Your Guide to Vendor Management

by Ty Collins on December 10, 2019 in Vendor Management

When you think about the people who are most important to your business, what are the groups that come to mind? Customers and employees are probably at the top of the list, and rightly so. You don’t have a business without either of them.

But what about vendors? Problems with a vendor can disrupt even the most well-structured of businesses, and that kind of disruption stresses your employees and often spells disaster for your clients. To avoid this particular domino effect, you need to manage your vendors well.

A Vendor Management Definition  

Simply put, vendor management is the process of creating and nurturing ongoing relationships with vendors. It’s easy for companies to think of interactions with vendors as stand-alone transactions, starting with the placement of an order and ending when the order gets delivered. 

The problem with this model is that it presents the vendor as an “other,” a separate third party, functioning apart from what the company does. As a result, the vendor relationship never gets the attention that it needs.  

  • Are you using the best vendors for your particular needs?
  • Are your vendors giving you the highest-quality product or service you can afford?
  • Can you get the same level of service for less money from another company?
  • What are the standards that you use to assess vendor performance? Are your vendors meeting those standards?

Vendor management systems answer these questions. Not only that, but they also show you if there are any other questions you need to be asking.

How does a vendor management system help your business?  

Vendor management systems allow companies to consider and optimize vendor relationships. They provide a framework through which companies can find the most suitable vendors, assess the fit of each one, and avoid the trap of sticking with a vendor simply out of habit. Benefits include:

  • An understanding of who your vendors are, what they offer, and how they compare to others
  • A one-stop resource for vendor contact information, history, and documentation so that you can communicate with vendors effectively
  • Easy access to vendor performance history so you can make more informed contract decisions
  • More cost-efficient vendor interactions, which ultimately improve the company’s cost-efficiency

Ultimately, vendor management systems exist to help you skillfully manage multiple relationships with product and supply providers.

Vendor Management Procedures: How to Do It Right

Like all new procedures, vendor management systems have their learning curves. There’s a lot to implement and some things are bound to be overlooked, but there are some steps you really can’t skip. They include (but are not limited to):

  • Ensuring that each vendor in your database can meet your requirements while performing to industry standards
  • Checking the reputation of your vendors (some vendors do their work well but have poor reputations in other areas, such as corporate responsibility)
  • Keeping your vendor data accessible to those who need it, yet simultaneously protecting proprietary data

In all of these areas, clarity and transparency are key. Here’s how to create a vendor management system that prioritizes both.

Vendor Management Processes  

First and foremost, resist the temptation to start by managing the vendors you already have. Start from the beginning, as though you haven’t hired vendors before. 

Step 1: Connect vendor services to business goals.

Make a list of all the vendors that you use. Then ask yourself why you use a vendor instead of an in-house person or department for a certain purpose.

Maybe the answer will be obvious. You don’t have a shipping department, so you need to hire a company to ship your product. In some cases, though, the line between “We need a vendor” and “It’s convenient to have a vendor” is a little bit more blurred.

For example, if your company hires a third-party email marketing service, you’ll want to make sure that it’s worth the expense. Does it bring in more business than you’d be able to generate if you charged your in-house marketing team with that same task? 

Answering these questions might help you to eliminate redundant vendors from your expense sheet. In other cases, the answers might serve as a baseline for pricing competing vendors.

Step 2: Create a vendor management team.

Chances are good that you’ll still have plenty of vendors once you’ve separated the must-haves from the nice-to-haves. Your next step is to identify a small group—or a large one, depending on your number of vendors—to keep track of all vendor activity. 

Their assigned tasks will include:

  • Selecting vendors and negotiating contracts
  • Acting as liaisons between the vendors and the departments that use them
  • Tracking vendor performance and identifying risks
  • Understanding the role of each vendor and eliminating redundant contracts
  • Assessing vendor ROI and shopping for new vendors when necessary

This team may be made up of new hires or existing team members, as long as the team has the collective skill to do all of the above tasks.

Step 3: Gather all of your vendor information into one place.

As soon as your team is complete, give them the task of creating a database that includes all information about each of your vendors, from contact details to performance KPIs (key performance indicators).

Very small businesses may be able to create this database using the software they already have, but don’t be surprised if your company needs to adopt new vendor management software. Look for something with:

  • Vendor communication channels
  • Project management functionality
  • Payroll and contract management tools
  • Compatibility with your existing systems
  • Database creation capabilities

Specifically, you’ll want your system to be able to create a database that can identify an appropriate vendor for the needs of your business units. That means being able to group vendors based on the services they provide and their typical price ranges.

