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7 tips for effective vendor contract management

Originally published on agiloft.com

Hardly any business runs on its own. Relationships with third-party vendors enable a huge portion of an organisation’s operation, and the health of these relationships are directly connected to revenue. Within this system, vendor contracts can play just as big a role as client contracts.

How organisations manage procurement of goods and services varies widely. However, a vendor contract management system that centralises documents and streamlines work flows can massively improve outcomes and allow for more profitable long-term third-party relationships—whereas a fragmented and inefficient one can have an opposite and detrimental effect.

Contract Lifecycle Management (CLM) software is a growingly popular platform for managing contracts for vendors and other types of agreements across a business’s entire enterprise. A comprehensive software system can offer the high-level AI functionality to manage your vendor contracts more efficiently, more securely, with improved compliance and outcomes, while also reducing spend leakage and driving revenue.

With the use of CLM software and the right vendor contract management plan in place, you can maximise the value of your vendor relationships and minimise potential risks. Insights from CLM software can help you refine your procurement strategy.

Here are 7 tips for effective vendor contract management.

1. Build your vendor contract management plan

Cementing a vendor procurement strategy that includes the drafting and managing of high-performing contracts helps you avoid compliance issues, missed deadlines, imprecise language, and compromised quality of goods and services.

CLM software offers the ability to analyze contract performance trends based on customised KPIs and other metrics, providing insights into which agreements are most beneficial to your goals. Contract management software can also store multiple versions of a contract as it undergoes changes during negotiations, which can be later reviewed without losing anything in the process.

With a system in place to evaluate the company’s procurement demands before the need arises to start a new vendor relationship, your company can assess your options and determine how they might match up against the performance metrics you have in place for past similar contracts.

2. Maintain a dialogue with vendors about priorities and expectations

While much back-and-forth goes into the drafting and negotiation of a vendor contract, it’s also crucial to continue a dialogue both with vendors and internally about company priorities and expectations. A key part of your vendor management strategy is the evaluation of a contract’s performance at the end of its life cycle when it will either be renewed, renegotiated, or terminated. These evaluations will help you establish best practices for future contracts.

Good vendor management gives vendors the transparency they need to meet your expectations. The better a third-party vendor understands a business’s priorities and goals throughout the life of a contract, and whether contracts perform well or poorly based on KPIs and contract analysis metrics, the more successful you’ll be in potential re-negotiations and nurturing mutually beneficial relationships.

3. Consider cost vs. commitment

It’s important to seek competitive bids, though a successful vendor relationship is about more than negotiating contracts that cost less than other suppliers in the marketplace. Building long-term relationships where both parties are committed to supporting one another can lead to better outcomes and potential savings in renegotiations down the line. Effective contract management means negotiating a contract whose terms leave both your company and your vendors happy, rather than drawing a hard line in the sand about one-sided expectations that only show an interest in benefiting your company.

During negotiations, CLM software platform allows all parties streamlined, secure digital access to a contract throughout each version, until everyone is satisfied with the scope, language, and terms of the agreement such as price; timelines, milestones, and deadlines; performance expectations and responsibilities; etc. This can lead to better performing and mutually beneficial contracts.

4. Seek vendors’ input on strategy

Although they are not your employees, suppliers are technically a part of your team—and a crucial component to your success. Your procurement professionals have sought certain key vendors out because they are able to provide a quality deliverable that factors into how your company produces revenue.

When analysing KPIs and setting goals related to the products and services provided by third parties, their expertise can provide valuable insights. It may also lead to discoveries of how to better optimize the terms and performance of vendor contracts in the future in ways that make your company more competitive.

5. Build lasting relationships with quality vendors

The ability to build a long-term beneficial relationship with your top-quality vendors will yield more success than creating a large turnover in suppliers for small short-term cost savings. Building trust can lead to more reliable buy-side contracts and more lucrative renegotiations, as a long-term vendor relationship can facilitate more favorable treatment and terms of agreement.

A contract management system allows a company to analyze its vendor contracts and track their performance from a centralised repository, as well as check broader trends among similar types of contracts. This way, it’s easy to identify contracts that perform well and vendors that meet your performance metrics, and thus you’ll know when it’s time to seek a lasting partnership versus when it’s time to cut ties.

6. Take an interest in your vendors

Vendors are operating a business just like the organizations they work with. They are more likely to value relationships with those who show an interest in understanding their side of things. Discussing what vendors need in order to provide goods and services to you more effectively will lead to better outcomes than pushing for cost savings without understanding their operational needs. This added insight can lead to setting more precise performance benchmarks when negotiating the terms of a contract.

7. Negotiate a contract both parties are happy to sign

While of course you want to draft vendor contracts that deliver quality and increase profitability to your company, a successful negotiation leaves both you and your suppliers happy. By trying to bully a supplier into a one-sided agreement, you may hurt your relationship with them in the long run or even lose their business altogether.

Procurement specialists should enter into the negotiation phase with clearly defined objectives that include but extend beyond price, into areas such as quality and service, and focus negotiations on these objectives.

CLM software gives your procurement team the tools to negotiate the best possible contracts that benefit both your business and your suppliers. Some important functions of CLM software include:

  • Standardised contract templates and clause libraries to manage language across multiple contracts
  • The ability to securely digitally sign documents by all parties
  • Inter-departmental workflow automation tools that lead to shorter turn-around times, better negotiations, and less risk and noncompliance issues
  • A customisable contract repository for quick access to individual contracts or clauses
  • Customisable reports to help analyse performance in terms of quality, efficiency, timeliness, and cost savings
  • Analyse contract obligations and supplier performance

By investing in an enterprise-level CLM system like Agiloft, your organisation can ensure your vendor contracts are efficient, compliant and secure, perform to optimised standards, and are managed in a streamlined and centralised system that significantly reduces costs.



 

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