How to Set Up a Vendor Contract Management Process

Vendor management is a critical process that can directly affect business performance. Failing to do it properly may lead to poor internal processes, losing control of systems, or becoming unable to deliver obligations to partners or customers. When choosing vendors for daily operations or providing goods and services to your organization, it plays a crucial role. Here’s how vendor management may affect your business:

  • The quality of products/services and their timely delivery can increase or decrease customer complaints and refunds.
  • The right supplier can give your business a competitive edge in terms of pricing, product consistency, or unique service features.
  • New customers, product or industry news, and advice can come from your vendor.

Smartly choosing and managing vendor relationships can help you achieve a company’s goals. At the same time, you can harness opportunities for cost savings, speeding up operations, and avoiding business issues.

How to Build a Successful Vendor Selection Process

Choosing the right vendor is never an easy task. Here’s a five-step plan that should make it easier for you.

Analyze your business requirements

You should always follow this simple golden rule: When you implement or use any service, start by analyzing your business needs. There are so many providers of goods and services, as well as technology vendors with different offers and price ranges, that you can easily get lost. You may need vendors for different reasons, whether it’s a raw materials supplier or an HR firm that finds someone to fill a vacancy. Analyze whether you need a long-term partnership or if it’s just a one-time collaboration, how much you’re ready to pay, and how fast your needs should be satisfied. 

To accomplish this, you’ll want to define the business and technical requirements of you or a particular department. It will help you to specify the requirements for the vendor while greatly simplifying the selection process.

Search for vendors

Identifying the business and vendor requirements will help you shorten the list of potential vendors. Once you have the list, don’t forget that not all of them may be suitable for your needs. Use the information you gathered from your research and interviews to select the ones you want to send a Request for Information (RFI) letter. This will help you create a shortlist of vendors.

Write a Request for Proposal and a Request for Quotation

The next step is to write a Request for Quotation (RFQ) or a Request for Proposal (RFP). Make sure to include any submission details, an introduction and executive summary, an overview and background of the business, specifications, and selection criteria. Any offers you receive in response will allow you to compare prices, skills, strengths, and weaknesses without spending additional time on research.

Evaluate proposals & select a vendor

After receiving proposals, reviewing them, discussing them with your team, and evaluating how each vendor satisfies your needs, your shortlist will become even shorter. You might even be able to select a winner that seems like the best fit. 

But some service providers tend to sell non-existing features and workflows, so we recommend asking them to show you a pre-built, tailored scenario after you receive a demo. This will help you know for certain that the chosen provider will cover the tasks you’ll collaborate with them for.

Create a contract negotiation strategy

Once you’ve chosen a vendor, there are still terms and conditions to discuss. Begin with a checklist of what you expect from the vendor, define your milestones and timeframes, and discuss terms for termination, renewal, and reporting. If you have any special requests, let them know. This will clarify matters for both parties and help establish trust and credibility, which in turn may help you get favorable rates and maximize the deal.

Vendor Contracts (aka Vendor Agreements)

A vendor contract or vendor agreement is a contract between two parties that provides an exchange of goods or services in return for some form of reward. It lays out the entire business relationship, including terms, conditions, and each party’s obligations. 

The main purpose of this type of contract is to regulate how parties interact. It indicates how deliverables and payments should be fulfilled, as well as the consequences for broken obligations. Vendor contracts cover different types of day-to-day operations as well as various events and one-time activities. 

What is Vendor Contract Management?

Vendor management is the process of initiating and developing relationships with service providers and goods suppliers. This complicated aspect of the job has to be done efficiently to ensure that goods and services are delivered on time while minimizing risk to the supply chain. Moreover, effective vendor management can help you build good relationships with vendors, as well as access better terms of cooperation or special offers. 

Here’s just a sample of what’s possible:

  • Discounts and special offers: This could take the form of a discount for some specific number bought, such as every 5th or 10th order. Or since you’re doing business with a vendor, one of their partners may provide discounts or services.
  • Free workshops: Along the way, your vendor will likely improve its services and software. Major changes might necessitate supplementary training for your employees, but vendors may provide such sessions for free for partners they value.
  • Special Pricing Agreements (SPAs): Many industries commonly use these agreements. Such agreements mean that the manufacturer supplies products to a distributor at a special reduced price.
  • Free trials: If your vendor launches a new service, it might offer you the chance to try it for free. This kills three birds with one stone: you learn if it’s useful for you, they gain user feedback, and they discover whether their new service has a potential user.
  • Free delivery: If your supplier always gets their payment on time, and you’re a reliable partner and a stable income source, you might receive free delivery. 

