Is it time to outsource vendor management?

Effective vendor management is a time-consuming endeavor.

On the sourcing front, it involves hours of market analysis, supplier vetting, and risk analysis.

Once you’ve gone through this rigorous process and decided which vendor to proceed with, you still have to get through contract negotiation and creation before seeing the fruits of your labor.

And even when the agreement is in place, you need to monitor contract compliance closely, report on vendor performance, meet regularly with suppliers to maintain a close relationship, and evaluate contract renewals as they arise.

It’s a lot to handle, but the consequences of not managing vendors effectively—increased costs, greater risks, and supply chain shortages, to name a few—make it a necessary evil.

But what if you don’t have the expertise or bandwidth to manage this in-house? Is outsourcing vendor management a reasonable and realistic option?

Learn the pros and cons of outsourcing vendor management and discover how to leverage advanced tools to establish the perfect middle ground.

Should you outsource vendor management?

Like any outsourcing decision, there are costs and benefits to this approach.

Outsourcing vendor management helps you access expert assistance immediately, but it creates another risk in and of itself, as you’re sharing critical business information with a third party.

Keeping vendor management in-house allows you to build a specialized team with a much more intimate knowledge of your company’s sourcing and procurement requirements, but it comes with the inevitable challenges of hiring and turnover.

Long-term, owning supplier management in-house is a generally better choice. So if you can, manage this process internally.

If you need to get a supplier management strategy off the ground quickly and don’t have the internal availability or skill set, outsource.

The following pros and cons will give you a more detailed understanding of which option is better for you, but overall there’s a good rule of thumb: Outsourced vendor management is better than no vendor management.

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Reasons for outsourcing vendor management

Speed and capacity

The most important reason for outsourcing vendor management is the need to act quickly.

Hiring takes time (as long as four months to fill a single position), whereas an outsourced vendor management service often gets started immediately.

This is also a benefit if you already manage some vendor relationships in-house but need to increase your capacity rapidly. In this case, you may outsource rather than hire to expand your internal team.

Subject matter expertise

Outsourcing vendor management can be a strategic way to bolster your team’s expertise.

Say, for example, you have an internal procurement team that’s great at sourcing and vetting new suppliers but doesn't have much experience managing long-term relationships.

Maybe you don’t have the expertise to train this skill, making outsourcing a viable option for filling that knowledge gap.

Employee turnover

Employee turnover is often overlooked when weighing any decision to outsource or hire in-house.

The average employee tenure is around four years. Of course, replacing an entire team will not all happen at once. If you have a team of eight, you can expect that, on average, you’ll need to fill a role every six months.

That’s a lot of job ads, assessments, interviews, onboarding, and training, all of which incur costs from using hiring teams’ time.

When outsourcing vendor management, you don’t need to worry about staffing. You’ll have an agreement with a service provider that ensures business processes are followed even if someone on their team leaves. From your vantage point, the service provider merely replaces your contact person with a new one.

Cost-effectiveness

All these factors combine to create a more cost-effective vendor management program than one managed in-house.

Just as importantly, the set outsourcing cost makes calculating the expense of your vendor relationship management strategy easier.

Your service-level agreement with your outsourced partner will tell you exactly how much you’ll pay each month.

However, calculating the true cost of internally managing vendors is a little more difficult.

The total cost of an employee can be as much as 1.4x their salary once you consider factors like paid leave and benefits. And hiring, onboarding, and spending time developing your vendor management systems and processes are also costs—ones that are harder to actualize.

Reasons against outsourcing vendor management

Lack of industry and vertical familiarity

Outsourced partners are experts at vendor management, but they may not have experience in your particular industry.

This may make them unfamiliar with the kinds of procurement contracts you have with third-party vendors or the risks involved—things you would be intimately familiar with if you handled vendor management in-house.

Reduced internal control

When you outsource any business activity, you relinquish some control over how that activity is handled.

You have a say in the end goal (“We’re paying you to complete X”) but not so much over how they get there.

This could mean you have less visibility over risk assessment, new vendor onboarding process, and contract lifecycle management.

No opportunity for vendor relationships

When you outsource vendor management, there is no opportunity for stakeholders at your company to form a personal relationship with suppliers. Instead, the relationship exists between the supplier’s account managers and your outsourcing partner's account managers.

This can have a long-term impact on your effectiveness as a procurement manager. If you decide to leave your current company, you will not have the benefit of taking this vendor relationship (and what you learned while managing it) with you to your next role.

Potential conflict of interest

When outsourcing IT vendor management, there is always a concern about conflict of interest. These companies have relationships with many vendors, meaning incentives that aren’t necessarily in your best interest can form.

Say you’re in the market for a new cloud-based video platform for running webinars. Your vendor management provider recommends the perfect supplier.

Even if the outsourced vendor manager isn’t directly incentivized for this recommendation—e.g., getting a financial kickback from the supplier—there is still some cause for concern.

What portion of recommending this supplier was due to the vendor manager’s experience, gut feeling, and familiarity with the product? And how much of the decision was based on due diligence and objective analysis of each option’s pros and cons?

With outsourced vendor management, it's harder to know the behind-the-scenes of this decision-making process.

Vendor management software: The perfect middle ground

For many organizations, the best approach is managing vendor relationships in-house while supplementing your expertise and efficiency using vendor management software.

At its foundation, vendor management software offers a centralized platform for making relationship management faster, easier, and more effective.

Supplier management tools include features like

• Vendor contract management: A centralized hub for document storage, contract templates, and automated renewal reminders
• Supplier performance monitoring: An easy way to track metrics and KPIs by which you assess vendor performance
• Vendor risk management: Templated matrices to assess supplier risk objectively
• Pricing benchmarking: Insights into the pricing models offered to your competitors so you can negotiate a more favorable deal the first time
• Spend management and analysis: Detailed insights into the effectiveness of your spend management and cost reduction strategies

Some platforms also offer dedicated support from a team of purchasing experts. They help you gain some benefits of outsourcing vendor management, like purchasing expertise, without relinquishing control or taking on additional security risk.

Vendr is a software buying platform that helps you source and manage new relationships with SaaS vendors.

Our team of software-buying experts provides industry-specific recommendations and points you in the direction of the most relevant and helpful tools for your needs. This is based on feedback from customers who collectively have spent over $1 billion on SaaS.