The complete guide to vendor management systems

SaaS vendor management is more than locating the best suppliers and negotiating a mutually beneficial contract. High-performing procurement teams regularly search for, assess, and onboard new suppliers. Then, procurement managers maintain up-to-date supplier records and regularly measure supplier performance.

A vendor management system (VMS) is a software solution that enables businesses to quickly spot and assess new suppliers, onboard them, and gain a 360-degree view of all vendor information—including performance and risk—in a single platform.

In this guide, we'll outline everything from what a vendor management system does to how it benefits your company.

What is a vendor management system?

Vendor management systems and software streamline every step of the vendor life cycle management process. This includes supplier evaluation, onboarding, performance management, and offboarding. VMS platforms help businesses collaborate with suppliers in real-time and conduct audits effortlessly.

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Why you need a vendor management system

There are three core reasons why vendor management systems are critical for teams who do business with multiple suppliers:

1. Efficiency
2. Cost savings
3. Risk mitigation

First, a quality vendor management system helps speed up workflows by providing automation functionality (for building automated processes like approvals workflows), templated documents like contracts, and a customizable vendor performance monitoring dashboard.

Second, comes the cost savings involved. Part of this comes down to efficiency gains, but a good vendor management system also helps you spot where you might be paying for two software tools that do the same thing or allows access to price benchmarking data to fuel negotiations.

Third, the best vendor management software platforms help mitigate risks related to security and spending. They do this by providing data on vendor compliance and enforcing approval protocols while protecting against automatic contract renewals.

Benefits of vendor management software

In a manual vendor management scenario, businesses face many hurdles. Poor onboarding programs can fragment software adoption. Irregular and inefficient vendor performance monitoring means customers don’t know if there’s value in their solution. Automating vendor management resolves these as well as various supplier-related problems.

Here are some of the benefits of implementing a vendor management solution.

1. Streamlined supplier onboarding

Supplier onboarding is collecting information (e.g., pricing tier, contract type, the contact information of the account manager, and more) from new suppliers and service providers for internal documentation purposes. This process makes it easy for buyers to conduct business with their suppliers, place new orders, and pay them.

A user-friendly vendor management software simplifies supplier registration with a self-service onboarding portal. With an automated vendor onboarding process, businesses:

• Minimize manual follow-up, data entry, and associated errors
• Decrease time spent evaluating and onboarding new suppliers
• Offer a consistent onboarding experience to all suppliers
• Empower suppliers to update their profiles and catalogs on their own

With a vendor management platform, procurement managers reduce data duplication and store all supplier-related information in a single, easily accessible place. Supplier onboarding modules improve supplier data quality and the visibility of supplier information.

2. Simplified contract management

A vendor management system automatically collects, stores, and displays all contract-related information in a centralized database. This enables procurement teams to eliminate spreadsheets and paper files. Procurement managers eliminate data redundancy since the database is seamlessly integrated with third-party tools like accounting software, ERP systems, and more.

Vendor management systems automatically monitor contract closure and SaaS renewal dates, then notify stakeholders to either renew or close the contract.

3. Standardized business processes

Procurement processes can be inconsistent, inaccurate, and sometimes non-compliant in a manual vendor management environment. Stakeholders may indulge in shadow IT—installing applications and software without the IT team's knowledge—because their purchase order was too long in the approval stage.

An automated vendor management process gives stakeholders complete visibility into the status of their SaaS purchases while ensuring the process stays consistent and compliant.

Most VMS platforms have ready-to-use standardized business templates that help organizations get their vendor management process up and running quickly.

4. Enhanced supplier collaboration

Nearly all procurement teams realize vendor management is a cornerstone of procurement excellence. However, vendor management is no longer restricted to data management. It also includes supplier relationship management.

When you converse with your supplier using email, phone, or a third-party tool, the conversation thread can quickly get lost or buried. Vendor management solutions offer a real-time collaboration that ties conversations to procurement documents like purchase requests, invoices, and more.

5. Mitigated supplier risks

In a VMS, organizations are provided with dynamic, rules-based workflows, which help acquire SaaS solutions while ensuring policy, regulatory, and legal compliance management.

