Vendor contract management has been an area growing in importance in recent years. Why? Businesses today are geared towards outsourcing more than ever. Budgets always include space for a wide variety of third-party vendors, ranging from professional services like consulting and marketing to the raw materials used for manufacturing.
These transactions naturally require the use of contracts to navigate the complexity of B2B commerce. But with so many suppliers to work with, it can be easy to lose track of all your contracts, hence the need for a robust approach to vendor contract management.
Studies have shown that the businesses in many industries represent over 90% of their annual revenue in contracts with suppliers. The importance of managing vendor contracts properly cannot be understated.
What Is Vendor Contract Management?
The process of managing vendor contracts from the point of creation through their execution, with ongoing analysis to ensure proper performance and cost optimization, is referred to as vendor contract management.
B2B transactions are a lot more complicated than the ones we’re used to in a store. Rather than a simple exchange of funds and a receipt, purchases made between corporations require a formal business contract to lay out the terms and conditions of the agreement.
This vendor agreement, also known as a vendor contract, is a vital document for both sides. The seller uses it to verify revenue and sales, while the buyer saves a copy to keep track of spending. Both use it to spell out how the two parties will work together, what obligations each side has, and any severance terms in case one side fails to hold up its side of the deal.
A vendor contract is more than just an invoice, as it covers multiple aspects of the buyer-seller interaction. For example, imagine you’re purchasing new desks and chairs for a new office space. On the contract, you would specify the color, size, and type of furniture you need as well as the timeframe for delivery. Extra details would be provided regarding the payment terms, delivery instructions, and return policy in case anything gets damaged during transit.
Types of Vendor Contracts
Contracts can vary in format depending on the nature of the transaction, the needs of the buyer, and the industry.
- Fixed price: Low-risk transactions made with trusted vendors usually run on fixed price contracts. These are ideal for products and services that aren’t impacted significantly by market fluctuations.
- Cash reimbursable: In addition to the purchase price, the buyer agrees to pay for any additional work associated with the fulfillment of the contract. This option is ideal for more risky or uncertain transactions.
- Hourly rate: If you’re purchasing professional services like consulting or freelance contracting, chances are that an hourly rate and time frame will be agreed upon.
- Indefinite: In any case where the quantity of the goods or the duration of the service is unknown, an indefinite contract will be made to specify a range of minimum and maximum delivery terms. You might see these contracts when no specific deliverables are known.
There are likely other specialized forms of contracts as well, but these are the ones you’re most likely to run into.
How Vendor Contract Management Works
Vendor contract management is naturally the procedure of writing up, negotiating, and finalizing vendor contracts. That is, it involves looking at every aspect of supplier agreements, such as how the documents are stored and tracked, who is allowed to sign and verify purchases, and any key provisions that must be included.
It aims to address a few main areas:
- Mitigating vendor risk associated with the purchase
- Keeping track of the accounting, whether it’s a deposit or a withdrawal from the company books
- Fostering healthy business relationships between suppliers and buyers, such as when to renew a recurring vendor contract
- Streamlining the contract life cycle for more efficient procurement operations
It’s often the responsibility of either the procurement or finance teams, though the legal department may get involved as the agreement is a legally binding document.
Why Does Vendor Contract Management Deserve Your Attention?
The general “sales pitch” for vendor contract management lies in its ability to control costs, mitigate risks, and ensure the efficient delivery of purchased products and services. Other advantages to having a formal system of vendor contract management in place include the following.
- A better selection of vendors: Get more value out of your suppliers by choosing the right ones to start working with in the first place. Contract management involves better decision-making: do you keep a vendor on board or drop it for another that provides better value? And what about fine-tuning your contracts with current suppliers? Contract management overall results in a larger selection of quality vendors and subsequently better deals.
- More proactive planning: Nothing’s worse than being stuck with a bad contract. If you don’t look over the terms properly, you might end up with an agreement that puts your company at risk. Perhaps there’s no auditing responsibilities or reporting requirements to cover contract non-compliance, or maybe there’s no incentive to safeguard sensitive information. Vendor contract management aims to prevent these problems by understanding the liabilities of every agreement and verifying exactly how the contract contributes to the needs of your organization.
- Clearer terms and conditions: One of the first things taught to business strategists is never to sign a contract that you don’t fully understand. Using simple language and terminology, a contract manager can craft agreements that clearly show stakeholders exactly what’s expected of them. Any omissions regarding project scope, deadlines, nature of the deliverables, or payment plans can be costly later down the line.
- Organizational benefits: Contract management makes it generally easier to work with a multitude of varied suppliers. You’ll have a repository to store and manage all your contracts and invoices, providing a holistic view of your vendor relationships. The result is accelerated agreements and faster procurement procedures.
- Ensuring contract compliance: Contracts don’t always go as planned, so learning to prepare for disruptions is part of the job. Breaches in the contract can involve defective shipments of products or failed payments. Addressing these issues early on can protect the reputation and daily operations of your business. Doing so involves performance reviews and audits to ensure that both parties uphold their part of the deal.
- Cutting down on rogue spending: Also known as maverick spending, rogue spending occurs whenever employees purchase products or services on short notice without taking the time to look through procurement policies or contract requirements. Rogue spending can easily result in inefficient use of the budget, hence why contract management must find a way to keep contracts together in one place and make them easily accessible to stakeholders in the business.
These advantages are only amplified with the use of automated vendor contract management solutions that accelerate certain tasks to minimize disruptions and achieve business objectives through comprehensive multisourcing.
Vendor Management vs. Vendor Contract Management
Even a single word can greatly transform the meaning of a term. Vendor contract management must be distinguished by its related but still separate concept, vendor management.
Vendor managers work mainly with suppliers directly to develop long-term business relationships. Their roles typically involve:
- Building an overall strategy for securing suppliers and resources.
- Managing a list of preferred suppliers.
- Maintaining business relationships through communication, support, and transparency.
- Defining performance metrics and key performance indicators that define how to measure the value that you get out of your suppliers.
- Working with service agreements, overarching contracts that cover a multitude of transactions with a single vendor. These documents contain general terms and conditions that streamline ordering from the same company and apply to all transactions with it. More specific details can be added by specific order contracts.
- Handling risk management on a supplier basis.
- Finding opportunities to save, such as consolidating multiple needs into a single purchase to take advantage of bulk discounts.
Contract managers, on the other hand, focus on individual contract agreements. They look at the requirements and terms of each contract and aim to maximize the value received out of every purchase. Their roles comprise:
- Writing up new procurement contracts with the scope and needs of the project in mind.
- Working with the contract lifecycle to ensure that business needs are fulfilled from the beginning of the engagement to the end.
- Negotiating with suppliers so that every deal is a win-win for everybody involved.
You can think of the distinction this way: contract managers have a stricter focus and dig deeper into each individual contract, while vendor managers look at holistic relationships with suppliers across multiple contracts and typically have more contact points with the vendors.
The two processes are also located in different parts of the company. Contract management is usually a component of the procurement team for the buyer and the sales team for the vendor. Vendor management is the responsibility of either the procurement or project management division, or it might even be in an entirely separate department in larger enterprises.
The Challenges Faced by Vendor Contract Managers
Dealing with business contracts is ultimately a risk management exercise. Every business relationship, whether it’s with a manufacturer or a contractor, involves some degree of risk. You might not receive the standard of quality you expect for the purchase price, or contract terms might be broken on a moment’s notice.
Another challenge is working with a large number of varied suppliers at one time. Each one might have its own payment terms and schedules, which can be difficult to budget properly. Storing all the data necessary to keep track of multiple vendors is another potential issue, hence the need for vendor contract management systems.
Vendor Contract Management Steps
We’ve cleared up what working with vendor contracts entails and why it matters, so the only question that remains is how you go about the actual vendor contract management process.
Creating Vendor Contracts
From the nature of the deliverables to the terms of payment, the goal of a contract is to communicate clearly the expectations for both the buyer and seller. To that end, the document must include information like:
- Scope: What are the quantities of product being purchased or the duration and extent of the services rendered? These amounts plus any extra work the supplier is expected to provide define the scope of the transaction.
