
- Risk Management
The process starts with researching viable vendors that fit the description for whatever products or services your business needs. Once you’ve identified potential options, you’ll typically ask for quotes in the form of RFQs and RFPs (requests for quotation and requests for proposal).
Beyond the price, you should also evaluate and compare vendors by reputation, security practices, capacity, and effective communication.
It’s common to tweak proposals during the contract negotiation process. Depending on the scope of the relationship, this can be time-consuming. The contract should include start times, end times, conditions, and other important terms of the deal.
After the vendor onboarding process, you’ll need to track their performance and evaluate potential risks that could hurt your company. This includes anything from compliance issues, data security, lawsuits, intellectual property violations, and more.
Benefits of Vendor Management
Applying vendor management best practices will be highly beneficial for any business. Some of the top benefits include:
- Better Vendor Selection
- Streamlined Contract Management
- Stronger Vendor Relationships
- Enhanced Vendor Performance Management
- Better Value
Vendor management best practices ultimately help businesses have a higher selection of qualified vendors to choose from. The increase in choice puts your business in a better position to get the most value, as you can create bidding wars between multiple vendors.
Overall, applying VM best practices will make it easier for your company to juggle relationships with vendors at every level. You’ll have a clearly defined system in place for decision-making, payments, and more—ultimately simplifying vendor operations.
Challenges of Vendor Management
Managing vendors, especially at a high level, isn’t always easy. That’s why it’s so important to understand and apply vendor management best practices.
Some of the most common challenges with managing vendors include:
- Compliance Risks
- Data Storage
- Data Security
- Payment Terms
- Reputation Management
When you’re using a vendor for crucial aspects of your business operations, those third parties essentially become an extension of your organization. You’re entrusting them with potentially sensitive data and other operations that put your business at risk for various non-compliance scenarios.
At the end of the day, your vendors are partners and play a crucial role in the success of your business. Their decisions and actions are ultimately a reflection of you and your organization.
As we dive deeper into applying vendor management best practices later on in this guide, you’ll see how to navigate these challenges and reduce risks associated with compliance, data security, and more.
Example #1: SaaS Vendor Compliance
SaaS would be a prime example of a scenario where vendor management best practices must be applied.
Maybe your industry, business, or a specific function within your operation is bound by certain rules and regulations. It could be anything from HIPAA to GDPR, PCI DSS, or something along those lines.
Let’s say you’re using a software vendor to store customer data. If that vendor isn’t following the appropriate steps and rules for data security compliance, your business would be on the hook for any violations.
Vendor management best practices would help you evaluate reputable vendors initially and ensure that the vendor continues to take all precautions as your relationship progresses.
Example #2: Supplier Contracts
Another good example of vendor management involves whole supplier purchases.
Failing to apply vendor management best practices here could put you at a disadvantage if a supplier makes late deliveries or supplies products that malfunction.
What happens if the late delivery causes production delays for your business? How do you handle defective products from the supplier? Are you out of luck, or are you entitled to compensation?
Vendor management best practices will help you define these types of terms in your contract negotiations. The process will also help reduce the chances that you’ll be put in these types of scenarios to begin with.
How to Get Started With Vendor Management Best Practices
If you’re new to vendor management, getting started and applying best practices can feel like an overwhelming task. Fortunately, we’ve simplified this process by identifying the most important, specific, and tactical steps you need to follow for success.
Regardless of your vendor types, industry, or business size, the following steps will help you apply vendor management best practices:
Step 1: Establish a Clear Vendor Management Policy
Before you start searching for vendors and evaluating risks, you need to create a formally documented vendor management policy within your organization. The document will be used to show company leaders, stakeholders, and other key members of the business how you’ll be applying strategic vendor management practices.
Start by appointing a formal purchasing committee. This group will be responsible for creating the policy, reviewing vendor performance, and changing the terms of your vendor management policy as needed.
The policy must clearly show who is responsible for certain tasks. This eliminates confusion, so nobody assumes that a task is being handled by someone else, and it ultimately gets overlooked.
Policies should identify how many vendors you need within each category of your operations.
You’ll also want to make sure that the vendor management policy aligns with your overall business goals. For example, if your company prioritizes innovation, you’ll want to work with vendors who are known as innovative leaders for product creation or technology.
All vendor management policies should define the process that your company will use for vendor sourcing.
Include things like vendor audits, risk assessments, and other important factors in this policy as well. For example, are you going to ask for bank statements and tax records before working with a vendor? Will you require SOC reports?
