4 Tips to Simplify Vendor Management
Companies rely on third-party vendors to create efficiencies in all aspects of their business.
Whether you work alongside service providers or direct suppliers, adopting successful vendor management practices can help you maintain visibility over where your company is spending across various vendors, track billing cycles, and ultimately reduce wasteful spend.
To enhance your vendor management, let’s review:
- What is vendor management?
- Why does vendor management matter?
- Whose responsibility is it to manage vendors?
- Tips for vendor management
What is Vendor Management?
Vendor management is all about developing, managing, and controlling vendor relationships and contracts. It encompasses pricing, quality management, and the overall business relationship. When done correctly, a simple business transaction is transformed into something more: a partnership where both parties are delivering value to each other.
Broadly speaking, the vendor management process can be broken down into four-steps:
- Establishing business goals – What are the reasons you need a vendor? What value are you hoping to achieve?
- Selecting the best potential vendor – Who can provide the balance of cost and successful delivery of the goods or services you require?
- Managing suppliers on an ongoing basis – Is the vendor providing the promised performance and output?
- Consistently meeting your goals – Is the vendor providing meaningful ROI that makes it worthwhile to continue paying for the product or service?
If you’re currently working with one vendor, vendor management may not seem all that complex. But what happens when your company scales? As you create autonomous departments within your enterprise, each with their own SaaS and vendor needs, having a centralized vendor management system will ensure you’re minimizing costs while driving the efficient delivery of goods or services.
According to Gartner, vendor management helps you “select the right vendors; categorize vendors to ensure the right contract, metrics, and relationship; determine the ideal number of vendors; mitigate risk when using vendors; establish a vendor management organization that best fits the enterprise.”
By following these practices, you can hit your objectives, reduce the likelihood of business disruptions, and ensure that you’re receiving as much value as possible from vendors.
Why Does Vendor Management Matter?
Many long-term vendor relationships continue out of a sense of familiarity or loyalty, even if the pricing or features don’t match up with the company’s budgets and current needs.
A strong vendor management policy can help you hold vendors accountable by continuously performing cost-benefit analyses to confirm that the relationship is mutually beneficial.
For that, it’s critical that you determine you must determine ahead of time what a successful vendor relationship looks like and then hold vendors to that standard. This means knowing the ROI of every vendor relationship you have so that you are allocating budgets wisely and making changes where necessary.
One common misconception about vendor management is that it’s all about simply bargaining for the lowest possible price. Achieving cost efficiency is a goal, but it’s not the only benefit of vendor management. Other benefits include:
- Regularly reviewing and renegotiating vendor relationships can create bidding wars between parties, which results in better pricing.
- Improved relationships with vendors facilitates collaboration, especially when adopting new technologies.
- It allows you to identify small issues with vendors before they are magnified.
- Prevents the misuse of funds, either through under-utilized software, SaaS creep, or duplicated subscriptions.
Once the vendor contract has been signed, the work isn’t over; it’s just beginning. There needs to be an ongoing evaluation of vendor performance to ensure you’re achieving a positive ROI.
Whose Responsibility Is It to Manage Vendors?
Managing vendor relationships is a critical and yet sometimes neglected aspect of vendor management.
As CIO notes, “Left unmanaged, vendor partnerships can quickly fall behind. However, by establishing a point-person who is focused on vendor relationship management, a strong dynamic partnership can be formed.”
Historically speaking, the procurement department was in charge of managing vendors. However, these days, department heads—such as heads of marketing or sales—are primarily responsible for managing the vendor relationships. This makes sense since they are the main client of the vendor. So, the department heads are the ones who need to handle those relationships and embrace a smart vendor management strategy.
The distributed nature of vendor management is another reason why it can be difficult to manage vendors across a large company. There’s less accountability and more parties that need to be observing best practices. This is why vendors and spend management tools can be a lifeline, especially as your company grows.
Tips for Vendor Management
When it comes to managing vendors, there are three main points of emphasis:
- Establish metrics of success from the get-go and monitor them
- Manage vendor spend
- Build and maintain relationships with key vendors
1. Establish Metrics of Success
Before you consider paying a new vendor, you should first determine the reasons and estimated ROIs for doing so. You must identify and establish what business goals this vendor will help accomplish.
Your goal could be something as simple as automating a common accounting task or as complex as reimagining how an entire department performs its duties. The goal is up to you. Every business will have different reasons for selecting vendors. Therefore, your team must come together to strategize and set benchmarks.
By developing your metrics of success from the outset, you can identify the right vendor to maximize your company’s success. When looking for cost-cutting opportunities, these benchmarks can help you measure and evaluate vendor performance. For that, you need the ability to track all of your vendor expenses to determine whether they’re hitting KPIs and providing a positive ROI.