- Compensation: How much money will the client business pay for the contract’s fulfillment? How will payments be determined if the price is subject to change over time?
- Timeframes: What deadlines are there for the seller to deliver the goods and services? What about payment deadlines for the buyer?
- Legal liability: Determine what happens if the contract goes wrong in any way. Agree upon legal liability beforehand to mitigate risks in the future.
- End result: Depending on how well the interaction goes, the client business may choose to either renew the contract with the vendor for another time or terminate the relationship.
When it comes time to write up the contract document, take the following steps to make sure you include all the necessary details.
- Specify the terms and conditions of the agreement: This section will be the meat and potatoes of the contract. Define the purchase price and payment terms. Lay out the obligations of the seller regarding the delivery of goods and services.
- Work out the legal details: With either an attorney or your legal department, write up the agreement policies like any applicable warranties, any confidentiality provisions, or any promises regarding the quality of the deliverables.
- Don’t leave out compliance and confidentiality: Contracts are legally binding documents, so obtain proper due diligence to enforce them. Have a clause claiming your right to audit a supplier. And since B2B interactions often require the sharing of sensitive data, mention data security and confidentiality as well.
- Know what to do if something goes wrong: Not all contracts go according to plan despite best efforts, so know what you want to do beforehand. Will you terminate the contract? Will litigation or arbitration be allowed? Hope for the best and prepare for the worst when designing supplier contracts.
We recommend against writing the document with a simple word processing program. Look to templates or vendor contract management software to get the job done more efficiently.
Vendor Contracts and Ongoing Management
Contract management doesn’t end once the document has been published and sent. Be ready to take a proactive approach to ensuring contract compliance after the fact. Don’t be reactive and just wait for problems to pop up on their own.
- Have a dedicated team to handle performance reviews. These vendor contract management teams act as a middleman between internal stakeholders and external vendors. Contract management has become such a high-demand field that many jobs have arisen specifically to address it.
- Know the market and what’s on offer to negotiate vendor agreements. Find out which suppliers are the most trustworthy, and don’t forget to study up on compliance requirements, industry-specific guidelines, and other regulations too.
- Facilitate back-and-forth communication between the vendor and the company. Vendors should be considered part of the team in a way, and lasting relationships can be even more valuable than just a one-off deal.
- Evaluate performance at the end of a contract and determine whether to renew the agreement, terminate it, or renegotiate it somehow. Use what you’ve learned over the contract period to develop better practices for future agreements.
The perfect vendor contract management workflow won’t crop up overnight. Developing it is an ongoing process that takes time and continuous improvement, so don’t be discouraged if your first set of contracts don’t go perfectly as planned.
The Role of Software in Vendor Contract Management
Software has found its way into many facets of business operations, and vendor relationship and contract management is one of those fields. First off, it can be used as a digital repository for your contract documents to sort and search through them quickly. But software goes beyond being just a storage medium.
- Creating digital documents: From invoices to the contracts themselves, vendor relationship management is much easier through software. The use of rich text editing tools allow users to sign the document, add comments, and export to a PDF format. Templates can also be used to speed up document processing.
- Ensuring data security: One of the greatest forms of vendor risk is the ability to entrust sensitive data to third-parties. Enhanced security available in most software platforms will greatly reduce this risk. For instance, role-based access control will prevent unauthorized parties from accessing certain sensitive documents and information.
- Notifications: Phone notifications are perfect for contract management, as constant reminders are necessary to keep things moving along. Take approval workflows as an example; it’s possible the legal team might have to approve a contract once it’s written, and a notification speeds up the process considerably.
- Integrations: Vendor contract management ties in with many other aspects of business management, so integrations with other software suites your business already uses can be greatly beneficial. You can sync up dates and deadlines with a calendar or combine your communication platform with the software to boost collaboration.
Software overall cuts down on the use of paper-based recordkeeping, which cuts down on human error and inefficiencies.