At its core, vendor management is relationship management. It’s all about the relationships an organization maintains (and benefits from) between itself and external partners, third-party service providers, and suppliers. Vendors, like anybody else, want to work with companies that treat them with the respect they feel they deserve.
Proper vendor management means making the firms and people you do business with feel valued and appreciated. It’s how the best companies develop customers into something closer to lifelong business partners.
A Working Definition of Vendor Management
In simple terms, vendor management processes are how high-quality organizations develop mutually beneficial relationships with outside vendors and service providers through support, empowerment and increased efficiency.
Vendor management best practices will begin at the early stages of choosing the proper vendors to best meet company needs. They will progress through cost management, vendor risk mitigation, payment terms and methods. The word “vendors” in this context includes service providers, consultants, advisors, and providers of “digital” products and services (online or internet-based providers).
Organizations should use a dedicated vendor management system that encompasses specific vendor management software and risk, audit and accounting tools designed to be compatible with vendor management policies and practices.
Steps in the Vendor Management Process
Vendor management can be looked at as having four distinct functions.
Choosing the best vendor to meet a particular need of an organization or supply a particular item to an organization is the foundation of vendor management best practices. Companies should review potential vendors from as large a pool as possible. The costs and level of service that each can provide should be scrutinized to pick the right vendor to help the company reach its long-term goals.
This part of the process entails negotiating fees and general terms of service. When both parties are satisfied that a mutually beneficial agreement has been reached, contracts need to be signed and other smaller details should be ironed out. The final part of “onboarding” is the integration — as much as possible — of each system into the other especially establishing ease of communication and order placement.
The monitoring function is an ongoing vendor management risk assessment system that keeps an eye on new and established vendors. Firms shouldn’t hire vendors they don’t trust, but neither should they trust blindly. Risk assessment should be a continuous endeavor.
In the past, the biggest risk from vendors was fraud from overbilling or theft. Today, now that vendors often have access to internal communications systems through email and company computer systems through order and invoicing systems, the more prevalent vendor risks take the form of “hacking” or other cybersecurity threats.
Monitoring is not just for the benefit of the hiring firm. Proper oversight of vendors will also ensure timely and accurate payment of fees that vendors have earned.
When a contract with a given vendor ends on its regular schedule or is prematurely terminated for one reason or another, a complete “offboarding” needs to take place. This involves purging the vendor's information and data from the company’s active systems as well as deleting any and all financial records.
Offboarding should not be considered final until all business with a vendor is completed. Good vendor management policies will make allowances for things like long-term warranties; service contracts; unfulfilled deliverables; and the potential for future returns, exchanges and dispute resolution.
Key Job Roles in Vendor Management
To the extent possible, firms should have personnel exclusively dedicated to vendor management and vendor relationships. This can be cost-prohibitive, but it is an ideal to strive for.
Vendor Contract Representative
This role can be thought of as a human resources officer for third-party suppliers and service providers. Their job is to oversee the process of creating and executing vendor contracts, including fee agreements, NDA forms to protect company intellectual property, service contracts and other paperwork.
Dedicated Vendor Manager
Vendors should have a liaison between themselves and the company they are working for. This person acts as the “point person” for the company, answering questions and coordinating responses to vendor concerns.
Vendor Financial Accountant
In an ideal situation, an organization will have an accountant whose sole job is to oversee company finances (billing, payment and accounting) that are associated with third-party vendors. If this cannot be achieved, the accounting department should use dedicated vendor accounting software and state-of-the-art vendor accounting tools.
Vendors' performance should be reviewed regularly, and performance should be tracked. The job of the vendor supervisor is to make sure vendors are living up to at least their minimum contractual obligations. If bad service or poor performance ends up costing the company money, it’s this person’s job to take steps to recover it and rectify the situation.
This administrative position is designed to work in the interests of the company. It involves the review of any proposed changes to contracts and things like scheduling any necessary meetings and contract renewal negotiations.
Why Emphasize Vendor Management?
Good vendor management will produce valuable benefits to both the company and the vendor.
Vendor management is a form of risk management. Weeding out bad vendors and continuously improving vendor service will yield improved revenue and profit over time.
Solid, mutually profitable relationships with vendors will lead to faster resolutions of problems when they occur. Vendors who are happy with an organization, enjoy working with them, and making money from them will hurry to solve that company’s issues.
Choosing the Best From the Start
As we’ve stated above, vendor management begins with the selection process. Sound vendor management procedures will mean future problems will be avoided by choosing quality vendors from the start.
Ease of Hiring and Firing
Standardizing the way vendors are managed leads to smooth onboarding and offloading situations. If the proper system is in place, things can be done with a few clicks of a mouse. If not, and each vendor must be handled like a unique entity, things can get messy.
Vendor Management Tools
We’ve highlighted below just a few of the over 190 items we offer that specifically deal with the topic of vendor management.
GDPR and How It Affects Third-Party Vendor Handling of Personal Data
This is a transcript of a conversation with accounting professional and Protiviti Managing Director Jeff Sanchez discussing the changes data controllers and processors will need to make in the handling of personal data to ensure compliance with the law.
Vendor Assessment Questionnaire
This is a comprehensive list of important questions to ask about vendors relating to risk, audit, and accounting subjects.
Vendor Contracting Policy
This sample policy establishes guidelines and procedures related to vendor contracting issues.
Vendor Selection Policy
This sample policy establishes a vendor bidding policy and ensures that all vendors hired have a valid, beneficial business purpose.
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