2. Manage Vendor Spend
One of the most important aspects of vendor management is managing, tracking, and then analyzing vendor spend and performance. Actions you can take to properly manage vendor spend include:
- Run RFPs for Largest Vendors
- Benchmark Pricing
- Maintain Vendor Expense Visibility and Control
Run RFPs for Largest Vendors
Requests for proposals (RFPs) help you simplify the vendor selection process by using a weighted scoring system to compare and contrast each vendor’s offering. By fleshing out an RFP, you can judge how well the vendor understands your company, budget, and needs.
Although each RFP will vary, it commonly includes:
- Your company history
- A description of your project or goals
- Specific requirements or desired outcomes
- Your budget
In addition, an RFP should contain questions that you’d like the vendor to answer, including:
- Can we start on a trial basis? – Whether you’re receiving a product or service, it’s smart to test it out before sinking a lot of money into something that may not be a good fit. This is especially true for software purchases which are heavily reliant on user experience.
- Do you have case studies or references? – Ideally, the vendor you’re reaching out to should already have a track record of success with companies that share similar characteristics and goals to your own. By seeing what an outside party has to say, you can get an unbiased assessment on the vendor’s ROI.
- Who are your competitors and how are you better? – Your vendor should be confident that their service is the best option. A vendor that is assured in its delivery and pricing should have no problem offering their direct competitors to allow you to do your own research.
- How will you protect against security risk? – Security is always a critical factor to consider, particularly for SaaS vendors. Work with your IT team to determine what they need to know about the vendor in order to mitigate risk. Consider asking vendors what industry standard certifications they have and request a copy for review.
- Do I have to worry about vendor lock-in? – For SaaS, vendor lock-in makes it difficult or exorbitantly expensive to stop using the product. To determine this, ask if the SaaS system is open or closed. If it is open, request a review of the APIs.
By performing your due diligence, you ensure that you partner with vendors who drive your business forward.
Benchmarking pricing is an important part of the RFP process. And it should be done for both small and large vendors alike.
Most companies aren’t receiving “fair pricing.” According to NPI Financial, “In the first half of 2018, only 5% of the IT purchase quotes reviewed by NPI were priced at fair market value based on market benchmark comparisons. That number is dangerously lower than what it was just a few years ago when ‘fairly priced’ IT purchases and renewals hovered around the 30% mark.”
At its core, benchmarking can be boiled down to comparing the prices you pay for a product or service compared to what other vendors may provide or what others are paying for the same product. By leveraging benchmark data, you’ll better understand your vendor’s pricing and can challenge it during contract negotiation.
Historically, price benchmarking was a painstaking manual process—one that was difficult due to markets being in a constant state of flux. Now, there are automated programs and intelligence tools that can track market prices in real-time, making it quick and easy to compare market offerings and find value from other vendors.
Maintain Vendor Expense Visibility and Control
The final aspect of managing your vendor spend involves regularly reviewing what you’re paying for, whether you’re using it, and if it’s providing any value. For that, you require real-time visibility into your financials, including your accounts payable data.
Powerful automated software can help you know where every dollar is being spent. It can identify who is in charge of each vendor spend, identify which are subscriptions, when they need to review, and automatically discover price benchmarks on your behalf. Additionally, with the right technology you can:
- Identify and eliminate wasteful spending, especially on duplicate or redundant software licenses
- Handle vendors and vendor payments all from one place
- Manage current and future spend
Without visibility into your financial data, you can’t make informed decisions. Vendor management software offers real-time visibility to help you identify positive ROI vendors, as well as any wasted spend that needs to be cut.
3. Build and Manage Relationships with Key Vendors
A crucial aspect of vendor management is building mutually beneficial relationships with your service providers and suppliers. Doing so will help both parties come to the bargaining table in such a way that everyone walks away happy and strengthens the relationship. Plus, when done with the right approach, contract pricing negotiations are a way to reduce your costs.
So, what is the right approach to negotiations? It’s the combination of a positive mindset and offering value-based metrics both parties can agree on.
Harvard Business Review recommends that businesses seek a win-win result: “Treat the selection process as if you were hiring a new employee. Work with your team to develop objective criteria, agree on respective weightings, and then make a value-based decision... applying hardball tactics could destroy the quality of delivery.”
When drafting your key metrics, set realistic expectations. That way you can avoid moving the goalposts throughout the relationship.
While relationship-building is especially critical for your largest vendors, you still should treat smaller vendors the same way you would your employees. Even if you only interact infrequently, it’s important that you actively work to motivate them to be proactive in the relationship.
Note: Not all of your vendors will have any kind of face-to-face. Some are simply self-service SaaS tools that can be managed by automated software.
Ramp: The Control Center for Better Vendor Management
As the world becomes more interconnected, the importance of proper vendor management will scale in proportion. Especially now, as entire departments are working remotely, communication and centralized control can reduce wasted spend and ensure continuity of software across teams. To help with that, Ramp’s spend management platform includes advanced vendor management built into your corporate card.
The vendor management software helps you plan your spend, streamline procurement, and eliminate SaaS creep. With the Control Center on your side, you’ll enjoy better visibility and ensure you’re spending in all the right areas.
Sign up with Ramp today to see how you can enhance your vendor management.