Supplier relationship management seeks cost reduction, vendor performance improvement, and long-term partnerships.
A strong contract management process, which goes beyond negotiating and drafting contracts, supports progress towards each of these goals by assessing and managing vendor expectations and KPIs.
Learn how vendor contract management helps meet procurement goals and learn the seven steps to efficient contract management.
Vendor Contract Management
Overseeing supplier agreement negotiation, approval, and execution is vendor contract management. A good supplier contract management strategy involves regular performance evaluations to verify vendor compliance.
In your vendor agreements, service providers may have to meet minimum software uptime criteria.
You’ll meet quarterly with vendor stakeholders to discuss contract performance. If vendors disappoint, you’ll adjust their contracts with improvement methods.
The procurement team manages contracts, although the legal department may help write and negotiate new ones.
What are contract management goals?
Contract management has three goals:
- Reduce vendor risk. All vendor relationships have financial, operational, and reputational risk. Contracts reduce risk by setting minimal expectations. Contractually requiring providers to conduct data security evaluations helps reduce SaaS security risk.
- Make sure suppliers follow contracts. Contract management requires regular review meetings to evaluate vendor performance and hold them responsible to KPIs.
- Establish long-term vendor relationships. Long-term vendor partnerships increase procurement ROI (the fewer often you need to search new vendors, the cheaper your procurement expenditures). Contract management helps you spot issues like contract non-compliance and KPI underperformance early on, improving long-term relationships.
What distinguishes procurement from contract management?
Procurement management oversees and directs your company’s procurement activity. That includes:
- Finding corporate needs
- Requesting purchases
- Evaluation and comparison of vendors
- Negotiating supplier contracts
- Make purchase orders
- Verifying received goods or services
- Approve and manage invoice payments
- Maintaining vendor connections
Contract management includes contract negotiation, creation, execution, and vendor relationship management (such as contract compliance).
So, contract management is part of procurement management.
Contract Management Process For Effective Vendor Management
Seven steps comprise the usual contract management workflow.
Depending on goals, procurement type (supply chain or SaaS), and internal rules, each company’s contract lifecycle management approach will vary.
Start with this seven-step contract management method and customise it for your company.
1. Contract drafting
The vendor and procurement team discuss goals, expectations, and risks before drafting an initial contract.
Your legal team or vendor may prepare this, depending on your arrangement.
2. Vendor expectations negotiation
Though the complete agreement might be negotiated before writing, an initial contract is usually drawn up to start negotiations.
After laying out all vendor expectations in the contract draft, the parties may want to refine points like:
- Terms of payment
- Key dates for onboarding and implementation
- Data security commitments.
Any agreed-upon revisions are edited into the contract document.
3. Approve final contract
For contract approval, all stakeholders evaluate and approve the final deal.
Since all parties participated in drafting and negotiating, this process is usually smooth.
However, a senior leadership team member may need to approve the contract.
4. Contract signing
When all parties agree to a contract, signatures are needed.
Today, digital signatures are prevalent. Digitising this phase allows stakeholders on both sides to legally validate a contract without printing it and getting everyone’s signatures.
5. Meeting contract obligations
The agreement’s terms are implemented (or executed) during this stage.
Payments are made, products are delivered and approved, software is implemented, and personnel are educated.
6. Monitor vendor performance
Your contract management team must monitor vendor performance and hold them accountable throughout the arrangement.
Tracking vendor KPIs and scheduling relationship management meetings to analyse performance and propose solutions achieves this.
7. Contract renewal or churning
You can terminate or renew the contract with the seller at the conclusion of the period.
This allows you to renegotiate pricing and performance assurances. The contract management process starts over with renegotiation.
Contract management best practices in Effective Vendor Management
Clarify your expectations.
Successful vendor contract management requires clearly conveying goals, priorities, and expectations. Much of the contract is for that, but many aren’t explicit enough.
This leaves some expectations open to interpretation, and conflict emerges when they aren’t met.
Contracts often say “within a reasonable timeframe”. Some examples of this would be something like, “The provider will respond to new customer support tickets within a reasonable amount of time.”
Without a “reasonable timeframe”, this clause may contradict.
72 hours may seem excessive if you’re waiting for your business banking platform’s help to identify a missed payment. However, a provider with half their crew off due to a bank holiday may find this timetable reasonable. Instead of “a reasonable timeframe,” a good contract will include vendor deadlines.
Be clear about your relationship expectations throughout contract drafting and negotiation and include them in the agreement.
Review contract performance objectively
You should objectively report contract performance during vendor review sessions.
The easiest way to maintain impartiality is to focus on the KPIs you set during negotiation.
Imagine your quarterly contract performance review with your payroll software provider. The platform’s downtime hinders operations management.
Your contract’s 99.8% uptime minimum KPI makes it easier to hold your vendor accountable. No more “It seems to us that your platform is experiencing too much downtime.” Instead, remark, “Your uptime this quarter has been 99.5%, which is below the contracted KPI of 99.8%.”
Improve contract negotiation skills for efficient vendor management
Vendor management requires SaaS contract negotiation skills.
It goes beyond price haggling. Negotiation skills are needed:
- Key deliverable dates and milestones
- KPIs and performance expectations
- Addressing support ticket issues
You may enhance your contract negotiation skills with practice, but it’s best to prepare before negotiating.
Control contracts in a vendor management platform
Contract management software organises vendor contract data so you can always find it and streamlines manual operations to boost profits:
- Templates speed up contract creation.
- Contract renewal notifications keep contracts alive.
- Compliance risk management improves with automated approval workflows
If you just require document storage, a contract repository works. Vendor management involves relationships as well as contracts.
To maximise third-party vendor relationships, invest in a vendor management system beyond contract management.