Most procurement solutions offer pre-written questionnaires for supplier due diligence. In addition, businesses streamline third-party risk management by integrating with comprehensive supplier screening services like DUNS (Data Universal Numbering System), which perform risk assessments.

6. Automated supply chain

With a vendor management system, the entire procurement process becomes simple, from vendor onboarding to adding purchase requisitions or converting PRs to purchase orders.

Procurement managers don’t have to chase after suppliers to update their profiles and catalogs. All suppliers can access a self-service portal to change their catalogs or pricing.

Challenges of vendor management

Decentralized purchasing

Decentralized purchasing (where leaders of multiple departments or branches have the authority to purchase rather than a single centralized purchasing unit) creates a significant issue for vendor management.

A vendor relationship management program often doesn’t exist at all.

A centralized cloud-based system that stores all vendor data in a single location is crucial for breaking down department siloes and building a stronger vendor management foundation.

Lack of established communication lines

When it’s not clear who’s in charge of vendor management on your end and who’s the account manager on the supplier end, vendor management falls apart.

This should be established during the vendor onboarding process. Speaking of…

Ineffective or non-existent supplier onboarding processes

Many organizations don’t have a clear policy or process for onboarding vendors.

A good onboarding process should cover:

• Who owns the vendor account at your organization
• Who your point of contact is at the supplier’s company
• How and when your accounts payable team should be involved
• Key vendor KPIs and expectations
• How often you’ll meet to review the performance

Auto-renewing contracts

The majority of software contracts auto-renew at their expiry date, which poses a threat to vendor management. If this goes unmonitored, you may pay for software licenses you no longer use.

Manual contract renewals are generally a safer way to proceed, and the best vendor management systems include automated contract renewal reminders as one of their key features.

Poor performance visibility

Your contract should clearly outline the expectations of your vendor relationship regarding things like delivery times, software uptime expectations, and maximum support response times.

But outlining your expectations is only one part of the equation—you still need to enforce them.

Many teams don’t know how their vendors perform and whether they meet their contractual obligations.

Those with great vendor management systems use custom vendor management dashboards to report on performance and meet regularly with vendors to hold them accountable for areas where they may be falling short.

Features to look for in a vendor management system

These are the seven features that most businesses looking for a vendor management system should seek out:

1. Self-service portal

A self-service vendor management portal empowers suppliers and customers to manage their profiles, update order details, and track payments through a user-friendly collaboration platform.

2. Paperless onboarding

With paperless VMS onboarding, procurement managers can instantly extract information from existing or third-party supplier databases and eliminate the bleak reality of onboarding paperwork. What's more, tailored processes ensure that the onboarding experience stays consistent across all suppliers.

3. Vendor screening

Vendor screening features let you retrieve and verify vendor information and certifications with the click of a button. Simply enter the supplier's DUNS number to retrieve information like business reports, financial data, credit risk reports, and more, which can help verify the value and veracity of the vendor.

4. Supplier performance management

Visual-rich reports provide a comprehensive view of supplier performance, including service downtime, regulatory compliance, and more. Businesses can use visual-rich reports to retrieve actionable insights, identify purchase risks, spot opportunities, and negotiate better deals.

5. Corrective actions

A VMS and its embedded dashboards make it easy to monitor vendor performance metrics and initiate a supplier corrective action plan (SCAR) if performance slips below an acceptable level. In such cases, businesses also have the option to offboard the supplier and close existing contracts.

6. Spend management

With spend management built into your vendor management software, organizations can capture and manage all spend categories with rule-based workflows and automated notifications. These workflows enforce budgetary restrictions, eliminating any risk of maverick spending or dark purchasing.

7. API Integration

If you use several procurement solutions, you’ll likely want to integrate them into your vendor management system. With API integration, you can improve your purchasing process's speed, productivity, and performance from requisitions to payments with integrations for your ERP, accounting systems, and external supplier databases.

Vendor management systems save procurement teams time and money

End-to-end vendor management systems offer functionality that helps businesses get maximum value from vendor relationships. These software solutions also facilitate joint growth and create value through open communication, transparency, and win-win goal orientation.

When you're on the lookout for a vendor management system, make sure the VMS platform you select has the indispensable features outlined above, and choose a vendor management system that plays well with your existing third-party tools.