Vendors have become critical to delivering business solutions in today’s fragmented tech landscape. Cost pressures induce several enterprises to outsource even core roles to vendors.

Enterprises that curate an ecosystem of competent vendors gain a huge strategic advantage. But the increasing scope and scale of vendors make relationships complex and raise several vendor management challenges.

1. Vendor Contract and Documentation Issues

Most enterprises fail to keep track of vendor contracts or maintain proper documentation of their vendors. As per the Venminder “State of Third-Party Risk Management” survey, documentation is the biggest vendor-related challenge for small and medium firms.

Vendor information becomes stale as soon as recorded. Electronic vendor records are no exemption. There is no workaround to updating vendor records. But updating records distracts the time and effort from the core business activity, both at the enterprise end and vendor end. Worse, small and mid-sized companies do not have the expertise to automate the process.

An online vendor management system is the antidote. A good vendor management system:

• Centralise scattered, disparate vendor information.
• Provide live insights into the stage of the vendors, such as vendors with a contract in place, and vendors requiring renewals.
• Analyse contracts terms to categorize vendors based on their strategic value. For instance, a long-term vendor may be more interested in a sustained relationship. But a short-term vendor would value price over the relationship.
• Offers safeguards to ensure vendor compliance with legal regulations and security protocols. It ensures the enforcement of an SOP, to ensure vendors to not stray beyond the required parameters.

2. Risk Assessment

Vendors come with financial, operational, compliance and data security risks. Only the extent of the risk varies from vendor to vendor.

Perform due diligence. Cost is an obvious consideration when selecting vendors. But also consider other vendor factors such as financial stability, experience and skill set of key personnel, internal quality controls, economies of scale, and regulatory records.

Deploy competent experts to conduct a regular risk assessment. Make sure risk assessment goes beyond “check the box” compliance. Identify vendor-related risks at every step of the vendor management process. Assess the impact of such risks based on the risk appetite of the enterprise.

Keep the vendor management policy flexible. In a fluid external environment, the needs and requirements keep changing, and so do the risks. Assess risks at regular intervals, especially when the external environment or internal circumstances change.

Track the symptoms of poor vendor management. Common symptoms include IT spend being too high or too low, vendor-related disputes, and unclear decision lines. Review vendor relationships if such symptoms persist.

3. Security Issues

Data entrusted to vendors is always susceptible to breaches. Vendors face risks such as rogue insiders, code vulnerabilities, and various other threats.

There is no workaround to a strong working relationship between the vendor and the IT team. The best vendor management systems co-opt security considerations. It lays down protocols for:

• Geo-redundant storage. The location and type of storage are critical for regulatory compliance, such as adherence to HIPAA norms.
• Security protocols in place, such as encryption of files in transmission, type of firewalls in place, and more.
• Legal compliance, such as PCI compliant payment information.
• Enterprise IT policies, such as public cloud usage policy which covers acceptable uses for SaaS, BYOD policy, and more.

4. Performance Issues

Not all vendors are equal. Many times, the enterprise cannot keep track of the vendor performance. This snowballs into major issues related to performance and coordination.

Institute streamlined ways to communicate and collaborate with stakeholders across the business. Have a robust collaboration channel for vendors and key stakeholders to communicate easily.

Deploy a centralized, indexable database, for vendors to upload documentation. Make sure the document management system has version control, to prevent confusion.

Automate sourcing and procurement. Solve any integration issues with vendor systems. This may require developing API connectors.

Set realistic and achievable deadlines for deliverables. Setting impossible deadlines impede vendor performance and value creation. It also prevents meaningful collaboration.

Establish KPIs to measure vendor performance. A good KPI covers the following areas:

• Relationship management, measured in terms of the vendor’s commitment, flexibility, and innovation,
• Cost management, measured discounted pricing, order costs, and similar factors.
• Quality of output, measured through staff expertise, order accuracy, and conformance to requirements.
• Delivery, measured by on-time delivery, response time to order issues and emergencies, and more.
• Customer satisfaction scores

5. Expectation Mismatch

Often, the enterprise and the vendor are not on the same page in expectations or deliverables. The formal contract may contain ambiguities or leave finer points not clarified.

Set standards upfront. Be clear on current and future requirements. Re-evaluate vendor roles, responsibilities, competencies, and relationships at regular intervals.

Define business goals with clarity. Articulate how vendor contributions will realise such goals. Keep track of milestones and deliverables, issue timely reminders, and clarify doubts.

Consider long-term vendors as strategic partners. Build lasting and meaningful relationships with them, based on a shared vision. Make the vendor a part of the larger enterprise ecosystem. Well-managed IT vendors become strategic partners and drive innovation.

Help vendors fill the gaps between their existing competencies and the desired competencies. Getting vendors who check all boxes is practically impossible. For instance, most vendors lack process flexibility required to drive innovation. Even if their internal systems remain flexible, rigid contracts may tie their hands. Many vendors, even when competent in their niche, do not adapt to the latest digital ecosystem.

Have a point of contact to engage with the vendor. A formal protocol to clarify ambiguous areas of the relationships preempts disputes. Adopt a win-win approach in negotiations with the vendor.

Change outdated organisational structures that impede trust and open sharing of information. A secretive enterprise will not trust the vendor with data, leading to the vendor unable to deliver.

Tackling vendor management challenges heads-on is crucial for enterprises to sustain their business. Traditional vendor management software required large up-front costs and lengthy, complicated implementations. The latest cloud-based applications, with SaaS pricing models and scalability, make vendor management software easy and affordable, even for small and medium firms.