Given the range of services modern businesses depend on, it’s not surprising that most organizations work with at least some qualified vendors to help direct business processes, provide access to advanced software, and better meet the expectations of their customers. This outsourcing strategy allows companies to leverage specialized skills and technologies, often at a lower cost than if they were to develop these capabilities in-house. By utilizing third-party vendors, businesses can focus on their core competencies, while external experts handle non-core functions such as IT support, logistics, manufacturing, and even customer service
Unfortunately, coordinating various vendors and other third parties can be an extremely complex endeavor. To help ensure that all suppliers and partner relationships contribute effectively to the organization's overall goals, successful companies turn to vendor management.
Vendor management is a broad banner, encompassing essentially all of the activities that an organization may engage in when interacting with its suppliers. These activities may include vendor sourcing and appraisal, contract creation and agreement, KPI and goal establishment, tracking, reporting, reviewing, security testing, risk mitigation, and dispute resolution.
Depending on its specific industry, focus, and customer base, a modern organization may work with potentially hundreds of vendors across a diverse range of markets. Each of these vendors must be approached as a unique entity, carrying with it its own pay rates, contract terms, and points of contact. As such, managing these vendor relationships can be an extremely complex task. Vendor management organizes these relationships, providing companies with tools and other resources for selecting and working with vendors to meet unique business needs. And while vendor management is clearly focused on improving vendor selection and ensuring supply chain consistency and reliability, when properly utilized it can lead to many other advantages as well.
Vendor management organizes these relationships, providing companies with tools and other resources for selecting and working with vendors to meet unique business needs. And while vendor management is clearly focused on improving vendor selection and ensuring supply chain consistency and reliability, when properly utilized it can lead to many other advantages as well.
There are a range of benefits to improving and managing supplier relationships. Here, we further explore several key advantages of incorporating an effective vendor management solution.
Incorporating clear business criteria and providing a centralized location in which to compare supplier information, vendor management gives organizations the reliable data necessary for choosing the best-possible vendors to meet their needs.
Manually managing every supplier can be extremely time consuming and labor-intensive. Vendor management not only streamlines the entire process, allowing businesses to reduce the time spent on individual vendor-transaction lifecycles, but also tracks supplier performance against established service level agreement (SLAs). Finally, the vendor management can help reduce additional recruiting and training costs while also eliminating rogue spend. Together, these advantages mean improved productivity on both sides, and fewer costs.
If not properly conducted, vendor onboarding can negatively impact productivity and increase operational costs. Vendor management speeds up the entire onboarding process, helping businesses capture and organize relevant vendor information for faster, more-accurate supplier approval.
Properly applied, vendor management brings all relevant vendor data into a single platform. This not only assists in organizing and managing vendors, but it also makes valuable process and operational data available for analysis. With advanced analytics and reporting options, organizations can more easily detect and anticipate needs, opportunities, and potential issues.
Unfortunately, sometimes vendors simply do not meet expectations in terms of performance or compliance, creating inefficiencies, delays, and potentially-damaging legal issues. Vendor management provides a resource in which businesses can automatically store and review vendor performance, allowing them to cut ties with suppliers who might pose future risk. On the business’ side, vendor management can help ensure that all vital paperwork is completed, proper approvals are detailed and followed up on, relevant changes and licensing requirements are being brought to the right people, and that a clear audit trail is always available.
A large part of managing vendors is building productive working relationships. Vendor management keeps every aspect of every vendor relationship fully organized and easily available to authorized individuals within the organization. As a result, every vendor can be managed on a more personal level, with the right attention paid to essential details, no matter how many vendors the organization works with overall. And, by improving supplier relationships, companies can often negotiate for better rates.
The right approach to vendor management offers many advantages. That said, it also carries with it certain challenges. Successfully overcoming these obstacles is a prerequisite for maintaining a strong vendor management system (VMS):
- Establishing strong vendor relationships
One common challenge is the difficulty of building strong, cooperative relationships with vendors. A healthy relationship can lead to better pricing, higher quality goods and services, and improved cooperation during times of dispute or negotiation. To help build the trust that these kinds of relationships depend on, companies should focus on regularly communicating with their vendors, sharing performance metrics, and involving them in strategy discussions. This creates a more transparent atmosphere that nurtures mutual respect.
- Tracking vendor performance
Vendors may not be employees (in the strictest sense), but their performance still needs to be measured and evaluated. Without an effective tracking system in place, it's difficult to assess whether vendors are meeting their contractual obligations. Implementing specialized software for tracking performance metrics is the answer. These systems help in maintaining records of adherence SLAs, providing a clear view of each vendor's performance.
