Vendor relationship management: What it is and why it matters

Vendor relationship management is a process that enables your company to control costs, mitigate risks, and improve service.

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Why vendor relationship management is vital

Vendor Relationship Management (VRM) is a crucial aspect of technology procurement, particularly in SaaS buying. It helps companies control costs, reduce risks, and improve services. Implementing a VRM solution is the most effective way to enhance the VRM process. To enhance vendor relationships, it's important to be transparent with your vendors, conduct annual evaluations, and understand their business and operations.

However, the terminology used to describe companies in a supply chain may vary from organization to organization. The terms "vendor" and "supplier" may be used interchangeably or have different meanings. This post will clarify the difference between vendors and suppliers and provide best practices to simplify vendor relations.

Vendor vs. supplier: What's the difference?

The chances are high that you consider vendors and suppliers one and the same. During more than 10 years working in technology procurement, I witnessed a gradual shift in buying organizations and supply chains, from the term “vendor” to “supplier” instead.

Today, the terms are commonly interchangeable, with a solid lean toward supplier as the more strategic of the two.

The key difference for those who don't use the terms interchangeably is that a vendor may be a reseller of a product, like software, produced or developed by a SaaS supplier. The supplier is the first link in the supply chain, and a vendor is the last. However, the terminology lines get blurred when suppliers sell directly to consumers, which is a practice we consider optimal for SaaS buying.

But here's a secret to unblur the lines: A supplier relationship management program is all-encompassing because it involves the segmentation of all different types of suppliers (and vendors). So, if you've got a refined supplier relationship management process, your vendor relationship management process will probably be stellar, too.

What is vendor relationship management (VRM)?

Whether they are short-term or long-term relationships, vendor relations are critical. Quite simply, it makes everyone's lives easier if we all get along, but getting along is just touching the surface. On a much deeper look, the inner workings of vendor relationships affect nearly every level of the buying (and selling) organization.

Gartner defines vendor relationship management as a "discipline that enables organizations to control costs, drive service excellence and mitigate risks to gain increased value from their vendors throughout the deal lifecycle."

But how does managing vendor relationships do all of those things? Suppose you segment or categorize the companies in your supply chain by their risk and profitability impact on the business. In that case, you'll be in a better position to identify areas of improvement in costs, risk mitigation, and overall value.

Vendor relationship management best practices

Whether you're planning to develop a vendor relationship management process or already have one in place that just needs some fine-tuning, here are some strategies to help make it a success. And since every company handles its supply chain management a bit differently, as you’re reading through this, think about how you can apply these strategies to your operations. You may even think of better strategies.

Add a VRM solution to your SaaS stack

A VRM application is a powerful tool that can transform your vendor relationship management process. It serves a similar purpose for buyers as a Customer Relationship Management (CRM) solution does for sellers - to provide automation, improved onboarding, and closer engagement, leading to better outcomes. Integrating a real-time vendor management system into your SaaS stack can streamline the often complex process of managing relationships with multiple vendors.

A VRM solution offers numerous benefits, including reducing the need for vendor-tracking spreadsheets, providing better oversight of renewals, streamlining cost tracking, offering end-user metrics, enabling data-driven decision-making, and minimizing waste. These benefits make a VRM solution an indispensable tool for any organization looking to enhance its vendor relationship management process.

Do annual vendor scorecards that include KPIs

Scorecards are annual performance appraisals for vendors. This is the time to offer praise and constructive feedback regarding the vendor's performance during the past year. If you have a VRM application in place, you're most likely already getting real-time feedback from stakeholders about their experiences with each vendor. Annual scorecard time is the right time to address that feedback and discuss key performance indicators (KPIs).

I think it’s important to mention here that issues may arise throughout the year that you will need to address immediately. For critical issues, do not wait for the annual scorecard time. Communicate those issues to your vendor, stat.

If you want to turn things up another notch, ask your vendors to do a reverse scorecard, where they return the favor and offer your company praise and constructive feedback. Think of the whole process as an opportunity to consider KPIs on both sides.

Be as transparent as possible

With any company, there are confidentiality limitations. However, where you can involve your vendors in business strategy and innovation, do.

Vendors are just as affected by the state of your business as you are by theirs. This type of mutual and transparent personal relationship can foster greater empathy, understanding, and perhaps even creative problem solving when needed.

Learn about your vendors' businesses and operations

Have you ever visited a strategic vendor's headquarters? Or perhaps taken a plant tour? I found that I became much more invested in a vendor, their product or service, how they produced or developed the product, and their overall business model when I took the time to visit. Greater knowledge means better negotiation strategies, stronger contracts, and all-around better personal relationships. Another plus is that it lets your strategic vendors know you're interested and invested in their business.

If vendor visits aren't in the budget, ask the vendor how to learn more and become more in-tune with what they do. Most people love to share their stories, and vendors are no exception.

The benefits of vendor relationship management: What to expect

If you're using a manual approach to vendor relationship management, it can be a complex, multilayer process that is challenging, to say the least. But with the right strategies, including a VRM solution, you'll have all the right tools at your fingertips to do VRM and do it well.

Here are just some of the things you can expect after implementing a strategic vendor relationship management process: