The complete guide to strategic sourcing in your vendor management process

When sourcing new suppliers, your biggest goal should be to identify vendors who can help you reach your overarching company objectives.

Strategic sourcing is the process of putting this into action.

In contrast to traditional sourcing, which tends to focus too much on cost reduction, strategic sourcing considers factors like mutual fit and long-term growth potential to support business goals.

In this article, we’re going to dive deep into strategic sourcing. We’ll outline what it is, explain why it’s so critical for vendor relationship management, and provide some helpful examples to give context.

We’ll also explain the five steps to implementing strategic sourcing in your business.

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What is strategic sourcing?

Strategic sourcing is an approach to procurement that includes cost analysis but looks beyond the bottom line to assess strategic factors such as:

• Alignment with strategic goals: How well can the vendor help you achieve your objectives?
• Mutual fit: Do the software buyer and seller both benefit from the relationship?
• Long-term growth potential: Will the vendor relationship still fit as your company scales?
• Tech stack fit: Does the software purchase you’re assessing integrate smoothly with your existing platforms?

The primary goal of strategic sourcing is to develop relationships with vendors who can help you achieve your organizational goals. As such, strategic sourcing also prioritizes partnerships over transactional purchases to maximize mutual fit and long-term continuity.‍

A strategic sourcing approach isn’t necessarily the right fit for all sourcing decisions.

It’s a comprehensive and robust approach to decision-making. As a result, it is time-consuming (and therefore costly), so it may be unsuitable for certain sourcing activities.

Procurement professionals should use strategic sourcing approaches for projects that are:

• Complex
• Highly specialized
• High-value
• Critical to business goals
• Part of a high-stakes company change initiative

In some cases, the benefits of strategic sourcing are outweighed by the time and costs involved in that particular decision.

Examples of when strategic sourcing isn’t appropriate include:

• Low-value procurement
• Sourcing decisions that don’t require a high degree of risk management
• Procurement for a single department
• Collecting vendor bids to meet policy requirements when you already have strong vendor preferences (for instance, if you’re engaging in a public construction project which requires the solicitation of vendor bids, but you already have a strong preference for a construction management platform you’re familiar with)
• Routine transactional purchases — an RFP (request for proposal) might be more suitable
• Instances where the purchase price is the main concern — an RFQ (request for quotation) is likely more appropriate

Your first decision, then, is to determine whether strategic sourcing is conducive to your business needs or whether you’d be better off with a more traditional approach.

4 benefits of implementing strategic sourcing into your procurement process

Strategic sourcing offers four key benefits over the traditional model, which we’ll explore here.

1. Risk reduction

Equally important as finding a good vendor is weeding out vendors who present potential risks.

Examples of risks posed by vendors include:

• Financial risk. The possibility that your chosen vendor may go out of business and leave you scrambling to find an alternative.
• Market risk. The possibility that your vendor may change their business model to meet market demand and no longer suit your needs (such as changing their pricing structure or removing product features that are core to your company’s operation).
• Reputational risk. The possibility that your supplier engages in an activity that earns them, and by relation, you, a bad reputation (for instance, poor employee safety practices).

There are also risks to the buyer to consider:

• Compliance risk. The possibility that, if legislation changes and your supplier is slow to update their business to remain compliant, your company then becomes non-compliant.
• Operational risk. The possibility of software outages and bugs that can impact your ability to operate effectively.

Mitigate risk at the assessment phase by including a risk evaluation phase in your strategic sourcing process. Review:

• Public vendor financial history (to evaluate financial risk)
• Software uptime history (to evaluate operational risk)
• Supplier PR archives (to evaluate reputational risk)

During your preliminary conversations with each supplier, ask these questions to assess compliance and market risk:‍

• What is your company’s policy with regard to legislation compliance? What happens if regulations change?
• What is the long-term plan for the company? How do you anticipate the market developing, and how do you plan to respond to this?

2. Longer relationships

Long-term vendor relationships are always a preference, as they:

• Lower costs through the ability to negotiate better terms
• Reduce demand on sourcing teams, as contracts are in place for longer time periods
• Improve efficiency, as you spend less time in the “getting set up” phase‍

Strategic sourcing reduces vendor turnover, as you look carefully at the factors that influence long-term success (like alignment with company goals) rather than only prioritizing cost reduction.

Implementing vendor relationship management processes is key to developing and maintaining long-term relationships. Learn more with our free guide: 6 best practices to power your vendor management process.

