Working with third-party vendors is a very common business practice these days. These vendors may provide produce for a grocery store, equipment for a manufacturing plant, maintenance for a healthcare facility, administrative support for an organization and so much more. It’s not uncommon for larger organizations and corporations to develop a vendor network consisting of hundreds of vendors, each providing a key service or product necessary to effectively run operations. If you’re juggling multiple vendor partnerships, vendor and contract management should be a top priority if you want to ensure your own operations are never disrupted.
The Nature of Vendor and Contract Management
Managing these third-party relationships is never as straightforward as finding a partner to perform a specific task and coming to a simple agreement. There are a lot of things to consider beyond deliverables and cost. After all, a lot of revenue is tied up in these agreements. One 2018 McKinsey report found that as much as 90% of revenue can be tied up in contracts for many businesses. Yet, across industries, the total operating expenses for procurement are typically less than 1% of total spending. This means the departments responsible for securing vendors and creating vendor contracts that generate the majority of revenue have one of the lowest budgets.
This lack of prioritization creates multiple vulnerabilities that can rear their heads both during and after contract creation. These include, but are not limited to:
- Disagreement over contract scope
- Weaknesses in contract change management
- Performance failures due to over-commitment
- Performance issues due to disagreement over what was committed
- Inappropriate contract structures
- Disputes over pricing
- Issues with subcontractors
According to the independent International Association for Contract & Commercial Management (IACCM), suboptimal contract terms and conditions and ineffective management of vendor relationships can have a financial impact equal to 9% of annual revenue. There is also the risk of non-renewal of contracts or a failure to to expand them through additional business or innovation, which can also impact your bottom line.
By dedicating the time and resources necessary to vendor and contract management, you set yourself up for positive growth and expansion of operations in the future. Beyond allocating a larger chunk of your operating budget to the process, there are few actions you can commit yourself to now that will pay off big later.
Preemptively Put Processes in Place
One of the most reliable ways to reduce risk throughout each stage of vendor engagement is to set up clear processes beforehand. As you search for and select the appropriate partner, enter into negotiations, identify each side’s goals, draft and revise an agreement and eventually approve, having a roadmap for yourself will keep you focused on objectives and ensure you get the maximum value out of any relationship.
Having a plan in place beforehand also ensures you can be more strategic in your actions. You don’t ever want to be in a position where you’re reacting to a situation and having to scramble to find a vendor to fulfill a dire need. You want to be in a position that allows you to form relationships that meet all compliance requirements based on carefully considered evaluation criteria.
Create a Formal Contract Creation Process
Any document should describe the duties and obligations of you as well as your vendor. Depending on how you operate, there are multiple ways to go about contract creation. Most businesses have a contract template they use for vendor relationships and simply edit the language to suit each situation.
If you have several different kinds of vendors you work with, it may make sense to have multiple contact templates. If you work with the same vendor on multiple different projects, you may also choose to have an overriding vendor contract which lays out the full terms of a relationship. Then, you simply create new statements of work to detail the specifics of each new project.
Make Sure Your Vendor Partnership is Legally Binding
If you want to make sure that your vendor – and your company – deliver on the terms of the contract as expected, there must be a concrete framework that details what both parties need to do. Not only do you outline deliverables and costs, but you also set standards of operation, confidentiality agreements, whether you allow work with competitors and other important matters. If your contract is not legally binding, there’s nothing to stop the vendor from violating any of these terms.
Don’t Ignore Ongoing Contract Management After Signing
After you enter into a relationship with vendors, your contract doesn’t cease to be relevant. It should remain an important tool throughout vendor management and should be referenced often. We can’t depend on someone to remember all the terms formalized in a contract, so those responsible for ensuring ongoing vendor and contract management should be able to readily access these documents at any time. Whether you store them physically in filing cabinets or online in the cloud, having an accessible repository is a must.
Streamline Vendor and Contract Management
A survey by IACCM found that 84% of companies are experiencing pressure for contract simplification and 81% have plans to implement contract automation. To facilitate these changes at your company, software can keep you organized and ensure that core aspects are covered, including where contracts will be stored and how they will be tracked.
With TotalCompliance Contracts, you’re able to work collaboratively with other parties to create contracts that take everyone’s concerns into account. You’ll always work on the most up-to-date version of a document, but maintain an organized record of changes. After contract creation, route to individuals, departments or distribution lists for review, approval and verification of information. Bringing in staff from legal, operations, accounting or other departments only takes a few moments.
TotalCompliance Contracts gives you the freedom to organize documents however you choose, and a flexible grouping schedule will allow you to layer access. For obvious reasons, it’s ideal to have a central, secure repository for all vendor contracts that will make it easy to track key terms such as expiration dates and renewal notices. Without proper tracking, contracts can expire or auto-renew without your knowledge.
Whether you have purchase orders, SSAs or proposals, our system enhances your vendor and contract management activities while simplifying the process. Request a demo with ComplianceBridge today to learn more about TotalCompliance Contracts and our suite of risk and policy management products.