According to a 2013 PwC survey of select procurement organizations, only 13% of the respondents claimed to have a fully established program for managing vendor and supplier relationships. While vendor relationship management may have been a minor function in the past decade, organizations today are far more aware of its role in maintaining consistent business operations.
This is because quality vendor relationships are no longer about merely getting along—they’re about optimizing costs and services and anticipating associated risks to derive the best value from each partner.
In this guide, we’ll discuss how you can benefit from a more systemized approach to vendor relationship management. We’ll then go over five effective strategies for implementing it without excessive costs or manual labor.
What is vendor relationship management and what does it entail?
Vendor relationship management is a set of practices that helps an organization oversee and navigate partnerships with third-party vendors as well as ensure stable availability of relevant products and services. It facilitates transparent and productive collaboration that promotes mutual trust and cooperation, reduces costs, and enables streamlined procurement.
From a practical viewpoint, managing vendor relationships typically entails the following:
- Maintaining direct communication channels
- Learning about the vendor’s industry and business practices
- Developing and establishing clear and agreeable contracts
- Aligning organizational goals and expectations for the relationship
- Managing incidents and collaborative problem-solving
- Assessing and addressing vendor risks
- Adjusting to cultural differences as necessary
If performed effectively, the above processes solidify your partnerships and give your operations more predictability. Procurement leaders often suggest having a separate vendor relationship management program for your organization, defining all the specific processes, strategies, and tools you use for your vendor interactions.
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Vendor risk management vs. vendor relationship management
It’s easy to confuse the terms “vendor relationship management” and “vendor risk management” as they both have the same acronym—VRM. While assessment and remediation of vendor risks are part of managing vendor relationships, it’s worth exploring the interconnected yet distinct nature of these functions.
Vendor risk management focuses on detecting and neutralizing the threats your organization faces while expanding its network of vendors and support services. It accounts for several types of risks, such as:
- Strategic and operational risks
- Financial risks
- Compliance risks
- Cybersecurity risks
Vendor risk management concentrates on processes like compliance checks, vendor due diligence, and ongoing monitoring of controls, and is often implemented as a standalone program. However, it is the outcome of these processes that ultimately guides vendor relationships.
Based on the scope alone, vendor relationship management would qualify as the broader concept as it also includes nuanced aspects like negotiations and feedback mechanisms. In practice, though, its core decision-making processes are heavily derived from risk management.
Benefits of vendor relationship management
By implementing a comprehensive vendor relationship management program, you can tap into the following benefits:
- Increased transparency and trust: Ongoing vendor relationship management fosters transparency and helps keep both parties on the same page regarding expectations.
- Reduced risk of disruption to business continuity: Vendor relationship management involves an oversight function to mitigate the risk of vendor-related issues that could disrupt your operations.
- Better forecasting and budgeting: Quality long-term vendor relationships help you predict metrics like variable fees and discounts more accurately, improving your financial forecasts.
- Stable production with defined contracts: Production consistency is easier to maintain with well-managed vendor relationships based on clear service-level agreements (SLAs) and key performance indicators (KPIs).
- Faster updates and innovation: Building a comfortable relationship may create space for innovation. For instance, you can get priority access to a vendor’s new product, which helps you stay ahead of the curve, or may be able to influence a specific feature or update.
- Vendor risk mitigation: Vendor relationship management helps you stay proactive about threats like data security concerns and compliance violations.
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5 vendor relationship management strategies and tips to follow
We’ll go over five broad strategies to implement an effective vendor relationship management program:
- Select, plan negotiations, and set expectations with vendors.
- Carry out risk assessments and vendor segmentation.
- Foster transparency and open communication.
- Define and track vendor KPIs.
- Leverage vendor management software.
1. Select, plan negotiations, and set expectations with vendors
It’s a good idea to start thinking about vendor relationship management if you have more than a dozen vendors in your network. Your first strategy should be to establish a standardized process for selecting and onboarding vendors, as well as negotiating collaboration terms.
As a baseline for a smooth relationship, consider working with vendors that are reliable and have similar business values as yours—you may want to factor in pricing later. You can then standardize your non-negotiables to help you effectively disqualify unfit vendors without wasting time and resources on subsequent due diligence and evaluation.