- Ensuring that all contracts and documentation are managed correctly
Mismanagement of important documents can lead to contractual disputes, financial losses, and even legal repercussions. Digital contract management tools help streamline the process of storing, accessing, and updating contracts. These can also be set to provide reminders for contract renewals or reviews, ensuring that all agreements are fully up to date.
- Personalizing the vendor onboarding process
Basic vendor onboarding processes may involve standardized procedures that fail to address the specific needs of certain suppliers. Personalizing the onboarding experience can improve vendor satisfaction and cooperation. This can be achieved by developing tailored onboarding programs that consider the specific products, services, and operational roles of each vendor. Likewise, creating a dedicated support team can help address any vendor-specific concerns.
- Securing vendor compliance
Vendor relationships only work when the vendors adhere to established regulatory standards and company requirements for doing business. Businesses can prioritize this need by conducting regular audits and providing compliance training sessions for suppliers.
To help achieve vendor excellence, there are several vital metrics that must be closely monitored. This includes the following:
How much money is an organization spending with each vendor annually? Improved visibility into spend can help businesses identify areas where they may be applying resources without seeing the associated returns.
Often, organizations will categorize vendors into the following groups: Key vendors (high-value; single-source), important vendors (mid-value; multiple-sources), and tactical vendors (low-value; many-sources). Seeing each vendor segmented and quantified helps provide a more-clear idea of which vendors are essential and which are not.
Are the materials being produced and delivered in compliance with established regulations and industry standards? Keeping track of non-compliance issues can provide greater insight into the risk represented by a particular supplier. This is most effective when it is included as part of a comprehensive third-party risk management program.
An effective vendor management process consists of seven individual steps.
Before making any formal agreements with suppliers, the first step in vendor management is determining business needs and goals. With clear goals in place, requirements of relevant business units can be established, possibly including creating a dedicated vendor management team. This will help ensure full adoption, and eliminate the risk of duplicated effort.
With businesses needs and responsibilities firmly established, the next step is to begin considering vendors. Establish selection criteria for evaluating potential vendors, including cost and non-cost factors. Assess any submitted proposals, and consider the scope of work, pricing, renewal dates, and any other important factors. The evaluation process should be as comprehensive as possible to ensure the best possible chance of working with only top-quality vendors.
Before any contract negotiation begins, conduct due diligence to identify any potential risks associated with the selected vendors. This must include assessing the vendor’s financial stability, legal standing, compliance with industry regulations, data security practices, and reputation in the market. Due diligence may also include reviewing audits, certifications, or past performance records.
Traditionally, contract negotiation has fallen to legal, finance, and sales teams, with the business units who will fulfill on the contracts only becoming involved once the agreement has been finalized. Effective vendor management instead brings these units into the negotiation process much earlier, including all relevant stakeholders in the early decision-making processes. Contract negotiation will define the goods and services being provided, as well as start and end dates.
After contracts have been negotiated, the selected vendors must be set up as approved suppliers within the company systems. This includes collecting documentation, approvals, and other details, such as relevant licenses, insurance details, and tax information. Adequate onboarding helps maintain compliance standards, and ensures that the supplier can be legally paid for their service.
As the organization begins to do business with the vendor, they must keep a close eye on results. Comparing vendor performance against established KPIs, and identifying and resolving potential issues before they develop into problems will help ensure consistency and reliability in supply chains.
Going hand in hand with the previous step, monitoring performance helps organizations identify potentially-damaging vendor risks, such as data security weaknesses, lawsuits, and compliance issues. Vendor performance can disrupt vital operations and damage a business' reputation, making this step an important part of proper vendor management.
As current contracts reach their end dates, effective vendor management provides a clear path and proven processes for closing out or renewing contracts. These processes must be followed to ensure strict compliance and protect the business and the vendor from subsequent legal repercussions.
Because ‘vendor management’ is such a broad term, the range of available vendor management systems—and their capabilities—is likewise expansive. When choosing a VMS, consider those that provide the following capabilities:
Support and training
Vendor management systems should offer support options to help users understand the software and how best to employ its capabilities. This may include training modules, hands-on tutorials, or detailed documentation. Responsive customer support services are likewise beneficial, as they can be an effective way to quickly resolve any issues that may arise.
Vendor onboarding
A streamlined vendor onboarding process is essential for quickly and efficiently integrating new suppliers into the organization’s supply chain. This includes automated workflows to capture vendor data, verify credentials, and ensure that all necessary documentation is completed and compliant.
