It is hard to imagine a business without at least one third-party vendor involved and the reality for many businesses is a reliance on a multitude of third-party vendor contracts, providing both services and supplies. Businesses often do not have the correct processes in place to get the most value out of those relationships. Especially if a large organization is relying on tens of thousands of vendors in their business eco-system. Although contract arrangements may seem like a simple task; a business makes an arrangement with the third-party vendor that can provide a service or supply cheaper and faster than anywhere else. But in reality, due to necessary compliance requirements and regulations for standards and dealing with any complications, the process is far more complex. Successful contract management for third parties and vendors rely on a set of key elements and processes that can help manage each stage of the contract lifecycle, so your business can minimise the risks involved and get the maximum benefit from each vendor.
Identifying Vendor Risk
Once you have outlined either an immediate or a strategic need for your business, then you can consider vendors and proposals. However, it is important to conduct due diligence for any potential future third-party vendor. According to a global study, a third of all companies did not do any due diligence on third-party vendors they entered a contract with. Not only does that create a huge amount of risk, but also means they will be unlikely getting the best value out of their third-party relationships.
To prepare for a successful contract lifecycle, your compliance or procurement team need to be creating risk profiles that rate risk for performance, quality, financials, data exposure, service, and security. This is a crucial step to ensure any future arrangements do not fall foul of non-compliance, poor service, goods, or litigation. All of which can have negative consequences for the success of your business, both financially and reputationally. You want to ensure that your business is not only going to be using the best value supplier, but a vendor that is not going to underperform, cause unnecessary risk and disruption to the running of your business.
Utilising the correct sources and databases for your risk profiles and assessment can often be overlooked, your risk profiles need to be relevant to elements of your business and the situation. Different countries and contracting for specific products and services for example, will create different risks and therefore different risk profiles. For a more in-depth look at identifying and managing third-party risk you can read here: Successful Third-Party Risk Management.
Setting Contract KPI’s
It is an important part of vendor contract management to measure and evaluate performance, efficiency, and standards. Therefore, it is useful to negotiate and set agreed Key performance indicators (KPI’s). These should be extensively used within contract management, but are especially useful in terms of third-party vendors. By having performance indicators set into the contract, it protects all the parties involved from a future fall in standards and can identify any areas where improvements can be made or help identify any risks. It also ensures fact-based decision making and helps your business gain the most value out of a contract.
Good third-party vendor management does not stop once the contract has been signed and the services involved start to flow. You need to have continuous monitoring and tracking during the contract lifecyle and an outcome management process. Whether this is automated or manually managed, it is important to continually audit your third parties, for both the success of your business and to reduce any future risk. Regular auditing and reviews of your KPI’s and vendors can protect your business from poor performance, non-compliance and minimizes risk. By monitoring these processes and analysing operational data, you can plan for future agreements, are less likely to miss contract renewals and can quickly solve any issues that arise from deliverables, operations, or non-compliance.
When you are trying to build relationships with third party vendors, communication is essential for all parties involved. Information relating to contracts needs to be readily available and communicated easily and effectively with all third-parties, and a framework for tracking and reporting performance and progress is the best practice when it comes to communication and managing expectations. By providing a visibility and accessibility to your vendors, you can create an environment that produces an excellent working relationship and allows KPI’s, contract reviews and deadlines to be monitored by all involved, helping the contract management process to run as smoothly as possible.
Consider Implementing Contract Management Software
Although smaller companies may be able to manually manage the processes involved with vendor contract management, any mid to large level businesses will find a manual process is not only exceedingly time consuming, but an inefficient use of resources. A practical solution is to implement Contract management software. If you already have a system in place, most newer software can integrate into existing systems and provide you with any features your business needs to improve. The software available, can automate all the above steps and increase productivity and efficiency and therefore have huge financial benefits.
Having an overview of workflows and reducing the time spent by your employees on the actual management of contracts due to the efficiency of an automated Contract Management system, means that productivity will improve, which in turn will improve business growth and performance. By optimizing your vendor contract lifecycle management by using the tools included with the software, you can keep on top of any KPI’s or renewal of contracts, allowing you to assess risk and project long-term revenue. Plus, the reporting and auditing features of third means you are always alert to compliance regarding contract terms and provisions, so you can avoid extra fees and expenses. Ultimately, the best way to master third-party vendor contract management is by implementing management software, and by embracing this technology, you have the benefit of being fully prepared for any business expansion and growth in number of vendors.
If you feel this is something that could work for your business, then contact us at Symfact and we can provide the right solution for you.