If you believe a supplier or service provider has enough potential, the next step is to clearly communicate your expectations and formalize them through contractual terms and SLAs. The goal is to leave no room for inaccurate assumptions or misunderstandings down the line.
2. Carry out risk assessments and vendor segmentation
As each vendor expands your risk surface, you need to have processes to assess potential threats that a vendor might expose you to and identify corresponding mitigation strategies accordingly. The best way to achieve this is to conduct thorough risk assessments.
Your assessments should account for the key risk types depending on the product or service acquired. For instance, if you’re sourcing raw materials, your risk consideration would be around production disruption. However, if you’re buying HR software, your concerns may include security and privacy risks.
The risk assessment process can be divided into three basic steps:
- Standardize your criteria to define acceptable risk levels.
- Develop risk assessment questionnaires to collect relevant data points.
- Create vendor risk assessment reports that pinpoint potential weaknesses.
At the end of the assessment process, you can consolidate and communicate your identified risks to be addressed before you sign a contract with the vendor. You should also segment vendors according to their risk level in your centralized vendor inventory.
Keep in mind that each vendor’s risk profile will evolve with time, so establish a cadence for regular reassessments.
3. Foster transparency and open communication
Nurturing any vendor relationship is an elaborate process that requires careful rapport-building. Aim for clear and documented communication to ensure long-term alignment and risk protection on both ends.
Vendor relationships are easier to maintain when you have defined the points of contact (POCs) between your organization and the vendor during onboarding. Additionally, clarify the touchpoints a vendor can use to reach you for any questions or updates. It’s also worth establishing a communication cadence for both parties to follow.
You might sometimes need to involve additional POCs over the course of the relationship. For example, a cybersecurity expert can be in touch with a vendor’s IT department to discuss potential security issues or events.
While it’s natural to maintain a certain degree of confidentiality, prioritize transparency in the following matters:
- Long-term goals
- Vendor spend related to the delivery of products or services
- Shared documentation
- Compliance requirements
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4. Define and track vendor KPIs
Vendor relationship management requires keeping a close eye on the consistency of products and services delivered, as well as their conformity to SLAs and policies. KPIs aim to give you a quantified overview of a vendor’s performance.
Some of the main vendor KPIs to track are:
- Service delivery and quality (supplier lead time, vendor availability, etc.)
- Procurement ROI
- Defect rate
- Compliance rate
Make it a point to outline the steps you’ll take when a vendor fails to meet standard performance expectations—you may want to suggest a threshold for corrective action or offboarding to streamline problem-solving.
5. Invest in vendor management software
Organizations already use technology like communication and document management tools to drive vendor relationships, but it is equally important to invest in quality vendor management software.
Such software comes with features that help you move away from disparate processes like maintaining manual onboarding checklists and contract renewal spreadsheets. The goal is to allow information to flow seamlessly, which helps optimize decision-making and resource use for vendor-facing teams. Other benefits to expect include:
- Real-time (or near real-time) insight into vendor updates
- Automated risk profiling and scoring
- Centralized performance tracking on dashboards
Most importantly, your platform should integrate with your current tech stack to centralize contract management, compliance requirements, and other related workflows.
Boost your vendor relationship management practices with Vanta
Effective vendor relationship management and risk management go hand in hand. Vanta offers an industry-leading solution that helps you manage streamlined vendor onboarding, risk assessment, and reporting all from one place.
With Vanta’s Vendor Risk Management solution, you can streamline your security and procurement workflows. Some of its noteworthy features include:
- Centralized vendor inventory and simplified categorization
- Streamlined risk assessments with configurable auto-scoring
- Tracking vendor status, risk profile, and other performance data on a dashboard
- Built-in resources for effortless security reviews and tracking
Watch our free webinar or schedule a custom demo to find out how Vanta can help your team.
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Vendor lifecycle management
Your complete guide to effective vendor relationship management
Vendor lifecycle management
According to a 2013 PwC survey of select procurement organizations, only 13% of the respondents claimed to have a fully established program for managing vendor and supplier relationships. While vendor relationship management may have been a minor function in the past decade, organizations today are far more aware of its role in maintaining consistent business operations.