Self-service portals
Self-service portals allow vendors to manage their information, submit invoices, and track payments independently. This reduces the administrative burden on the organization while also improving transaction speed and data accuracy.
Cost control
One of the primary advantages of vendor management is increased cost control. This can be established through improved ability to identify opportunities, eliminate redundant or unnecessary expenses, narrow down supplier options, and negotiate better rates.
Performance tracking
Effective management systems include tools to track and evaluate vendor performance against agreed-upon benchmarks. This helps organizations ensure that their vendors meet all performance standards, leading to better quality products and services.
Benefits realization
With so much riding on results, it is important to keep the terms of the vendor contract firmly in mind. At the same time, vendor management should streamline internal processes to help businesses reach their goals more quickly and consistently.
Payment functionality
Including automated payment systems within a VMS can ensure timely payments to vendors, enhance trust, and reduce administrative burden. Integrating with payment gateways further simplifies the process.
Supply chain resilience
Unexpected supply chain disruptions can create significant problems for organizations and vendors. Supply chain resilience solutions help maintain an ongoing dialogue with suppliers, allowing both parties to work together to identify and assess risks, and plan for contingencies.
Centralized data hub
A single source of truth for all vendor-related information and relevant documents eliminates much of the risk associated with data soloing. This provides direct access to necessary data for collaborative tasks and decision-making, and reduces the complexities that often come from managing multiple vendors.
Activity log
An activity log helps track all interactions and transactions with vendors, providing a clear audit trail that can be invaluable for resolving disputes and ensuring compliance. As a bonus, activity logs may be used to review and evaluate how suppliers interact with the vendor-facing side of the VMS, providing invaluable insight into its effectiveness.
Compliance Management
Regulatory standards exist to ensure that businesses act in a way that is supportive of the continued happiness and safety of their community. This includes providing quality services and products, being honest with customers and audiences, and promoting ‘fair play’ within the market. Compliance management helps ensure that the organization is up to date and fully compliant with all relevant federal, state, and local mandates.
Relationship management
As previously stated, building and maintaining positive relationships with vendors is foundational to successful vendor management. Features that support relationship management include built-in communication options, shared interfaces for project management, relationship management tools, and platforms for feedback and dispute resolution.
Risk management
Risk management gives organizations the information they need to identify and prioritize potential future events that might impact their business. They can then take action to mitigate and control any predicted negative outcomes.
At the end of the day, vendors are people, and that means they are more likely to provide exceptional service and competitive rates when they feel positively about the people they do business with. Establishing a strong vendor relationship between the organization and the supplier can lead to significant cost savings, reduced availability issues, and overall better service.
To effectively grow and cultivate these crucial relationships, consider the following tips:
Establish open and honest communication
Regular and clear communication forms the foundation of any strong relationship, including those between businesses and their vendors. Organizations should make efforts to include vendors in relevant strategy discussions and inform them of upcoming changes or promotions early. This transparency allows vendors to adjust their plans or stock levels accordingly, ensuring that both parties' operations are safe from the dangers of stockouts and surplus inventory. Scheduled meetings, whether virtual or in person, can be beneficial for discussing goals and resolving any issues that may arise.
Always make payments on time
Prompt payment is a simple yet powerful way to build trust with vendors. Consistently meeting payment deadlines as per contract terms demonstrates the organization’s reliability and commitment to the partnership. This practice may also yield benefits such as priority service from the vendor during critical periods or when addressing special requests.
Refer exceptional vendors to industry partners
When it comes to showing gratitude to top-quality vendors, there are few gestures as appreciated as making referrals. Referring trusted vendors to colleagues or industry partners strengthens the existing relationship and can help establish a positive reputation for the vendor within the industry. Additionally, referrals may encourage the vendor to go above and beyond in their service delivery, knowing that their efforts are recognized and rewarded.
Vendors and other third parties help businesses manage increasingly complex needs, allowing them to outsource services and streamline operations while redirecting more focus towards core objectives. But along with the many advantages of partnering with other organizations comes increased risk. External relationships can expose businesses to vulnerabilities such as data breaches, compliance violations, operational disruptions, and reputational damage.
ServiceNow Third-Party Risk Management, built on the award-winning ServiceNow AI Platform, helps mitigate these risks by providing essential context, real-time monitoring and reporting, and reliable risk-management processes, all backed by advanced automation capabilities. And, by bringing all relevant vendor and risk information together into a single database, Risk Management offers unparalleled transparency and control across the entire vendor ecosystem—all managed from customizable, intuitive dashboards.
ServiceNow is taking the risk out of risk management; demo ServiceNow today , and see what the right approach to your vendors can mean for your business.