5 vendor management best practices for businesses

Jocelyn Ho

Published on February 20, 2024


As businesses grow and expand, it becomes less feasible for them to run every operation on their own. Companies outsource services and products to reduce the workload of their internal teams, and to boost business growth and productivity.

But working with third-party service providers comes with its own challenges, from risk assessment and pricing negotiations, to building long-term vendor relationships and optimizing cost savings.

Given the fact that vendor management is a multidisciplinary business practice that spans several teams and often involves executive oversight, many companies find it to be a complicated and stressful process.

The good news is there are several strategies that teams of all sizes can implement to handle vendor management more effectively. In addition to applying vendor management best practices that we’ll break down in this post, companies can also invest in spend or vendor management software, which use process automation and spend analysis to optimize business and finance operations.

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What is vendor management?

The main goal of vendor management is building, maintaining, and strengthening mutually-beneficial supplier relationships that drive company success. This success can have multiple definitions, e.g. lowering business costs, increasing output, or driving product innovation.

There are many elements involved in this complex business practice, but effective vendor management should always consider the following:

Risk assessment - Naturally, there is increased security risk when businesses outsource projects to third-party vendors, and companies should have policies in place to mitigate this risk. Beyond avoiding high-risk collaborations, it’s imperative to have a solid framework and action plan for financial, legal, and even reputational liability in active partnerships.

Fit - When developing relationships and selecting external suppliers, both vendor and client need to clearly communicate their needs and expectations. The benefits of the collaboration should be reciprocal and remain so throughout the duration of the contract. Thoroughly review the terms of the contract (including penalties for breaching it) and make sure all parties involved are in agreement before proceeding.

Pricing - If a vendor’s prices exceed your allocated budget, finance will tell you they’re not the right fit. Details like billing frequency and rates, as well as payment methods and processes, should be clearly laid out and validated on both sides.

Finance teams aim to increase the value of outsourced staffing and products by controlling the overall vendor costs, while vendor-facing teams focus on improving vendor performance. Businesses often use finance tools like spend management software or a warehouse management system to organize their company’s vendor database.

5 vendor management best practices

Depending on team structures and company activities, the procurement process can be executed quite differently from one department to another. Be aware that major inconsistencies in vendor selection criteria can cause inefficiencies across the company or harm vendor relationships.

From sourcing the best suppliers and negotiating deals, to processing invoice payments and measuring vendor performance–there’s a lot to handle, even when everything is going as planned.

For that reason, every business should develop transparent and consistent processes for handling vendor relations and contracts. Optimize vendor management within your organization with these best practices:

1. Enforce a clear vendor management policy

Today there are increasing data security concerns when working with third-party service providers. Your company should have formal documentation that informs all teams, leadership and board members of the official vendor management policy.

Like any other business function, vendor management processes should be periodically reviewed and updated over time to improve performance, operations, and costs. Assign an internal committee with team members that are SME (subject matter experts) to oversee specific steps of the vendor management process, based on their professional knowledge or expertise.

For internal accountability, always include a clear outline in the policy that details official committee roles and what they are responsible for.

2. Choose the right vendors for your business

Finding the best suppliers for your business is all about strategic sourcing. Great vendors provide high quality service at an affordable price that consistently increases your company’s overall performance and competitive edge in the market.

That means you should follow a set of standards when it comes to picking vendors, even if you only need a one-time solution. To develop strong vendor partnerships for your business, look for these qualities:

  • Expertise. Your business will benefit most from vendors that are experts in your unique industry. Vendors who provide niche products or services that you need are more likely to understand the nuances of your business operations and market, giving both parties a competitive advantage.

  • Stability. Get a good sense of vendors’ financial stability, as this will have an effect on your own business. Assess whether they have a sound business model, and if they have stable partnerships with other similar clients in your field.

  • Due diligence. Before signing a contract with a new vendor, review their professional history, media presence, and client roster. This can help determine whether the vendor is safe to work with, is legally regulated and compliant, and serious about their data privacy and security.

Investing in smarter procurement builds healthy long-term relationships that will bring your business positive returns over time. Companies save significant time and money when they have an updated database of trustworthy and reliable vendors that they can immediately reach out to whenever necessary.

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3. Proactively manage and nurture vendor relationships

A large part of vendor management is vendor relationship management. Nurturing supplier relationships is critical to balancing a healthy collaboration that delivers concrete benefits to both businesses.

This means exchanging honest feedback and staying flexible throughout the partnership, especially when negotiating prices or dealing with unexpected issues that may arise. To avoid miscommunication, it's imperative to be as transparent and specific as possible when detailing your expectations and needs–and your vendors should do the same.

Knowing when to compromise is a high-value skill here, as small concessions can lead to bigger returns in the long run for both businesses.

4. Monitor and track vendor spend

Maintaining control over your business spend is necessary for sustained growth. Yet manually tracking vendor spend is a laborious challenge for companies that want to scale their vendor management processes.

Spend management softwares like Spendesk are powerful online solutions that help companies run vendor management more smoothly. Finance teams gain increased visibility and control over company spending with advanced features that enable them to:

  • Track and reconcile every business transaction from one centralized platform, with real-time overview of all budgets and spend activity

  • Optimize finances by pinpointing the best cost savings opportunities

  • Manage all SaaS vendors and recurring payments automatically

  • Prevent and eliminate duplicate and redundant SaaS subscriptions with a click

  • Create unique payment cards with allocated budgets for individual or multiple vendors

  • Easily review vendor details and employee contacts on any transactions

To optimize vendor spending with these tools, businesses analyze and identify actionable insights or trends from their spend data and activity. Often, this may also require a deeper look at the qualitative performance of your vendors.

5. Measure vendor performance

It’s important to define what success looks like from the start of your collaboration, in order to set realistic expectations with your vendors and lay out how performance will be measured. This could be identifying the relevant KPIs (key performance indicators) for your industry or determining what kinds of qualitative results are important to your team. As KPIs are not static, it’s good to periodically review your shared business goals based on market changes or product updates.

Having a diverse array of data points and metrics helps you measure the true impact of vendor performance, and comparing these results against vendor spend gives you a better picture of your business ROI.

Evaluating vendor performance with both quantitative and qualitative factors enables you to accurately determine whether vendors are meeting expectations, underperforming, or even over-performing. Conducting in-depth reviews with your vendor also enables you to identify if business needs have changed, or if there are new opportunities to act on together.

Transform vendor management with smart spending

It’s evident that vendor management is no simple task. Finding the right balance of efficient logistics with reciprocal relationships is full of complex nuances. But with automation softwares like Spendesk and resources that drive smarter spend management and procurement, consolidating your company’s vendor management processes into a streamlined workflow is effortless.

Finance teams and budget managers can monitor, track, and approve spend in a few clicks, while vendor-facing team members can instantly get access to the funds they need on personalized company cards –all from one central dashboard. Strengthen your vendor relationships and empower your finance team with better processes using Spendesk’s complete spend management platform.

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