Getting a Grasp of Contract Vendor Management
Contract vendor management is the practice of overseeing the full life cycle of vendor contracts. This includes identifying the need for a vendor’s services, procurement of the vendor, ongoing communication with the vendor throughout your business operations, and finally, termination of the contract. For most organizations, vendor-related activities account for a significant percentage of discretionary spending, research suggests as high as 50 percent in some cases. Unfortunately, lacking contract management practices can result in 9 to 53 percent of unnecessary spending . Businesses that centralize their vendor contract management practices are more likely to experience cost savings, improved vendor relations, and enhanced compliance with vendor contracts than those without such strategies. For example, according to research from Deloitte, organizations with high-performance contract management processes report fewer contract overpayments. Proper vendor contract management can also lead to increased internal department communication, which may uncover areas of untapped savings.
Key Elements of Vendor Agreements
Contracts with vendors are not just simply agreements to do business. There is much to consider and integrate into any successful contract, including the terms and conditions, performance metrics, compliance requirements, dispute resolution clauses, and more.
Terms and Conditions
Terms and conditions include what is required of each party. For example, how much lead time is required for services rendered, payment terms, warranties, and whether the service is exclusive. For software-as-a-service products, it should also include minimum uptime commitments and whether service credits are the sole and exclusive remedy for a service interruption.
Performance Metrics
Performance metrics measure the success of the business relationship. At the very least there should be service level agreements (SLAs) for responsiveness and resolution of issues, both in terms of a severity level of the problem. All SLAs should be written in terms of percentages, for instance, resolution of high severity tickets in under 48 hours is 99% and for critical severity tickets is 90%. When the SLAs are not met, the vendor should be subject to a credit of 10% of the monthly fees for the service attributed to the SLA shortfall. Additional SLAs that benefit you may include periodic project milestones, delivery of reports, and status updates. Depending on the size of the engagement, it may be worth having monthly meetings to review the issues and SLAs.
Compliance
It is critically important for the vendor to comply with your company policies and legal compliance obligations that are applicable to the products or services it is providing to you. All vendors should be made aware of your policies as a condition of doing business with you. For example, many companies have an acceptable use policy that restricts employees from certain activities. Laws which may be applicable to third-party vendors include privacy laws (e.g. COPPA, FCRA, HIPAA and GLBA), export control, and others.
Dispute Resolution
Dispute resolution provisions should set out key information such as, where disputes will be heard and whether certain types of disputes will be heard in front of a neutral arbitrator, requirements for the sending of notification of a dispute, time periods for resolving the dispute before arbitration, and whether attorneys’ fees are recoverable in the event that a dispute is escalated to arbitration or litigation.
Criteria for Effective Vendor Selection
Effective vendor selection criteria include an assessment of the vendor’s qualifications, history of past performance, pricing structure, reliability and quality of service. While most business owner/operators and in-house contract managers/administrators try out most new vendors on a trial or proposal basis, they need to have guidelines in place to evaluate which ones will be retained and which ones will not.
To be considered for anything but "trial" vendor status, a vendor should have passed an initial vetting process that included supply chain and market credentialing. The vetting process includes a comprehensive review of the vendor’s suitability, in terms of technical qualifications, past performance, ability to meet critical timelines and availability of support. Of course, the ability to meet critical cost constraints is also significant, so budgetary concerns and the vendor’s pricing structure should also be a part of the initial determination of whether the vendor qualifies for further vetting.
The then management team assesses the vendor’s performance throughout and, if appropriate, recommends that it be retained as a preferred vendor. At any time, however, a vendor team member may raise concerns related to vendor performance. When this happens, the management team should determine whether the concerns are valid and, if so, whether those concerns are serious enough to warrant removal of the vendor from the preferred list.
Best Practices in Vendor Relationship Management
Maintaining strong vendor relationships requires a comprehensive strategy, which includes but is not limited to effective communication with your third-party vendor’s management team and the personnel responsible for executing your particular contract. You need to be vigilant about your service level agreements (SLAs), which are generally designed to reduce disputes. These may be incorporated into your contract with your vendor or an ancillary set of documents. Once the agreement is in place, you should monitor all of the agreed-upon measures to ensure they are being met over time. Regularly reviewing your relationship and performance with your vendor can help to identify and correct issues before they evolve into larger problems. Issues that may be worthy of investigation include consistency of service, attention paid to details, volume of required resources, and how your contractual obligations are being fulfilled. An annual or biennial review of your vendor’s performance can make sure your expectations are being met, and if not, will ensure you have clear documentation in place to refer back to when discussing the issue with them. Regular quarterly or semi-annual meetings can also be part of your best practices for an ongoing communication strategy and can keep you up-to-date on issues or concerns as they arise. These meetings can be formal or informal and can include an internal audit of your vendor’s processes as they relate to your contract and further develop mutual trust and understanding regarding both of your expectations. You can also meet with your vendor to show them how to best fulfil your contract requirements, which can help you both achieve your goals, and possibly save money in the long run.
Technology and Tools for Effective Contract Management
As contract vendor management becomes more important, new technologies continue to emerge that can help organizations streamline the process and ensure compliance. Contract management software is one such tool that can significantly reduce the time, effort and cost associated with contract vendor management.