Establishing all of this ahead of time with a formal vendor management policy gives everyone in your organization a playbook to follow as you start to work with new vendors and suppliers.
Step 2: Make Sure Contracts Clearly Describe Vendor Responsibilities
Vendor contracts are one of the most important things in any vendor relationship. It’s a legal agreement between two parties and can be used to clarify all expectations and responsibilities for a vendor.
The contract should contain specific details of the service or product in question. This includes quantity, conditions, timeframes, and more.
You should also include stipulations and resolution steps that will be enacted if the vendor doesn’t meet the terms of the contract.
Best practices for vendor management contracts include:
- Apply Your Vendor Management Policy — Refer back to the vendor management policy you created back in the first step of this guide. This policy will be a crucial resource as you’re drafting and negotiating contract terms.
- Define the Scope of Work — SOWs and SLAs (service-level agreements) will cover the specific terms that a vendor must follow. These involve performance thresholds, compliance rules, data security management, penalties, and more. All of this will be used to hold vendors accountable.
- Payment Terms — The contract should clearly articulate the costs associated with the product or service, as well as payment schedules and penalties for late payments. Make sure you can meet these terms, or it could create an adverse relationship with your vendors.
- Liabilities — Your vendors should offer proof of insurance coverage, including workers’ compensation and liability coverage. This can protect your company and the vendor alike from certain lawsuits.
- Fourth-Party Terms — It’s possible for a vendor to subcontract work to other vendors. To protect yourself, you should make sure your vendor identifies all other contractors in the agreement and provides evidence that they have best practices to ensure those fourth parties comply with the terms of your contract.
Even for smaller vendor agreements, it’s always in your best interest to have an experienced business lawyer provide assistance during the contract negotiation process.
Step 3: Create a System to Measure Vendor Risks and Performance
How well are your vendors performing? Are they holding up their end of the deal?
These questions can be surprisingly difficult to answer if you don’t have a system in place for tracking performance. To ensure success, follow best practices like:
- Establish KPIs to measure the most important success metrics
- Make sure your vendor clearly understands the KPIs you’re tracking
- Set realistic expectations for vendor performance
- Use software to track KPIs and measure performance
- Identify potential risks using a scoring method
- Periodically review your vendor policies for risk mitigation
- Establish policies for financial risk management, data risk management, security risk management, and reputation risk management
- Obtain SOC (service organization controls) reports from an independent CPA
Ultimately, these best practices will help limit and mitigate risks and threats for your business as it pertains to vendor relationship management.
Step 4: Build Strong Relationships With Vendors
Establishing a close partnership with vendors is an important aspect of maintaining long-term working relationships.
You don’t want to go through lots of churn or trial-and-error with vendors, so it’s important to see them as a partner in your success—and you want them to view your business the same way.
Some best practices for building vendor relationships include:
- Create a formal vendor onboarding process with clear expectations
- Establish mutually beneficial partnerships and goals
- Take steps to build trust
- Offer room for flexibility and improvement
- Make sure both parties are transparent with each other
- Create information-sharing rules and procedures
Ultimately, you want to set your vendors up for success. As soon as you start viewing them as a strategic partner, the easier this becomes.
As these relationships start to develop over time, you can eventually start to challenge your vendors to be more innovative and improve quality. These types of conversations can’t happen unless you’ve already established a strong, respectful, and mutually beneficial working relationship with your vendors.
Step 5: Prepare For Vendor Termination
While nobody likes to think about terminating partnerships before they get started, a clean exit strategy is a crucial part of managing the vendor lifecycle.
To prevent potential problems down the road, your business should prepare for this ahead of time.
There are lots of different reasons why vendor relationships end. It could be due to price increases, contracts ending, compliance issues, a supplier going out of business, or something else. But regardless of the reason, how will you handle these situations if and when they arise?
Here are some best practices to consider here:
- Establish exit provisions in your vendor contract
- Include review terms and semiannual updates for due diligence provisions
- Ensure transparency at each stage of the contract lifecycle
- Keep accurate and organized records
- Make sure you have solid grounds to terminate the agreement based on the contract terms
You should also consider a termination checklist. When a vendor relationship ends, you don’t want there to be chaos that exposes your company to potential risks.
For example, you might require the vendor to return all inventory records, sign confidentiality agreements, safely return all collected data, relinquish access to software systems, and more. While these situations can be awkward, it’s important to have a termination process in place that ensures a smooth transition.