This is because quality vendor relationships are no longer about merely getting along—they’re about optimizing costs and services and anticipating associated risks to derive the best value from each partner.
In this guide, we’ll discuss how you can benefit from a more systemized approach to vendor relationship management. We’ll then go over five effective strategies for implementing it without excessive costs or manual labor.
What is vendor relationship management and what does it entail?
Vendor relationship management is a set of practices that helps an organization oversee and navigate partnerships with third-party vendors as well as ensure stable availability of relevant products and services. It facilitates transparent and productive collaboration that promotes mutual trust and cooperation, reduces costs, and enables streamlined procurement.
From a practical viewpoint, managing vendor relationships typically entails the following:
- Maintaining direct communication channels
- Learning about the vendor’s industry and business practices
- Developing and establishing clear and agreeable contracts
- Aligning organizational goals and expectations for the relationship
- Managing incidents and collaborative problem-solving
- Assessing and addressing vendor risks
- Adjusting to cultural differences as necessary
If performed effectively, the above processes solidify your partnerships and give your operations more predictability. Procurement leaders often suggest having a separate vendor relationship management program for your organization, defining all the specific processes, strategies, and tools you use for your vendor interactions.
{{cta_withimage20="/cta-modules"}}
Vendor risk management vs. vendor relationship management
It’s easy to confuse the terms “vendor relationship management” and “vendor risk management” as they both have the same acronym—VRM. While assessment and remediation of vendor risks are part of managing vendor relationships, it’s worth exploring the interconnected yet distinct nature of these functions.
Vendor risk management focuses on detecting and neutralizing the threats your organization faces while expanding its network of vendors and support services. It accounts for several types of risks, such as:
- Strategic and operational risks
- Financial risks
- Compliance risks
- Cybersecurity risks
Vendor risk management concentrates on processes like compliance checks, vendor due diligence, and ongoing monitoring of controls, and is often implemented as a standalone program. However, it is the outcome of these processes that ultimately guides vendor relationships.
Based on the scope alone, vendor relationship management would qualify as the broader concept as it also includes nuanced aspects like negotiations and feedback mechanisms. In practice, though, its core decision-making processes are heavily derived from risk management.
Benefits of vendor relationship management
By implementing a comprehensive vendor relationship management program, you can tap into the following benefits:
- Increased transparency and trust: Ongoing vendor relationship management fosters transparency and helps keep both parties on the same page regarding expectations.
- Reduced risk of disruption to business continuity: Vendor relationship management involves an oversight function to mitigate the risk of vendor-related issues that could disrupt your operations.
- Better forecasting and budgeting: Quality long-term vendor relationships help you predict metrics like variable fees and discounts more accurately, improving your financial forecasts.
- Stable production with defined contracts: Production consistency is easier to maintain with well-managed vendor relationships based on clear service-level agreements (SLAs) and key performance indicators (KPIs).
- Faster updates and innovation: Building a comfortable relationship may create space for innovation. For instance, you can get priority access to a vendor’s new product, which helps you stay ahead of the curve, or may be able to influence a specific feature or update.
- Vendor risk mitigation: Vendor relationship management helps you stay proactive about threats like data security concerns and compliance violations.
{{cta_webinar4="/cta-modules"}}
5 vendor relationship management strategies and tips to follow
We’ll go over five broad strategies to implement an effective vendor relationship management program:
- Select, plan negotiations, and set expectations with vendors.
- Carry out risk assessments and vendor segmentation.
- Foster transparency and open communication.
- Define and track vendor KPIs.
- Leverage vendor management software.
1. Select, plan negotiations, and set expectations with vendors
It’s a good idea to start thinking about vendor relationship management if you have more than a dozen vendors in your network. Your first strategy should be to establish a standardized process for selecting and onboarding vendors, as well as negotiating collaboration terms.
As a baseline for a smooth relationship, consider working with vendors that are reliable and have similar business values as yours—you may want to factor in pricing later. You can then standardize your non-negotiables to help you effectively disqualify unfit vendors without wasting time and resources on subsequent due diligence and evaluation.
