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3 Tips for Effective Vendor Contract Management

Contract Basics

There is no external party more directly tied to your business’s success than your vendors: from office support to software to key parts and equipment and so much more, businesses rely on third-party vendors for a wide variety of services and supplies.

In theory, this sort of arrangement seems simple: find a provider who can fulfill a key task or deliver necessary goods faster, cheaper and/or at a higher volume than makes business sense to do internally, come to an agreement on deliverables and costs, and you’re all set. In reality, though, vendor management is a much more complicated prospect.

First, consider the volume of vendors most companies deal with: while smaller businesses may outsource to a manageable number of providers, it’s not uncommon for large companies to rely on goods and services from a vendor network consisting of tens, if not hundreds, of thousands of providers around the globe. Without a process in place, this can quickly become an unwieldy task.

Secondly, vendor relationships are rarely as simple as just delivering goods. From third-party compliance requirements to the management of issues such as delayed or inaccurate shipments, goods or services that do not meet acceptable standards, countless risks and complications can arise in dealing with external providers.

Considering that one McKinsey review found that it’s common for businesses to have as much as 90 percent of revenues tied to vendor contracts, it’s crucial that enterprises get these key relationships right. And yet so many businesses don’t: according to a global study, a third of companies don’t evaluate third-party providers at all before engaging with them, and 11 percent don’t even know how many third party vendors they are working with.

Putting in place clear processes for each stage of vendor engagement is an important way to reduce risks and ensure that you drive the maximum value out of your supplier relationship.

Here are 3 tips for creating an effective vendor management system.

1. Have a clear planning process

There are two ways to approach the decision to bring on a vendor to fulfill your needs: the first is reactive, or finding and onboarding a supplier only once a need arises. The second is strategic – determining a need before it becomes pressing and putting a process in place for fulling it in a timely manner. While there may be times when you need to seek out a vendor reactively – for example, an essential piece of machinery breaks and your existing supplier can’t fix or replace it – there are numerous advantages to approaching outsourced goods and services in a more strategic way whenever possible.

Firstly, the more knowledge you have of the market and existing offerings and the more time you have to consider the performance of past vendor agreements that are similar, the better you can gauge the value of a vendor proposal in terms of both costs and deliverables. You can also reduce risks such as conflicts of interest and establish methods for spotting providers who may not be able to follow through as promised. Planning means you also have plenty of time to determine compliance requirements and any other specifications that may affect your choice of a vendor. This should include checking any state or federal rules, industry-specific regulatory bodies and any internal requirements. Having a planning process in place also allows you to establish any other evaluation criteria up front so that you have a clear method for assessing and comparing providers.

2. Get it in writing

Once you’ve evaluated candidates and found the right fit, it’s important to get your agreement down on paper in the form of a contract and/or statement of work. A contract describes the duties and obligations you and your vendor have towards each other under your working agreement. In some cases, a secondary document, called a statement of work, may lay out the specific details of the work to be performed. While businesses may use a single contract to govern vendor relationships, it’s also not uncommon for businesses to have an overriding vendor contract which lays out the full terms of the relationship and then create new statements of work to detail the specifics of each new project. Either way, if properly executed, these documents will become a legally-binding roadmap for your vendor relationship.

Why is it important to get it all in legal document form? Because in order for all parties to deliver as expected, there needs to be a concrete outline of what each party needs to do to satisfy their side of the deal. In addition to the deliverables and costs, a contract might also include terms about confidentiality, competitive work and other matters.

Vendor contracts don’t only have to deal with worst-case scenarios: you might want to consider using incentives for finishing early or other desirable outcomes or ask your vendor for a discount should you increase your order or be able to meet shorter payment terms.

3. Don’t sign it and forget it

Once signed, your contract is an enforceable document, with party legally on the hook for their obligations therein. As such, your contract itself is an important vendor management tool that should be readily accessible to key stakeholders. While it’s helpful to have a secure central contract repository for all company contracts, it’s also important those responsible for managing vendor relationships can reference contracts as needed. Whether routinely as part of an ongoing performance monitoring plan — a must to ensure that deadlines, deliverables, and other milestones and requirement are all met — or as one-off questions or problems arise. One easy way to enable this access is to look for contract lifecycle management software that offers permission-based user roles, so that those involved in contract execution may reference agreements whenever they need to. Automated reminders within contract management software can also take some of the work out of remembering to ensure that everything within your agreement – including deciding to renew or terminate your agreement when the time comes – happens when it should. 

The Master Checklist for Contract Review & Management

Tips and best practices for a successful contract management process.

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