This is just the tip of the iceberg. There are many more benefits you can get from a reliable partnership: vendor discounts, reduced costs, free feedback, sharing ideas, brainstorming, and more. Leveraged wisely, these will help both partners work more efficiently. Lastly, good communication, fast issue resolution, and streamlined processes will reduce delays and quality concerns, thereby increasing customer satisfaction.

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Risks sprouting from poor vendor contract management

Vendor contract management includes creating, negotiating, agreeing, storing, and tracking contracts so that legal, procurement, and finance teams can manage risk and renewals. However, poor vendor management may lead to a number of risks:

  • Strategic risk: Some actions and decisions by vendors you work with may not meet your strategic goals. For example, if they don’t allocate enough resources to meet their obligations. 
  • Operational risk: If a vendor fails to resolve issues promptly or control internal processes properly, this may result in poor performance or downtime.
  • Compliance and regulatory risk: This happens when a third-party vendor fails to comply with laws and regulatory requirements that govern the products and services your company provides. Also, it may occur if they do not operate according to your organization’s policies, procedures, and standards.
  • Financial risk: If a supplier does not fulfill their obligations like they should, or vice versa, it may lead to financial losses. For instance, if you haven’t received some tools necessary for your job by the date stipulated, or if you forget about the billing date, you may not be able to meet your obligations.
  • Reputation risk: Third-party vendors can damage your reputation directly or indirectly. This can be due to a lack of deliverability, a drop in quality, or poor customer experiences. As an example, let’s assume that some company failed to efficiently manage the supplier agreement, causing them to miss the billing date and not receive the goods from the supplier on time. This delay leads to customers not getting what they ordered, which in turn results in a loss of reputation. 

Establishing proper vendor contract management may help you minimize the possibility of these risks. But it also has its issues.

Possible Issues in Managing Vendor Contracts

Usually, there’s more than one third-party vendor company to work with. There can be service providers, consultants and advisors, short and long-term contractors, and delivery companies. Additionally, some of them may work with different departments or business branches using various contracts. Without a doubt, there are a lot of documents to deal with. Managing an endless number of them is a hard task, and if you do it manually, it can be a real nightmare.

Manual approaches have the following issues:

  • Manual document exchange usually requires multiple tools for negotiations and redlining. Many of us are familiar with the endless cycle of sending emails back and forth, sharing spreadsheets, and downloading or uploading files. This is time-consuming and non-transparent, meaning you never know who made the changes and why.
  • Contracts are stored across different locations. This makes it difficult to find and monitor key dates, terms, and other important information. 
  • Amendments can prove challenging. Due to the lack of side-by-side collaboration, you can’t edit, comment, or work on different versions of contracts with several people in real time. And it’s impossible to track all changes and reasons why they were made. Using this approach, you can easily become lost among versions and accidentally use the wrong one.
  • Needing to copy-paste data each time you need a new contract. In different documents with the same parties, you often use information that was previously used. If you at least have a digital version of the contract, this is progress, but it’s much more inconvenient if you have only a paper version…

To be more specific, here’s how these issues may affect vendor agreements.

Too many contracts for one vendor

If you don’t have complete control of your vendor agreements, it may lead to situations when you have multiple agreements with one vendor from different departments. This can result in inconsistent provisions, poor tracking, and even missed price opportunities.

Chaos in terms and responsible parties

When different departments have to develop and negotiate supplier agreements with vendors, managers may not be aware of some critical terms that should be included. This also creates a mess with regards to who should add information to the contract, when, and whether they have the latest version. 

As a result, the whole process may take much longer than it really needs, putting your organization at risk if the contract doesn’t include certain points. This may be a proper agreement on sensitive information, personal data protection, or the right to audit. 

Missed key dates

If we’re discussing vendor contract management issues, we have to mention missed key dates. When critical data isn’t at hand, you can easily forget about terminating contracts you weren’t going to renew.  Nevertheless, once this happens, you may be forced into another period of working with a supplier or on terms that don’t meet your expectations.

These issues and risks may sound somewhat scary, and vendor contract management might seem like a very hard task. And it really is. Nevertheless, the right tool, such as contract lifecycle management solutions, can mitigate risks and simplify workflows.

