If you follow either my Twitter or LinkedIn feeds, you may notice that I travel quite a bit and tend to talk to people a lot about contract management and automation. A typical, perhaps paraphrased, conversation is:
“Craig, you are so smart, tall and handsome, and this contract management stuff sounds great. But where can I get return on investment (ROI) quickly?”
“Thank you for noticing. And quick ROI is in vendor management.”
“Vendor management? Isn’t that a procurement thing?”
“Yes, in a way, but it’s really a contract thing.”
Realistic depictions of my everyday life aside, it is fair to say that there is some confusion on what vendor management is. Now, I am not the word police, but generally speaking, vendor management is a form of contract lifecycle management focused on managing the post-signature activities around buy-side contracts including:
- Vendor performance management against the contractually agreed set of vendor obligations and deliverables;
- Vendor compliance with intra- and extra-contractual regulatory obligations (think GDPR or other security); and
- Vendor financial management to ensure that the purchasing party is not paying more than was contractually agreed.
Now, that is all well and good, but how does it apply to a real-life situation? In essence, vendor management services are “business case assurance.” We all hear the numbers about revenue leakage, or companies losing 9.2% of their annual contract value through poor contract management. Much of that is in the vendor management space. A company only purchases services–especially big spend services–if there is a business case or approval which can be oversimplified as spending X to receive Y. But the funny thing is that often companies pay X plus 20% and receive Y minus 20%.
This is not because vendors are evil, but rather:
- Proper discounts and rate cards are not applied
- Deliverables and services are not verified against SOWs to see that all has been delivered
- Penalties and milestones are not enforced
- Change Order/Amendment management is less rigorous than original vendor selection and contract creation
- Services are auto-renewed when not needed
- Overlapping services are purchased multiple times from multiple vendors
All of the answers to these problems are found in the contract. But guess what? No one reads the contract after it is signed. The problem is that the contract is written by lawyers for lawyers and the people who are charged with delivering the contract or managing it are not lawyers. They have real skills (I’m allowed to say that). It’s like being an English-only speaker and picking up a French menu. Sure, you may understand a few words, “boeuf” looks like “beef”, etc., but all the other words that describe what happens to that beef are not in your wheelhouse. And you can certainly be surprised by what is presented on the plate. Do you think anyone really ever ordered “Tête de veau” on purpose? That dish is clearly an inside joke perpetrated by the French tourist restaurants, and for that I applaud them.
This is not to say that you need to be distrustful of your vendors. But you do need to set the terms to be clear and transparent. For example, it’s not a negative to expect your partner/spouse to communicate with you and discuss things like who is picking up the kids, getting dinner together, or planning a vacation. You certainly wouldn’t tolerate it if they just disappeared off to Vegas for the weekend, and lost it all at the blackjack table. So why would you allow a vendor to not have a plan on GDPR, not validate their invoices, or change the scope without getting your signoff?
But this happens all the time–often in small ways. Small ways that add up. Most of us don’t see the point in fighting over $1000 on a megacontract. But what if you had 3000 vendors and overspent by $1000 on each of those? $3,000,000 generally gets your attention!
Only through a mix of proper technology, process, and expert people, will an organization achieve the clarity and transparency in contractual performance and obligations needed to avoid this type of loss, confusion and inefficiency. Contracts (and the relationships they represent) are becoming more complicated, more global and more core to company value. Therefore, vendor management is no longer a “nice to have,” but an absolute necessity to ensure proper ROI for a contractual portfolio.