How to make your vendor management more efficient and effective

Reducing costs, improving vendor performance, and fostering long-term partnerships are all key goals of the supplier relationship management process.

Progress toward each of these goals is underpinned by a solid contract management process, which extends beyond negotiating and drafting effective contracts and into implementing a robust process for reviewing and managing vendor expectations and KPIs.

Learn how vendor contract management helps achieve key procurement goals, and master the seven steps that make an effective contract management process.

What is vendor contract management?

Vendor contract management is the process of overseeing the negotiation, approval, and execution of supplier agreements. A great supplier contract management process also includes regular reviews of contractual performance to ensure vendor compliance.

For instance, your vendor agreements may stipulate key metrics and KPIs service providers must meet—such as minimum software uptime requirements.

You’ll meet regularly, often quarterly, with vendor stakeholders to review performance against contract terms. Should vendors fall below expectations, you’ll put strategies for improvement in place in an updated vendor contract

Contract management is generally owned by the procurement team, though you may collaborate with the legal department to draft and negotiate new contracts.

What are the objectives of contract management?

Contract management has three primary objectives:

1. Reduce vendor risk.All vendor relationships involve risk, such as financial, operational, or reputational risk. Contracts help mitigate this risk by stipulating minimum expectations. For example, you can help mitigate SaaS security risk by contractually obligating suppliers to perform regular data security reviews.
2. Ensure suppliers are contract compliant. Contract management involves regular review meetings to assess performance against expectations and hold vendors accountable to the agreed-upon KPIs.
3. Develop a long-term vendor relationship. Long-term relationships are generally favored, as they result in higher procurement ROI (the less often you need to source new vendors, the lower your procurement costs). Managing contracts efficiently improves long-term relationships by allowing you to identify potential pitfalls (such as contract non-compliance or low performance against KPIs) and rectify them early on.

What is the difference between procurement and contract management?

Procurement management is the process of overseeing and directing the various activities involved in procuring goods and services for your company. It includes:

• Identifying company needs
• Creating purchase requests
• Assessing and comparing vendor options
• Negotiating supplier contracts
• Creating purchase orders
• Inspecting and approving received goods or services
• Approving invoices and orchestrating payment
• Managing ongoing vendor relationships

Contract management is the process of negotiating, creating, and executingcontracts, as well as managing vendor relationships as they relate to contractual obligations (such as tracking contract compliance).

As such, contract management is actually one component of procurement management.

Learn more about the procurement management process in our guide, What is procurement management, and why is it important?.

What is the contract management process?

There are seven stages in the typical contract management workflow.

However, every company’s contract lifecycle management process will look slightly different, depending on goals, procurement type (e.g. supply chain or SaaS purchasing), and internal regulations.

Use this seven-step contract management system as a starting point, and adjust as required for your specific organization.

1. Drafting the contract

After a series of conversations between the vendor and the procurement team that cover goals, expectations, and potential risks, an initial contract is drafted.

Depending on your arrangement, this may be drawn up by your legal team or provided by the vendor.

2. Negotiating vendor expectations

Though the entirety of an agreement can be negotiated before the drafting stage, it's common to draw up an initial contract to provide the basis for negotiation discussions.

For instance, having laid out all of the vendor expectations in the contract draft, the two parties may wish to refine points such as:

• Payment terms
• Dates for key milestones like onboarding and implementation
• Data security commitments

The contract draft is then edited to reflect any negotiated and agreed-upon changes.

3. Approving the final contract

The contract approval stage involves all stakeholders reviewing and approving the final contract.

In many cases, this is a fairly seamless process, as all stakeholders have been present and active during the drafting and negotiating stages.

In some situations, however, approval may need to be granted from a party who hasn’t been involved in the contract negotiation, such as a member of the senior leadership team.

4. Signing the contract

When all parties have agreed to the terms of a contract, signatures must be captured.

Digital signatures are common today. Digitizing this step allows stakeholders from both sides of the table to legally authenticate a contract without having to print the whole document out and obtain the physical signatures of everyone involved.

5. Implementing the contract requirements

The implementation stage—sometimes referred to as the execution stage—is when the terms of the agreement are put into action.

Payments are made, items are delivered and approved, software is implemented, and the appropriate employees are trained in its use.