3. Cost savings

While strategic sourcing moves beyond looking at the most cost-effective solutions, cost savings is still a priority for procurement leaders.

Strategic sourcing helps reduce procurement costs by focusing on longer-term partnerships, so you spend less time sourcing and replacing suppliers. It also helps you identify areas of spend overlap, so you aren’t paying for two products that do the same thing.

4. Better value from vendors through innovation

Part of strategic sourcing is about identifying vendors with whom you’re a mutual fit.

That is, they help you achieve your organizational goals, and you help them achieve theirs (i.e., you’re an ideal customer for them).

Say, for example, you’re a marketing agency looking for a new project management tool. One of the ideal customer segments of a vendor you’re assessing is agencies, and as such they have a business goal of attaining more customers in this segment.

In this case, assuming they meet your sourcing needs, you’ve established mutual fit.

When this is the case, long-term relationships lead to improved innovation. Your suppliers find new ways to provide value, improve their service offering, or reduce costs, and you reap the benefits.

The 5 steps of strategic sourcing

Ready to get started with strategic sourcing? Follow these five steps.

1. Decide who is involved in the sourcing process

Generally speaking, strategic sourcing is handled by the procurement or sourcing team.

However, you may include department stakeholders in decision-making, particularly where it directly impacts their business processes.

For instance, when assessing a new sales CRM implementation, it may be suitable to include the VP of Sales in the decision-making process. They’ll have a much more direct understanding of how the competitive advantage of each option impacts sales workflows and, in turn, the software’s value.

2. Gather your initial list of potential vendors

Next, pull together your list of initial suppliers.

Based on your initial market research, you’ll have already filtered out those who aren’t a fit at a high level. Maybe that CRM doesn’t offer a specific feature you require, for example.

All the vendors on your list can solve your business challenge at this stage. From here, it’s about determining the ideal partner.

3. Leverage software tools to assist with strategic sourcing

There are a variety of software platforms that can assist with the procurement process, allowing sourcing teams to take advantage of automation and templates to move quickly.

Look for strategic sourcing software with features like:

• Cost and savings tracking
• RFP templates
• Data collection, analysis, and reporting
• Price benchmarking
• Contract management and renewal notifications
• Project management

Price benchmarking and overlapping spend notifications help reduce unnecessary costs. Workflow management and approval automation eliminate tedious manual work and allow department leaders to run fast when sourcing software.

4. Assess each vendor across multiple dimensions

Remember, to achieve value at scale, strategic sourcing is looking for long-term supplier relationships.

To assess the likelihood of this kind of partnership flourishing, you’ll need to assess each potential vendor across several dimensions, including:‍

• Innovation and continuous improvement
• Brand reputation
• Quality of product
• Customer service level
• Long-term financial stability
• Scalability
• Total cost of ownership

6. Initiate vendor conversations and negotiations

The last phase of strategic sourcing involves starting conversations with potential vendors.‍

These conversations will help you assess relationship aspects like mutual fit, as well as uncover any hidden or unexpected costs so you can measure the total cost of ownership accurately. If you’re working with an outsourced procurement team, they can use their knowledge of thousands of software purchasing transactions to guide and inform the process.

Then, contract negotiations take place. The typical contract negotiation process includes seven stages:

1. Preparation. Pull together information like budget limitations, important questions to ask your vendor, and non-negotiables.
2. Opening. State the goals of the negotiation so both the seller and buyer are clear on expectations.
3. Testing. Ask the important questions outlined in the preparation stage, and actively listen to supplier responses. Take notes you can refer back to at a later date.
4. Proposing. Both parties propose what they’d like to achieve. For instance, you’ll state payment terms.
5. Bargaining. If the vendor accepts your offer, this may not be required. However, they’ll likely counteroffer, and you’ll need to negotiate, trade off, and compromise. Learn more on how to negotiate a software contract here.
6. Agreement. Both parties are happy, and a verbal agreement is reached.
7. Closure. The contract is signed, and the relationship begins.

Interested in leveling up your contract negotiation game? Improve your software negotiations with these strategies from the experts.

How Vendr can help with strategic sourcing

Our SaaS experts work closely with your team to provide purchasing insights from thousands of software transactions. We’ve got the know-how and experience to help build your stack with the right software for every team and stage of your business.

Our in-house procurement specialists and onboarding team build an efficient buying process that streamlines stakeholder requests through the sourcing, evaluation, and approval phases. Your employees get the tools they need, and you get compliant purchases.

Learn more with our free guide, Perfect your SaaS purchasing process.

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