You’ll want something that’s easy for your people to use. It doesn’t have to be simplistic, but the learning curve shouldn’t be too steep considering your team’s skillset. Think about your vendors as well as your in-house team, since they’ll probably also have to interface with the system on some level.

Step 4: Specify your selection criteria.

When you have a good working database, the vendor selection process becomes faster and more effective. Companies without vendor management systems often rely on price as the primary decision-making factor when selecting service providers, and that can leave your company vulnerable to risk. You’ll also want to consider:

  • The reputation of the vendor and its work
  • Other companies’ experiences with the vendor
  • Better Business Bureau and Trustpilot ratings
  • The value that the vendor offers for its price
  • Any recommendations that have come your way, positive or negative
  • Whether you have any existing vendors that can provide the service you need
  • Whether the vendor offers any other services you need

It’s fine to hire a vendor that only meets one need for your company, but a multifunctional vendor means that you have built-in options. For instance, if your email marketing service provider raises its prices next year and your CRM company also offers email marketing, you could potentially switch vendors without collecting more proposals.

Step 5: Evaluate your current vendors.

Any time you don’t have a vendor management system in place, you risk staying with the same vendors just because it’s too much work to consider a switch. Fortunately, by this point in your vendor management process flow, you know what you need in a vendor and what your options are for meeting that need.

This is a perfect time to assess whether your existing vendors meet the criteria you’ve specified. Take a close look at all of your vendors and how they stack up. Do they meet all of your requirements? Has their performance been steady or improving? Have their prices been increasing, and if so, have the increases been worth it?

Step 6: Request proposals when they’re needed.

If you’re not fully convinced that you have the right vendor to meet a specific need, consider welcoming new proposals. This isn’t the time for “okay,” or “adequate.” It’s the time to make sure you’re getting absolutely the best value for your money. Otherwise, why go through such an extensive process?

As you consider new vendors, ask yourself the following questions:

  • What do you need the vendor to do?
  • What terms do you need to ask of them? Are they going to ask anything of you?
  • How long will the contract last? What will the renewal process be?
  • What is the vendor’s pricing structure, and how does it compare to what you already have?

Compare at least a few vendors side-by-side. Again, remember to look at more than just price. What are each vendor’s strengths and weaknesses? How is the vendor’s industry doing? Will they be doing as well in a year or two?

This process will be the first big thing that you’ll ask of your team, so make sure they have the support that they need. Model clear expectations and have specific questions you need them to answer.

You’ll know the team has done a good job when there’s one clear first choice for each vendor category.

Step 7: Develop contracts.

Your vendor management team may be able to handle the early stages of the contract development process, but soon they’re going to need to get legal and finance people involved. At this stage, the vendor management group’s job will be to create a conversation.

The platform doesn’t matter, but collaboration does. If a person or team will be working with the vendor, they should be involved in determining the terms of the contract. You can send the contract to the legal department to finalize it, but only after it looks good to the people who will be working with the vendor.

Vendor Management Best Practices

The most important vendor management best practice is to keep the lines of communication active, honest, and specific. Don’t fall into the trap of assuming that because you’ve chosen a great vendor, everything will go smoothly and without interference.  

1. Be clear about what you expect from your vendors.

Starting from the very first conversation, clarify everything about what you expect from your vendors and what they can expect from you. 

Remember that conversation you had with your team about why you need a vendor to provide a certain product or service? Share the important points of that conversation with the vendor.

The most important expectations to discuss relate to money and time. First, there are deadline expectations:

  • What is the deadline for the product or service that the vendor will provide?
  • Is it a one-time deadline or an ongoing one? 
  • Is the deadline firm or flexible?

Above all, you’ll need to ensure that the deadlines you set are realistic. You could impress your customers with speedy delivery if your vendor has an amazingly quick turnaround, but is that turnaround achievable? The only way to know is to ask.

The financial conversations are equally important, if not more so. Just like you need to be able to know what to expect from your vendors, they need to know what they can expect from you. Ask them if they’re clear on payment methods and schedules, and if not, clarify.

2. Treat your vendors as collaborators.

Dialogue with your vendors shouldn’t end when deliverables arrive, nor should the conversation be limited to how much they charge and what kind of quality you can expect. Those interactions are necessary, but they’re not enough.

Like any relationship, personal or professional, you need to go deeper if you want it to last. Sit down with your vendor, whether that means virtually or in person, and talk about your business. Share things like:

  • Your business objectives and goals
  • How their services help you meet your goals
  • What you need from the vendor for the relationship to work

Invite the vendor to be an equal partner in the discussion. After all, hiring a vendor means you’re helping their business grow by being their customer. Ask them:

  • How your contract helps them to achieve their goals
  • What they hope to get from your contract besides on-time payment
  • Are there ways to leverage your relationship to add value to both parties?
  • Can their expertise help you to be more competitive, and vice versa?

