Vendors are an essential part of your business. They deliver back office services, software support and key components for your flagship product. You literally can’t get things done without them. This is why you need to manage your vendors. Yet this is an area where a surprising number of firms fall short, often hurting themselves and their customers in the process. Here are four tips to improve vendor contract management.
Evaluate Them
One study found that up to ninety percent of a business’s revenue depends on their vendors delivering products and services as promised. Still, a third of businesses didn’t evaluate third party providers before engaging with them. Worse yet, ten percent didn’t know how many vendors they were working with, much less whom.
The solution to this is to have a clear process to evaluate vendors at every stage of the relationship. Don’t hire someone to manage your IT infrastructure without verifying they have the skills, capability and reputation you should require for such critical services. Set clear standards that vendors have to meet. This could be quality levels or meeting industry standards. A formal process for evaluating vendors allows you to minimize conflicts of interest and have set criteria for weeding out potential under-performers.
Monitor Vendor Performance Per the Contract
Every business should use contracts to manage their vendor relationships. The contracts should define exactly what is expected of both parties. Then monitor their performance according to the standards laid out by the contract. If someone isn’t meeting their obligations, then they are in breach of contract. You don’t have to argue with them about doing what they promised. You can file a lawsuit and sue for breach of contract.
There are many different types of breaches of contract. There are both immaterial and material breaches. Material breaches are those where substantial damage can or already has occurred. An immaterial breach is one where substantial damage isn’t likely to occur. For example, a material breach of contract is someone who does nothing despite the money you paid them. Perhaps the building is half-built, and you have to pay a fortune to have someone else finish it. Or you were shipped a lot of defective products, and you had to refund unhappy customers. The costs you incur are significant and “material”.
An example of an immaterial breach would be a shipment that’s a day or two later than originally scheduled, but you were still able to meet customer demands. This breach is obvious, but it was an inconvenience. You can sue in this case, but you must be able to prove potential damage to your business because of it.
Get It in Writing
One mistake that small businesses make is committing to work without a contract. Always manage vendors and suppliers based on the contract you signed.
A common mistake across the business world is signing a limited agreement with a supplier and then expanding the scope of work. You can avoid a lot of problems by issuing a new statement of work with the specifics of every new project. These documents become a legally binding agreement for your new, expanded vendor relationship. Then there’s no conflict between the work being done for a new project and the original vendor contract. If you fail to require them to agree to confidentiality and competitive work terms, you could lose business secrets before your new venture has launched.
Vendor management is a complex process. However, it can save you from costly mistakes down the line, including ones that could diminish your competitive advantage.
Community manager at Visual Contenting. Jacqueline loves to talk about social media trends, new technology and how they help businesses accelerate their marketing efforts.