Key Features CLM Needs for Managing Vendor Agreements

Contract lifecycle management platforms can be a great help with vendor agreements if they have a particular set of features. Here’s the list of functions we recommend you pay attention to when looking for a CLM system:

  • Centralized repository: Make sure you can keep all your contracts in one place, whether they’re new or legacy contracts. This will help you analyze and report contracts, as well as quickly check information such as payment dates or shipment terms. 
  • Real-time collaboration: CLM should have a tool that allows you to collaborate on documents with other people simultaneously. You’ll be able to edit, comment, and work on different versions with several people in real time (and from multiple locations). This drastically improves negotiation and version control.
  • Self-service: Some contracts are frequently used as part of vendor partnerships, such as MSAs. Having a self-service function allows business teams to create simple documents using pre-approved templates without needing to involve legal teams.
  • Automated reminders: Set up automatic notifications so you won’t miss any key dates. You’ll avoid costly auto-renewals, and you’ll gain valuable time to prepare for renegotiating terms.
  • Seamless export/import to and from Word or PDF: Not all vendors use legal tech for contract creation. Some use MS Word and MS Word online. As a result, you may receive many Word documents. That’s why it’s important to have a CLM with the ability to export/import documents. Also, check to see if the CLM is able to compare versions created outside the platform with versions created on the platform.
  • Projects: Vendor agreements can quickly grow in volume. You should be able to sort them into dedicated folders so that you have them all stored in one place. For example, you should be able to create a separate project for each vendor and store their contracts in folders. This is quite useful for when you have a series of documents for a single counterparty or if you want to save information for further use.
  • Smart search: We’d also recommend you pay attention to the search capabilities of CLM solutions. For example, in AXDRAFT, search can be done using metadata, names, tags, or text. This greatly simplifies and accelerates searches for documents.

These features may help you establish an efficient vendor management process.

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Best Practices

Vendor management best practices may help you get the most from business relationships. These methods will allow you to better choose and monitor vendors, reduce risk, and improve performance.

Establish a Clear Vendor Management Policy

The best way to establish a policy is by creating a document that will inform the board and senior management about activities related to vendor management. To do so, establish a purchasing committee that includes a unit manager, a vendor manager, and other stakeholders. Also, outline management oversight standards and create a vendor selection and review process. Vendor strategies should align with the company’s overall strategy, which means KPIs must also be set.

Use KPIs to measure and monitor vendor performance

KPIs are established to measure vendor performance and to see how they meet your needs. Monitoring KPIs helps improve and revise workflows, as well as business goals, based on market conditions. Review them regularly and adjust if necessary. Vendors should be aware of these metrics so that they can meet your expectations. That’s why you should make sure contracts clearly outline vendor responsibilities.

Foster vendor collaboration

Naturally you should always be clear about what you expect from vendors, and how you monitor their performance. At the same time, try to build a strong relationship with your partner. Here are a few tips on how to do so:

  • Don’t forget there are two parties to the contract: Discuss what it takes from their side to reach the desirable result, discuss planning and timelines, and factor in their needs and methods.
  • Pay on time: Make this your priority so that you’re seen as a reliable customer. If, for some reason, you can’t do this on time, then let your vendor know the exact date of when you’ll be able to pay.
  • Communicate: Explain any business processes your vendor needs to know, inform them about important changes, and introduce them to people they will work with.

These simple tips can help you to build a win-win partnership for both sides.

Leverage contract lifecycle management solutions

Keeping all your vendor contracts under one roof makes them easy to access, analyze, and report. Use a CLM to improve your negotiations cycles, evaluate contract performance, and track KPIs to attain the best results. Schedule reminders so that you stay up to date on key deadlines. Implementing role-based access will protect your information much better than any file cabinet.

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Conclusion

Managing vendor contracts is an important task, but it’s not that easy. When trying to gain control over those agreements, organizations may try different tools, but decentralized solutions such as spreadsheets lack the speed, visibility, efficiency, collaboration, and easy access to documents.

Contract lifecycle management solutions simplify the entire process. As mentioned above, the solution must be custom-tailored to your needs. With AXDRAFT, you can choose the necessary features you’ll use, as well as customize your dashboard so that it’s in line with your internal processes. In addition, all company units can use AXDRAFT, and mastering can occur within just a matter of hours. Drop us a line or book a demo if you’d like to discuss how we can improve your vendor contract management.

FAQ

How do you manage contract renewals?

Contract renewals require multiple steps to be carried out. This can include:

  • Recording all contract dates
  • Reviewing your contracts ahead of time
  • Negotiating from the strongest possible position
  • Refining the contract
  • Leveraging contract lifecycle management automation
What is the contract renewal process?

This is the process when parties to a contract agree to ‘renew’ the terms of a contract after it expires. Renewals continue the arrangements, making the contract enforceable for the new period.

How do I initiate a contract renewal?

If your contract doesn’t renew automatically, you’ll need to initiate a contract renewal offer to the counterparty.

What is the contract management process?

The contract management process is the series of steps related to managing a contract’s creation, execution, and analysis to maximize operational and financial performance while reducing financial risk.

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