After this conversation, you and your vendor will be better prepared to serve one another. Better yet, discussions like these show your vendors that you’re a respectful and collaborative business partner. What vendor wouldn’t want to offer its best terms to a company like that?

3. Establish KPIs related to vendor performance.

Responsible vendor management means continuing to keep track of how your vendors are doing. After all, while it feels great to establish clear expectations and sign off on a carefully developed contract, how are you going to ensure that the vendor abides by the terms you’ve set?

KPIs can help you track vendor performance just like they help you track your company’s bottom line. Naturally, however, the metrics you use will be different. With your vendor, you’ll be tracking things like:


  • What does your company end up paying for each order?
  • Do you qualify for any discounts?
  • Your vendor costs are what percent of your expenses, both overall and in particular product or service lines?

Quality of service

  • How accurate is each order?
  • Do deliveries happen on time?
  • What percentage of deliverables are defect-free?

Consumer satisfaction

  • How happy are the customers that are affected by this vendor’s service?
  • Have there been any changes in customer sentiment since you signed on with this vendor?

Relationship quality 

  • How quickly does the vendor respond to requests?
  • How many issues have you had? Have they been resolved?

As you collect information on vendor performance, you might find the need to keep track of vendor results as measured over time. In this case, consider creating or acquiring a vendor management scorecard, which functions like a mini-database. It records and creates a visual representation of:

  1. The KPIs that you’re measuring
  2. Each vendor’s performance compared to your requirements
  3. If relevant, how different vendors perform compared to each other  

To make your scorecard even more useful, list KPIs in order of importance. One vendor won’t be head and shoulders above the rest in every way, so prioritizing what you need will help you to compare.

As with the software you choose, make sure that your scorecard is accessible and relevant to everyone who needs to use it. Your vendors don’t need to have access to their files, but they should know that the scorecard exists. It’s just a good transparent business practice, and it may even help to keep your vendors motivated.

4. Identify potential risks.

In every area of your business, protecting performance means minimizing risk. That’s as true in vendor management as it is in any other business area, no matter how good your vendors are. Any time you work with a vendor, you take on certain inherent risks including:

  • Strategic risks: If you share business goals with a vendor, might that information get leaked?
  • Stability risks: What happens if your vendor gets into financial trouble or goes out of business?
  • Supply chain risks: If something happens along the logistical supply chain, how could it impact your business? This is particularly relevant if you’re taking on international vendors, since political and/or climate events can stall a critical shipment.
  • IT security risks: If your vendor is plugged into any of your systems, could an IT vulnerability on their end create problems on yours?
  • Legal risk: Will your vendor sue if they don’t get their money on time? What about regulations and industry standards—is the vendor compliant? Do they have the resources to stay compliant if standards change?
  • Project completion risks: How scalable are your vendor’s systems? If you enter a period of explosive growth, can the vendor keep up?

Approach these questions with curiosity rather than worry. You can only reduce the risks that you understand, so avoid the siren call of denial and look at each of these potential risks honestly. If something does seem like a realistic concern, decide whether to broach the topic with the vendor or consider other options.

Vendor Management vs Vendor Relationship Management

Some sources confuse vendor management with vendor relationship management, using them as synonyms. They are similar, but they’re not the same.

Vendor relationship management is one component of a complete vendor management system. It may even be the most important.

No matter how hard you try, you can’t collaborate with a company. But do you know who you can collaborate with? 


People are behind every company in the world, including the ones that you want to hire as vendors. This is the principle behind vendor relationship management, which focuses on the human aspect of vendor management.

What does vendor relationship management look like?

When you sit down with a vendor and discuss how to develop a mutually beneficial contract, that’s one part of vendor relationship management. The rest is keeping that kind of dialogue open for as long as the relationship is active. 

The longer you maintain clear and honest communication of this sort, the more your vendors begin to feel like partners. 

  • You understand each other’s businesses and goals.
  • You share unavoidable risks. 
  • The vendor understands how their company benefits from the relationship, beyond the invoice.
  • There’s mutual trust between the parties.

This mutual trust is what puts the “relationship” in “vendor relationship management.”

The Take-Away 

Vendor management means that your company is treating vendors like the indispensable resources that they are. Take the time you need to create a system that is effective, user-friendly, and supportive of real collaboration.

Remember, your vendors are business leaders just like you, and a good relationship benefits both of you. Take care to choose the right vendor, not just based on price, but on considering overall value and the potential for a long-term relationship. 

Most importantly, invest in goodwill between your company and the vendor. The more value the vendor is willing to provide, the better off both organizations will be.