All businesses contract with vendors and service providers, either routinely or periodically, for services that they can not do themselves. This can be anything from contracting with a payroll company to process your payroll, to a beverage company that stocks your soda machine.
But all vendors, regardless of how routine or “unrisky” they may appear, should be evaluated and monitored through your risk management process.
Failure to execute due diligence and adequately manage your vendors can result in over-spending, non-compliance, violation of service level agreements (SLAs), and more. These outcomes can all be avoided through proper contract management, which includes budgeting, project oversight, and effective communication.
Vendor lifecycle management is now considered a core component of enterprise risk management for successful organizations. Applied properly, it can facilitate greater value from your vendors, reduction of risk, and maintenance of quality and compliance standards.
Today we’re going to share tips on how you can succeed at vendor contract management. First, let’s clarify what we mean by the term itself.
What is vendor contract management?
Vendor contract management is a key part of the overall vendor management lifecycle. It refers to how vendor service agreements are monitored from start to finish.
While the exact process may vary from one organization to the next, the vendor contract lifecycle broadly looks something like this:
- Sourcing vendors
- Contract Negotiations
- Vendor Performance
How do you manage vendors effectively?
Regular measurement and analysis of key performance indicators (KPIs) should include:
- Routine tracking and scheduled evaluation
- Emphasis on uncorrected performance issues
- Measures that show the correlation between vendor performance and business success
- A threshold for triggering a review of repeated failure to maintain contractual obligations or underperformance.
- Methods for improving a distressed vendor relationship
The key to improving and optimizing your vendor relationships is for the contract manager to maintain as much visibility into the vendors’ performance as possible. In doing this, it’s easier to find areas where workflows can be optimized, or where miscommunications happen, and then create a path to improvement.
Without the right tools to clear away “silos” that keep important information cloistered from other parts of the enterprise, or tools to automate manual processes, gaining the visibility you need will be difficult.
What should be in a vendor contract?
Several items should be specified in a vendor contract and monitored by stakeholders throughout the contract lifecycle. Let’s take a look at those now.
One of the most important parts of vendor contract management is performance management. This means you should define the KPIs (key performance indicators) that specify the expectations for your vendor.
Without KPIs, there is no clear way to measure performance and evaluate what went well and what failed, and little chance for a floundering vendor relationship to improve.
Vendor KPIs might include:
- Service level agreements (SLAs)
- Other contractual obligations
- User satisfaction
These metrics should be clearly specified in the contract, reviewed during onboarding, measured throughout the lifecycle, and reviewed routinely so that corrective measures can be taken before excessive damage is done.
Another critical part of vendor contract management is to incorporate risk management protocols into your vendor contract and to monitor adherence to these protocols. You also need to have contingency plans in place to manage non-compliance.
It is vital that your organization understand all of the risks involved in doing business, including those that pertain to your supplier relationships. Furthermore, those vendors in your supply chain that bring more risk should be monitored more frequently.
The best risk management plans outline all potential outcomes, as well as mitigation plans for each risk. You can learn more about creating a third-party vendor risk management plan in the blog post linked here.
Once this plan is in motion, it should be monitored with the help of a contract management system, and then updated and revised as your vendors and business operations change.
Visibility Into Spend
Your vendor contract information should include pricing, budgetary requirements, and spending limits. How the budget is allocated toward vendors and their performance should be analyzed annually or quarterly, to assure effective ROI for the company.
Furthermore, spell out budgetary constraints in a contract and then routinely monitor vendor activity to assure compliance. That’s the best way to avoid overspending that can result in a large financial failure later on down the road.
All spending data should be collected from all types of transactions, given a description, and then organized in a central repository so the information can be easily studied later when evaluating vendor performance and budget.
Use a contract management solution that allows you to visualize your spend data across vendors, and that provides detailed reports and forecasting so you can take greater control over your vendor contract management.
While this might be less obvious to include, collaboration between your organization and your suppliers will help reinforce effective communication in your vendor relationships.
Many executives worry about which information can be shared between a vendor and an organization without breaking risk compliance protocols. Others are concerned that by sharing operational and financial details, the organization puts itself in a weaker negotiating position.
Those fears aren’t unfounded, but they can be sated by specifying the terms of collaboration and which information can be shared within the vendor contract.
Sharing ideas, tools, and strategies can add value and result in cost savings for both parties. Using contract management software to manage communications with vendors can help to mitigate concerns over sharing data.
What types of tools/software can help me manage vendor contracts?
Conducting your due diligence manually via spreadsheets can result in a number of security risks, and consumes time, effort, and expense that could be better applied in other areas of your business.
By using cloud-based vendor risk management software, you can have greater visibility and control in your vendor relationship by using automation to carry out much of the governance, risk, compliance, and vendor management duties that you would otherwise be monitoring yourself.
With ZenGRC you can streamline the contract management lifecycle and remove all of the headaches and uncertainty involved in vendor risk management.
Its continuous monitoring features ensure your management team is always on top of your third-parties’ compliance requirements. Zen keeps track of vendors’ compliance with multiple frameworks and provides continuous auditing in a few clicks.
Its user-friendly dashboards show you in a glance who is compliant and who isn’t, so your team can focus on providing more value to your customers.
Ready for a free consultation? Reach out today.