Working with vendors: Six best practices for vendor success
Discover six best practices for working with vendors and use them to create an effective vendor management process that cuts costs and minimizes risk.
Many businesses underestimate how much they rely on external vendors, yet the average organization has 182 vendors connecting to its system each week. While this might be surprising, most organizations would also be surprised by how much risk these vendor relationships involve.
For the majority of organizations, vendor relationships are critical to ongoing business operations. Vendors supply crucial software platforms like CRMs, supply chain components for manufacturing, and manage overheads and utilities.
Discover six best practices for working with external vendors and use them to create an effective vendor management process that cuts costs, minimizes risk, and enhances profitability.
What is vendor management, and why is it important?
Vendor management is a procurement practice dedicated to increasing the value your business receives from each supplier relationship.
Though it’s an important practice, increasing value doesn’t just come from cutting costs. Vendor management encompasses a number of strategies, such as:
- Building and monitoring vendor health dashboards
- Analyzing and mitigating potential risks
- Holding vendors accountable to performance agreements
- Creating streamlined vendor onboarding processes
- Holding regular meetings to realign goals and report on vendor performance
- Drafting, negotiating, and signing vendor contracts
- Using business process automation to speed up workflows
A strong vendor management process helps procurement teams drive supplier performance, reduce risk, and maintain compliance with legislation like the GDPR.
It also allows procurement managers to drive down the overall cost of doing business with external parties by:
- Catching and mitigating risks early
- Maintaining longer-term relationships (reducing the need to engage in lengthy sourcing processes)
- Negotiating more favorable payment terms
- Ensuring vendors meet performance objectives
Below, we discuss six important best practices for working with vendors to help you take advantage of the above benefits.
1. Clearly communicate your supplier needs
One of the most important best practices for working with external vendors is letting them know exactly what you want, need, and expect out of them.
This information transfer should begin during strategic sourcing conversations.
For example, sharing details about your sales and marketing strategies with your potential vendor is critical if you're looking for a new sales CRM.
Then, their customer success manager can design a plan for helping you use the CRM in a way that aligns with your revenue growth plans.
Additionally, your vendor contract should clearly outline the expectations of each party. On your end, these expectations will likely be primarily around invoice payment terms.
For your supplier, performance terms might include:
- Software uptime requirements
- Customer support response times
- Delivery timeframes
- Quality control measures (like maximum order defect rates)
Putting clear expectations in writing ensures everyone is on the same page regarding the terms of the relationship. It also provides a basis for dispute resolution should that be required.
2. Hold vendor performance review meetings
This is the first area where most vendor management strategies fall apart: Procurement teams don’t hold suppliers accountable for their agreements.
A good vendor management framework includes performance management dashboards, so your procurement team can monitor how your vendors stack up in real-time.
But knowing how your vendors are doing is just the first step. You must also communicate this information to your service providers and hold them accountable if they fall short of expectations.
Quarterly vendor performance review meetings are the best practice for communicating this information.
They are also an opportunity to recap your expectations and fill vendors in on any strategic business changes that might alter the nature of your relationship.
For example, it’s important for account stakeholders at your CRM provider to know if you shift from an outbound sales approach to a product-led growth approach.
3. Prioritize value over cost savings
While keeping costs low is necessary for sourcing and procurement, it shouldn’t be your primary focus.
Lower-cost suppliers tend to be so for a reason, which may create issues like:
- Supply chain shortages
- Excessive software downtime
- Slow support response times
- Data security problems
- Difficulties reaching account managers
Instead, look for ways to maximize value to improve your return on investment.
Let’s go back to our CRM sourcing example. There are plenty of low-cost and even free CRM providers available. But many of them enforce usage limitations that could throttle growth.
Instead, put your business in a better position by paying slightly more for a CRM platform that doesn't put usage throttles in place or charge overages for exceeding limits.
Furthermore, while a dedicated customer support person might represent an additional cost, it can be worthwhile to speed up ticket resolution and keep business operations running smoothly at all times.
4. Manage contract renewals manually
Many of the agreements you have with external vendors are for a fixed time, with the expectation of renewal at the end of that period.
For example, the contract with your CRM provider might last three years. But both parties expect you to need that CRM still to store and manage customer data at the end of those three years.
In most cases, SaaS contracts such as this renew automatically, and they sometimes include a clause where your pricing structure reverts to the standard model unless there’s prior renegotiation.
This is bad news for spend management, so you should agree to manage contract renewals manually.
The best practice here is to use a supplier management platform like Vendr to schedule automated upcoming contract renewal reminders.
You can schedule an automatic reminder for a month or two before renewal, giving you plenty of time to:
- Reassess your company’s need for that product
- Analyze the market and pricing competitiveness
- Prepare for renegotiation conversations
5. Run supplier risk analyses before signing
All vendor relationships bear some risk. Successful vendor management is about identifying risks early on, then finding ways to mitigate them.
The best way to do this is to run a supplier risk analysis before beginning a new working relationship and at regular intervals. For each potential risk you identify, use a risk matrix to assess the likelihood and severity of the risk.
If you identify risks in the top right-hand corner during your due diligence process, this could signal that this isn’t the right vendor for you.
Consider the possibility of a data breach, for example. If you’re a financial services consultancy looking for a CRM, then the impact of a data breach would likely rank as a five on the severity scale.
If, when assessing new vendors, you find that one CRM also ranks as a five for likelihood—due to poor data management practices—this would clearly be a no-go business relationship.
6. Use vendor management software to streamline processes
Working with vendors can be a complicated undertaking, but it's one that’s made a whole lot easier by using a vendor management system.
These specialized software tools offer several critical features for managing vendor relationships, such as:
- Automation to speed up workflows like the approval of purchase orders
- Supplier performance management dashboards to keep track of key metrics
- Access to vendor information, such as price benchmarking, to help you make informed decisions during the sourcing process
- Insights into industry trends
- Integrations with the tools you’re already using (like ERPs) to centralize data and improve spend management
Learn more about how these powerful software platforms improve the vendor management process here: The guide to vendor management systems.
Vendr: Your best friend for working with SaaS vendors
Modern organizations rely heavily on relationships with software vendors. But buying SaaS isn’t as simple as hitting “sign up now” and plugging in your credit card details.
Strategic procurement teams need a vendor management tool built around the need for effective SaaS purchasing: Vendr.
Vendr’s SaaS buying platform offers all of the features discussed above, plus:
- The largest database of SaaS transactions around to arm you for negotiation conversations
- Analysis of SaaS spending to help you spot areas of overlap and opportunities to consolidate licenses
- Dedicated support from a team of SaaS buying experts during sourcing and renewals processes