How To Set Up Successful Vendor Contract Management

Updated June 28, 2023
9 min read
How To Set Up Successful Vendor Contract Management

Introduction

If your organization purchases goods or services from external suppliers, vendor contract management is 100% an integral part of your procurement process. If this process is executed correctly and considering all the legal and organizational points, your business will receive the best conditions in the price-quality ratio.

In this guide, we cover best practices for a successful vendor contract management process, key stages of any contract, identifying supplier needs, creating a team for vendor contract management, developing a supplier contract management plan, and using a ready-made template vs. hiring a lawyer. If you want to improve your vendor contract management, let’s get started.

Why is Vendor Contract Management Important?

For any organization, vendor contract management not only helps to define and effectively manage relationships with suppliers but also ensures compliance with important regulatory requirements and minimizes the risks that your organization may face.

For example, you buy raw materials from a vendor. You can use vendor contract management best practices to ensure a peaceful life — make sure you receive quality goods on time and on terms that work for you. To avoid problems with the vendor, you can sign a vendor agreement that outlines all the important points for you. That's it, you're 99% insured against problems with your vendor.

So what exactly can sign a vendor agreement save you from?

  • Value for your money: When you have a vendor who meets their contractual obligations, you clearly see where and how vendors may fall short. And that's already half the success. With adequate vendor contract management, you will know for sure that you are not paying 220% for a substandard product.

  • Risk management: What risks does a partner have with vendors? The financial stability of the vendor, insurance, risk anticipation — all of this can be regulated by vendor contract management. Again — one of your signatures is under the vendor agreement, and you are insured against your vendor disappearing and not saying goodbye to you.

  • Regulatory compliance: Even the smallest vendor that delivers you a minimum amount of goods must work legally and in accordance with the laws of your country and state. Therefore, a quality vendor contract management system can save you from legal troubles.

Take California, which has specific regulations for vendor contracts in the public sector. These regulations clearly state that vendor contracts must be awarded to the lowest responsible bidder. Additionally, it is specified that the vendor must meet certain qualifications and certifications. If you do not meet the system requirements, you may be fined. To avoid this, your business must have a quality vendor contract management system.

Six Steps to Creating a Perfect Vendor Contract Management System

Now that everything is clear with the question, "Why do I need a vendor contract management system?" we can move on to why we are here. What can you do to create a perfect vendor contract management system that protects you from risks and legal issues?

Step 1: Identify vendor needs

What does your organization or business need? What products and services does your organization require, and who supplies them to your city, region, or country? Do the capabilities of potential vendors meet your needs? Before getting your hands on a vendor contract, you should cover the basics.

Also, when building your vendor contract management system, you need to find the best vendors you can rely on and sign a vendor contract with them. When looking for a supplier, you can pay attention to customer reviews, price-quality ratio, reliability, and timeliness of delivery.

Step 2: Create a vendor contract management team

Once you've identified your organization's needs, it's time to assemble your vendor contract management team. You'll need to recruit people from procurement, legal, and finance departments — or do it yourself if you have these areas of responsibility. This vendor contract management team should change vendor contracts, negotiate terms and conditions, and ensure that vendors meet their contractual obligations.

If you manage to assign people to handle vendor contract management, be sure to clearly define who has what responsibilities.

Step 3: Develop a vendor contract management plan

The third step in setting up successful vendor contract management is to develop a plan. In short, this is a list of processes and procedures that will be followed to manage vendor contracts, including how contracts will be reviewed and renewed, how disputes will be resolved, and how vendors will be evaluated. To learn about vendor contract management plan best practices, you will have to conduct research among businesses similar in nature and size to yours.

Also, when planning your vendor contract management, take into account the number of vendors you work with and the types of products and services you require.

Step 4: Create a vendor agreement

The fourth step in setting up your ideal vendor contract management finally involves working with legal documents. You need to create a vendor contract (or vendor agreement) that meets your needs.

In general, you can go two ways — hire a lawyer to do all the work for you or use a ready-made template. Which option is better?

Talking about hiring a lawyer, you can highlight such moments as convenience (because all the work will be done for you), reliability (because a lawyer knows exactly what to include in your contract), and costs (because a lawyer's work takes time and requires payment).

As for the vendor agreement template, it is a faster process (taking up to 10 minutes all in all, and you don't even have to leave your house) and cost-effective (templates cost ten times less than a lawyer's work).

It's up to you to decide, as it depends on your abilities or desires. No matter how you get that agreement, make sure it complies with the laws of your state.

Step 5: Implement the vendor contract management plan

When you have a vendor with whom you intend to work, a team, and a vendor agreement that outlines all of your requirements and rules, it's time to start the engine. Sign a contract with the vendor and specify regular reviews and updates, contractual obligations for vendors, and timelines that will help you resolve any disputes.

Step 6: Monitor and evaluate the vendor contract management plan

The final step, which is more like a marathon by nature, is monitoring how your vendor contract management process is working as you need it to. Here, it is necessary to regularly track key performance indicators, such as vendor performance and cost savings, and adjust the plan as needed.

Vendor Contract Management Best Practices

How to understand that your vendor contract management process works as you need? To ensure that you are getting the best value for your money, you can follow the best practices for vendor contract management. These include:

  • Regularly and responsibly conduct vendor audits. Do not rely on the honesty of vendors. Always verify that they are responsibly fulfilling their contractual obligations.

  • Use vendor contract management software or a vendor contract management system to streamline the process. This way, you can automate routine tasks that require a lot of time and attention. For example, this can include contract creation, vendor onboarding, and contract renewal.

  • Talk to your vendors. Vendor contract management is not just about getting a unilateral benefit. Constructive dialogues with your vendors can lead to more advantageous conditions for both you and the vendor.

  • Build a process for handling disputes and conflict resolution. Vendor contract management is incomplete without this aspect.

Conclusion

It is impossible to overestimate the importance of vendor contract management - vendors provide you with raw materials and bring you income. Therefore, building effective vendor contract management should be your number one priority.

Remember that vendor contract management requires your constant attention, but there are always moments that can be automated and streamlined so that they do not hang over your shoulders like a constant burden.

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Article by
Inna Chumachenko
Lawrina

Inna Chumachenko is the Content Lead at Lawrina. She is responsible for managing all the content found on the blog, guides, and other website pages. Inna has a degree in philology and a vast interest in law. In her role at Lawrina, Inna oversees the content team, establishes collaborations with writers, and curates content from various contributors.

If you have any questions or suggestions regarding the content for Lawrina, please feel free to contact Inna directly via email at i.chumachenko@lawrina.org or connect with her on LinkedIn.

Frequently Asked Questions

What is vendor contract management?

All questions regarding price, quantity, and quality of supplies are regulated by the vendor contract, which is a component of vendor contract management. Overall, this is a complex system that involves building relationships with reliable vendors and regulating conduct and delivery conditions.

How can I ensure that my vendor contracts are accurate and complete?

To obtain a legal and effective vendor contract, you can either consult a lawyer or create the contract yourself using a template created by lawyers. Both options are practical and of good quality, but the main difference lies in the amount of effort, time, and money you will spend in obtaining the document.

What is vendor contract management software?

Like any software, vendor contract management software exists in this world to make it easier for businesses to cooperate with vendors. This software automates processes such as contract creation and management, vendor onboarding and qualification, contract approval workflows, contract renewal management, and vendor performance tracking and reporting. In addition to automation, the system provides insights into vendor performance, allowing companies to better understand the quality of their cooperation with a particular vendor.