6. Tracking vendor performance

Throughout the length of the agreement, your contract management team is responsible for monitoring performance against expectations and holding vendors accountable where required.

This occurs through tracking key vendor KPIs, as well as regularly scheduled relationship management meetings to review performance and discuss potential solutions to any shortcomings.

7. Renewing - or churning - the contract

At the end of the contract term, you may decide to part ways with the vendor or continue working with them by renewing the contract.

This also serves as an opportunity to renegotiate any terms, such as pricing or performance guarantees. Where renegotiation is the case, the contract management process begins again from step one.

Get a full run-down on the contract management process in our dedicated guide: Contract management: Process, stages, & examples.

Contract management best practices

Ensure your expectations are communicated clearly

Clearly establishing and communicating your goals, priorities, and expectations is critical to successful vendor contract management. In many ways, that’s what the contract is for, though many contracts aren’t as detailed as they should be.

As a result, certain expectations are left up to interpretation, and conflict arises when those uncommunicated expectations aren’t met.

For instance, a common phrase in contract terminology is, “within a reasonable timeframe”. A common example would be, “The supplier will respond to new customer support tickets within a reasonable timeframe.”

Without defining a “reasonable timeframe”, this clause will likely result in conflict.

If you’re waiting on support at your business banking platform to locate a payment that hasn’t come through, 72 hours might seem unreasonable. However, this might be a completely realistic timeframe for a supplier with half their team off due to a bank holiday. Instead of “a reasonable timeframe,” a good contract will provide the exact dates and times to which the vendors must adhere.

During the drafting and negotiating stages of the contract management lifecycle, get as clear as possible on any expectations you have of the relationship, and ensure these are stipulated in the agreement.

Keep contract performance reviews objective

Your intention during vendor review meetings should be to objectively report on performance against contract expectations.

The best practice for achieving this level of objectivity is to focus specifically on the KPIs you’ve set during the negotiation phase.

Say you’re holding your quarterly contract performance review with the company that supplies your payroll software platform. The platform has been experiencing significant downtime, which impacts your ability to manage operations efficiently.

Because you’ve set an uptime minimum KPI in your contract (say, 99.8%), it’s easy to hold your vendor accountable. It’s no longer a case of, “It seems to us that your platform is experiencing too much downtime.” Instead, you can say, “Your uptime this quarter has been 99.5%, which is below the contracted KPI of 99.8%.”

Upskill yourself in contract negotiation

Learning how to successfully negotiate a SaaS contract is a key skill for vendor management.

It’s not just about bargaining for a lower price, either. You need to be skilled in negotiating:

• Key dates and milestones for deliverables
• Performance expectations and KPIs
• How issues like support tickets are handled

Contract negotiation is a skill that you’ll improve on through practice, but it’s always wise to upskill yourself before you engage in a negotiation.

Vendr has a number of helpful guides on the subject to take your contract negotiation to the next level:

• Improve your software negotiations with these strategies from the experts

• How to negotiate a software contract

• Software negotiation strategies: Best practices from over 300M in SaaS

Control contracts in a vendor management platform

Beyond acting as a central repository for all your vendor contract data (so you’ll never have a problem locating a specific contract), contract management software offers several features to help streamline manual processes and improve profitability:

• Templates helps speed up the contract creation process
• Contract renewal notifications prevent expiring contracts from lapsing
• Automated approval workflows improve compliance risk management

A contract repository works fine if all you need is a place to store documents. Vendor management, however, is about more than just managing contracts—it’s about managing relationships.

Go beyond basic contract management solutions and invest in a vendor management system to get the most out of your third-party vendor relationships.

Vendr is your SaaS vendor management software partner

With Vendr, you’re not just managing contracts—you’re managing the entire SaaS buying lifecycle.

At the front end, you’ll gain access to the largest set of SaaS purchasing data around. This will allow you to use price benchmarking data to drive software contract negotiations and ensure you get the best price possible.

You’ll gain real-time insights into vendor performance, so you can spot areas of contract non-compliance and address them before they become an issue.

Then, you’ll proactively track upcoming renewals (preventing contracts from lapsing) and manage the renewal approval process with automated workflows.

Discover just how much your SaaS contracts are costing you today with our free savings analysis.