Contract management software Solutions allow organizations to centralize their contracts and associated data, ensuring that all information is readily accessible and up-to-date. This centralized system also provides a unified repository for all vendor-related documents, including agreement terms, pricing and contact information.
Modern contract management software Solutions have powerful search and filtering capabilities, making these vast libraries of information easily accessible to users. With a contract management solution, procurement teams can set specific alerts and the software will then notify them when, for example, a contract is nearing renewal or a vendor is due for an annual review. With this level of control , your team can be certain important procurement events are not missed, such as contract expiration dates or evaluation periods.
In addition to improved ability to quickly and easily retrieve information, powerful analytics provided by contract management software also enables organizations to proactively mitigate risks and provide valuable strategic insights. The deep reporting and analytics provided by enterprise contract management provides procurement teams with actionable insight. They gain insight into contract utilization and performance, which allows them to manage rates better, negotiate discounts and extend and consolidate deals.
Contract management software also ensures compliance with contractual obligations. Contract management software ensures all key contract information resides in the same place at the same time, maintaining a consistent record of contract changes. It also helps assign specific roles and responsibilities to employees regarding contract renewal, performance evaluations and expiration dates. These steps strongly improve contract compliance.
Reducing Risks in Vendor Management
No matter how careful you are in choosing the right vendors, it is essential to maintain a process of ongoing risk management. Vendors who have failed to meet their obligations in the past may do so again in the future, and if your company has not made sufficient efforts to stay informed about their stability it could be on the hook for damages. Depending on the kind of contract involved, the end user may also have risks to manage that could impact the bottom line. Contract vendor management is incomplete without a risk management strategy.
There are several key areas that regularly surveying vendors is important to:
Continuous surveys and audits of vendors are essential in any line of business. In banking, audits are considered best practice and become regulatory requirements for larger institutions. For example, 12 CFR 30, Appendix B, Section III(b) states "A financial institution should periodically conduct due diligence with respect to quality, fairness, and pricing associated with the products offered by the vendor. A financial institution should engage in ongoing monitoring of the risk management and control environment of its third-party providers." The same is true for other institutions that recognize the value of maintaining a strong relationship to vendors.
Audits and surveys of vendors are critical for early detection of developed problems, but in addition to these audits, contingency planning is vital in any business. Contingency plans allow a business owner to make informed decisions concerning vendors with existing issues, and to prepare for response and mitigation of the impacts of their failure. For example, an institution might determine that a takeover of the vendor is necessary, or that the cause of a problem is small and easily repaired, such as a server crash that requires replacement or software update. When an institution has done the hard work of auditing its contingency plan with the necessary stakeholders, response in the face of a vendor failure becomes easier to deal with.
How to Measure Vendor Performance
Once a contract vendor relationship is in place, ongoing measurement is critical to ensure the success of that relationship and to protect the entity from unnecessary costs, subpar service, and/or failure to deliver. Perhaps the most important question to ask when measuring vendor performance is: is the vendor living up to the terms of its contract? Paying particular attention to timeliness, quality, and cost of performance will usually help answer that question.
Timeliness of Performance
Timeliness of performance is generally addressed in the contract, and operationally, entities typically implement reporting requirements for each vendor. These reports generally include metrics such as: 1) compliance with contractually agreed upon timelines; 2) comparison of actual spend against budgets (or unfunded matching); 3) exception reporting on state and federal reporting requirements; 4) any and all contract or policy violations; and 5) any and all need for early intervention due to performance problems. These reports should be consistent across vendors, so as to allow for apples-to-apples analysis of each vendor’s performance.
Quality of Performance
The quality of performance is generally addressed in the contract. The entity should have a process in place to monitor and quantify quality of work. Again, having consistent and standardized reporting across vendors will be key. Additionally, claims adjudication (with regard to Federal Employee Health Benefit Plan (FEHBP) plans) and grievance and appeal management processes are critical to ensuring quality performance by vendors . Unresolved claims and appeals, particularly in a bankruptcy scenario, could expose the entity to liability and potentially can become the basis for an involuntary petition (if there is a minimum 12 eligible employee requirement – generally includes leased and part-time). In addition, it is critical to document all claims and appeals, and in the case of FEHBP plans, all internal appeals. Failure to do so could affect the recovery of overpayments from other sources.
Cost of Performance
There will be rare times when additional funds are required to be paid to a vendor. While TWIA is doing well with regard to reserve levels, politically, TWIA will be tested. It is likely that the general mindset will be "a check is a check" and any subsequent checks will be hard to justify. Assuming TWIA has sufficient reserve levels, funding not required to be reported to the Federal Government should be retained in TWIA’s reserves. TWIA may also have a "parental guaranty" from a "parent" insurance companies. Or TWIA could negotiate a loan or line of credit with the Texas Treasury Safekeeping Trust Company. In any event, additional funds should be carefully documented so that TWIA is prepared to justify any funding provided to or retained by contractors.
While it is possible and preferable to have a single entity collect the required reporting from each vendor and distribute standardized reports to each Board, having a vendor manager at TWIA or a consultant periodically assess the metrics could be very helpful.
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