Estimated reading time: 5 minutes
• Effective contract administration and vendor management are not easy to achieve, especially when an organization is dealing with multiple vendors.
• There are multiple contracts to be agreed upon, monitored, reviewed, and renegotiated each year.
• When done well, contract administration can create win-win situations for a business and its vendors. However, if it fails, it can lead to massive losses for a business through poor utilization of procurement spending.
The Goal of Contract Administration and Vendor Management
The scope of work that’s classified as contract administration begins as early as when the business acknowledges the need to acquire goods or services. It involves looking for potential suppliers, sending out RFPs, and negotiating contracts. During the life of the contract, the vendor management process involves keeping in touch so that the expectations of both parties are met. Specifically, contract administration and vendor management seek to achieve several things.
Understanding Vendor Operations
It’s important for a business to understand how a vendor works when they are a critical supplier. A fault in the vendor’s operations affects the business greatly through interruptions. It’s important to understand a vendor’s key strengths in order to build strategic alliances with them. You may need to liaise with them when you are planning to start manufacturing new products so that they expand their capacity or acquire new technology so they can serve you effectively.
Build Long-lasting Partnerships
Vendor management aims to build relationships with suppliers who are a great fit in terms of culture, capacity, and quality of work. Both companies can improve each other through the exchange of knowledge, business intelligence from data, and so forth. This can be a source of competitive advantage for both firms.
Vendor management also involves looking at how vendors are performing through a set of predetermined KPIs. Assessment is important to determine whether the organization is getting fair value for money paid to vendors. If a vendor’s standards are dropping, an organization may be left without a choice but to replace them.
The Challenges Present in Contract Administration and Vendor Management
Whereas the goals are quite clear, contract administration and vendor management create unique challenges for business today.
A Lack of Visibility
Attaining full visibility into vendor contracts and their performance requires that a business has a method of collecting, storing, and analyzing the relevant data for decision making. The management also needs a dashboard from which they can easily monitor trends and patterns efficiently. Putting such systems in place takes time and significant investment. Without them, vendor management and effective contract administration won’t be effective enough.
There is always the risk that despite a rigorous vetting process, some of the vendors may not deliver as you expected. There may be a drop-off in the quality of their products, an inability to deliver on time, or a rise in their production costs. This will lead to a strain in the customer-vendor relationship and may require a re-evaluation of contract terms. Replacing a vendor is never easy. You need to send out new requests for proposals and go through the vetting, negotiation, and onboarding process. All this while, the business may be losing money and incurring fixed costs without any production going on.
A major part of vendor management is checking whether vendors are adhering to all relevant laws. This can get complicated when a business is sourcing from multiple countries. Vendors must keep all their licenses up to date. In case a vendor loses a license, the business will need to stop working with them lest they also commit a regulatory breach.
Differences in Payment Terms
While dealing with multiple vendors, a business may find that vendors are using different payment terms. Some vendors may be flexible with their credit periods while others may insist on cash transactions or payments in a particular currency. Currency differences result in exposure to foreign exchange fluctuation risk. The business has to determine whether such a risk is worth taking on.
Poor Communication Culture in the Vendor Organization
Proper contract management and relationship building require frequent communication between the two organizations. For instance, if the vendor sends a mock-up of a product for approval, the business should be quick to get back to the vendor with feedback. Similarly, the business expects the vendor to provide updates for queries made. A lack of transparent communication leads to a breakdown in the working relationship. The business may feel that the vendor is not as invested as it should be in the contract.
Best Practices in Contract Administration and Vendor Management
One of the best things your organization can do to improve contract administration is to develop a framework for contract management. This should begin with an audit of the company’s current contracts with vendors. You will end up with a list of all stakeholders affected by the contracts, as well as an understanding of the resources and processes involved. With these, you can develop objective methods of assessing contract performance and assign people monitoring roles.
Your organization should take advantage of contract management software. Such software helps keep track of all contracts and vendors your business is working with. There are dashboards to track important metrics, search features to quickly find contract metadata, and you can even set up alerts for important events. The inbuilt contract repository also adds to the security of the company’s most sensitive and confidential contracts.
If your organization is seeking a better way to approach contract management, reach out to ProcurePort for consultation. Procureport is the world’s leading provider of e-procurement software.