If you believe a supplier or service provider has enough potential, the next step is to clearly communicate your expectations and formalize them through contractual terms and SLAs. The goal is to leave no room for inaccurate assumptions or misunderstandings down the line.
2. Carry out risk assessments and vendor segmentation
As each vendor expands your risk surface, you need to have processes to assess potential threats that a vendor might expose you to and identify corresponding mitigation strategies accordingly. The best way to achieve this is to conduct thorough risk assessments.
Your assessments should account for the key risk types depending on the product or service acquired. For instance, if you’re sourcing raw materials, your risk consideration would be around production disruption. However, if you’re buying HR software, your concerns may include security and privacy risks.
The risk assessment process can be divided into three basic steps:
- Standardize your criteria to define acceptable risk levels.
- Develop risk assessment questionnaires to collect relevant data points.
- Create vendor risk assessment reports that pinpoint potential weaknesses.
At the end of the assessment process, you can consolidate and communicate your identified risks to be addressed before you sign a contract with the vendor. You should also segment vendors according to their risk level in your centralized vendor inventory.
Keep in mind that each vendor’s risk profile will evolve with time, so establish a cadence for regular reassessments.
3. Foster transparency and open communication
Nurturing any vendor relationship is an elaborate process that requires careful rapport-building. Aim for clear and documented communication to ensure long-term alignment and risk protection on both ends.
Vendor relationships are easier to maintain when you have defined the points of contact (POCs) between your organization and the vendor during onboarding. Additionally, clarify the touchpoints a vendor can use to reach you for any questions or updates. It’s also worth establishing a communication cadence for both parties to follow.
You might sometimes need to involve additional POCs over the course of the relationship. For example, a cybersecurity expert can be in touch with a vendor’s IT department to discuss potential security issues or events.
While it’s natural to maintain a certain degree of confidentiality, prioritize transparency in the following matters:
- Long-term goals
- Vendor spend related to the delivery of products or services
- Shared documentation
- Compliance requirements
{{cta_withimage5="/cta-modules"}}
4. Define and track vendor KPIs
Vendor relationship management requires keeping a close eye on the consistency of products and services delivered, as well as their conformity to SLAs and policies. KPIs aim to give you a quantified overview of a vendor’s performance.
Some of the main vendor KPIs to track are:
- Service delivery and quality (supplier lead time, vendor availability, etc.)
- Procurement ROI
- Defect rate
- Compliance rate
Make it a point to outline the steps you’ll take when a vendor fails to meet standard performance expectations—you may want to suggest a threshold for corrective action or offboarding to streamline problem-solving.
5. Invest in vendor management software
Organizations already use technology like communication and document management tools to drive vendor relationships, but it is equally important to invest in quality vendor management software.
Such software comes with features that help you move away from disparate processes like maintaining manual onboarding checklists and contract renewal spreadsheets. The goal is to allow information to flow seamlessly, which helps optimize decision-making and resource use for vendor-facing teams. Other benefits to expect include:
- Real-time (or near real-time) insight into vendor updates
- Automated risk profiling and scoring
- Centralized performance tracking on dashboards
Most importantly, your platform should integrate with your current tech stack to centralize contract management, compliance requirements, and other related workflows.
Boost your vendor relationship management practices with Vanta
Effective vendor relationship management and risk management go hand in hand. Vanta offers an industry-leading solution that helps you manage streamlined vendor onboarding, risk assessment, and reporting all from one place.
With Vanta’s Vendor Risk Management solution, you can streamline your security and procurement workflows. Some of its noteworthy features include:
- Centralized vendor inventory and simplified categorization
- Streamlined risk assessments with configurable auto-scoring
- Tracking vendor status, risk profile, and other performance data on a dashboard
- Built-in resources for effortless security reviews and tracking
Watch our free webinar or schedule a custom demo to find out how Vanta can help your team.
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Explore more TPRM articles
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Vendor lifecycle management
Vendor risk assessment
Running a VRM program
Regulatory compliance and industry standards
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