A Guide to Cost-Effectively Monitoring Vendor Contracts
Even large companies can’t always handle every project internally. Developing relationships with vendors is an inevitable aspect of smooth business operations for many executives. You’ve likely heard horror stories about wasted funds and failed projects. Setting up a strong vendor management program and clear expectations can lead to your company achieving the value and performance outcomes needed from vendor contracts.
Negotiate Carefully From the Start
Medical professionals may say, “An ounce of prevention is worth a pound of cure,” while sports fans prefer, “The best defense is a strong offense.” Whichever idiom you like, the point is the same: Paying attention at the outset of a project can help you avoid problems down the road.
What this means for vendor contract management is applying thoughtful strategy to vendor procurement and project negotiation. Setting clear expectations from the RFP stage onward sets your company up to select a partner with the right qualifications.
In addition to negotiating numbers, it’s also critical to evaluate a potential vendor’s experience. Can they provide case studies of similar, successful projects? Can they demonstrate that they have the staff bandwidth and resources, or do they only promise that they will when they have your project in hand? Finding a capable vendor and making project expectations clear early might be the difference between project success and failure (and a potentially astronomical sunk cost).
Build Flexibility Into Contracts
Companies hoping to cultivate price-competitive relationships with vendors should make flexibility a priority. The more a contract boxes a vendor into adhering to particular methods, materials, or other limitations, the less room they have to innovate without breaching the agreement.
Agility may be especially important for software service providers and other vendors in rapidly-updating fields. Even for vendors with time-tested materials and strategies, it can be good to allow some flexibility in certain areas. In some cases, a vendor may be working to create an innovative deliverable, and it can be difficult to articulate final parameters precisely. A complex project may require a collaborative approach, with the vendor contributing expertise that the company lacks, or taking a more proactive approach to project coordination and adaptation. Safeguarding contracts against risk is important, too, but avoiding unnecessary bureaucracy can let vendors implement stages of a project more quickly and cost-effectively.
Consider Length of Term
Signing a vendor into a long-term contract has its advantages. The process of screening potential vendors, negotiating a contract, and on-boarding a new vendor partner can be lengthy and costly in itself. It makes sense to lock in a relationship with a reliable vendor, especially one that provides high quality services for a fair price.At a certain point, a long contract term length can also come with some drawbacks. Elements of flexibility, technological advancement considerations, or ongoing performance standards can be hard to predict or define more than a few years out. Defining the length of a contract term is a strategic decision that involves consideration of the company’s ongoing needs and the vendor’s ability to innovate and continue to maintain quality standards while keeping to the original, agreed-upon scope.
Maintain Ongoing, Organized Documentation
When it comes to managing a major project, a (virtual) paper trail can be a critical asset. If a project begins to encounter challenges, you want documentation that can show what went wrong and which party (if applicable) should be held accountable. Without adequate documentation, a substantial amount of time may pass before a mistake becomes apparent. Neglected problems don’t tend to resolve on their own. Instead, they can snowball into catastrophic proportions, wasting significant funds and possibly compromising the entire project.
A non-exhaustive list of documents to manage throughout the project include:
Statement of work
NDA or any other applicable confidentiality agreement
Finalized contract, signed by all parties
Any applicable materials for subcontracted parties
Data reports (cost reports, quality metrics, etc.)
Involve Multiple Tiers of Leadership
The Coast Guard abandoned a project to launch an electronic medical records system, stating that after five years, the Coast Guard had too many concerns about the project’s viability, time frame, and cost. The failed project cost over $60 million over the course of seven years, and may still continue to accrue costs for services like equipment removal.Although the failed project was cancelled in 2015, it’s receiving renewed attention (and criticism from members of Congress) because the U.S. Government Accountability Office determined that serious mismanagement by the Coast Guard contributed to the failure.
Ideally, you’ll invest time and resources to develop an internal vendor management team that specializes in mitigating risk, monitoring performance, and keeping the vendor relationship running smoothly. Thorough vendor management should also involve regular or periodic supervision from:
Understand Different Roles of Vendor Management
Treating all vendor relationships alike is a mistake. While all vendor contracts should involve some oversight, certain types of vendors will require a more hands-on approach than others. Service vendors, for example, may be more relationship-oriented and need more information about a company’s strategy and goals than a vendor providing hardware.
Vendor management also attends to more than one group’s needs. Vendors need clear guidance, evaluation, communication, and feedback. Client stakeholders, who may have been accustomed to much more transparency when projects were handled in-house, need briefings and explanations for any new metrics that will inform them about project progress. Vendor managers, as described in one guide from Gartner, act as a hub between vendors, company reps, and stakeholders, melding often-conflicting requirements and priorities into an actionable plan.