Vendor contract management is an integral part of any solid vendor management program. Vendor contracts require specific handling, and are complex documents that do more than simply establish terms and conditions. Managing vendor contracts means not only managing the creation of contracts, but also their negotiation, execution, and review over time.
The contract management process ensures that both your company and the vendor involved in the contract meet the obligations and expectations put forth in the contract.
What is Vendor Contract Management?
Vendor contract management is a practice that allows organizations to control costs, mitigate vendor risks, and drive positive vendor performance throughout the vendor’s contract lifecycle. The management of vendor contracts is vitally important to your business, as contracts are legally binding documents and determine a business’s stakeholder relationships, scope of work, pricing, rights and obligations, timelines for projects, warranties and more.
If your company’s contract management is unstructured or simply doesn’t exist, your business could experience exposure to several different types of risk, including operational, financial, and reputational.
Contract management isn’t simply keeping track of documents. Contract management means understanding every aspect of a contract so that meaningful insights can be extracted and applied to future contracts. Contract management can be a useful tool to drive business performance and reach specific goals and objectives.
The goal of the vendor contract management process is to make sure that all parties to the contract meet the expectations and obligations set forth in the contract.
Here are the steps generally involved in the contract management process:
Nine Steps to Vendor Contract Management
- Enable contract management. Identify the contract and verify the roles and responsibilities, and procedures laid out within the contract.
- Contract negotiation. Once the contract draft is complete, both parties should assess whether or not the terms are acceptable. Ensure that the contract draft establishes roles and responsibilities of both parties.
- Contract approval. To ensure contract approval moves along quickly, parties should create workflows tailored to approval, including serial and parallel approvals, to ensure that the decision-making process is efficient.
- Contract execution. Executing the contract can be done either via fax support or e-signature to expedite the process.
- Obligation management. This part of the process includes project management to make sure stakeholders are holding up their contractual obligations. This type of management also ensures that the contract’s value doesn’t diminish and that the verbiage of the contract retains meaning.
- Revisions and amendments. The original contract should have clauses that lay out how the contract can be revised and amended should the contract need to be changed. Examples of changes in contract may be product specifications, delivery deadlines, and the like.
- Auditing and reporting. Contract audits and reporting ensure that the organization is in compliance with the terms of the agreement throughout the life of the contract. Auditing the contract can help organizations stay on top of possible issues that may arise in the future as well.
- Contract renewal. Contract renewals should be automated.
- Contract exit strategy. Plan for a clean contract termination. Document exit provisions with your vendor. Many businesses use the ISO4401 Collaborative Business Relationship Standard. If you follow this ISO standard, you include a joint exit strategy. You should also ensure that your company has valid grounds to terminate a contract via documentation, contract review and updates, and other predetermined and contractual KPIs.
Vendor Contract Management Best Practices
A vendor contract is a legally binding document that lays out the expectations your business has for a particular vendor. The contract will specify the nature of the product or service, the quantity, and the terms under which the vendor will supply these products or services. Your company should be following these best practices when creating and managing vendor contracts:
- Follow your company’s vendor management policy and use that policy when developing vendor contracts.
- Create service level agreements (SLAs) or scope of work (SOW). These documents cover general parameters as well as vendor-specific terms and agreements to prevent confusion down the line. These documents should also include performance expectations, compliance requirements, data breach management outlines, and the penalties for not meeting these expectations.
- Communication expectations and requirements. Your organization should be transparent in sharing information regarding vendor strategies, challenges, pain points, objectives, organizational details and relevant technology stacks as part of your agreement. You should also lay out communication and transparency expectations for your vendors as well.
- Payment terms. The contract should explicitly state the cost of products or services, who is to be paid, payment schedules, and penalties for late payments.
- Stipulations for additional parties. In the case that your vendor sub-contracts to third and fourth parties, the contract should require that your primary contract vendor monitors these sub-contractors and that they also comply with the contract.