What is vendor management?

Almost every business uses IT products and services provided by external organizations. These providers are known as vendors. A vendor can be an individual or a company. The terms supplier and service provider are also alternatives to the term vendor. A business could have a few or many different vendors, each with different terms and conditions. Vendor management is the term used to describe all of the activities the customer organization should perform, so it can obtain the best value from its vendor arrangements. These activities include researching the IT marketplace for products and services, sourcing and selecting vendors, obtaining quotes, negotiating contracts, managing relationships, evaluating vendor performance, managing deliveries of products and services, and paying the vendors for them. The detailed vendor-management activities and the level of management required for each vendor will vary, according to the characteristics of the vendor and what products and services it supplies. To be effective, vendor management requires specific skills, allocated time and sufficient resources.


How can vendor management drive service excellence?

Vendor management in many organizations is limited to sourcing the lowest-cost vendor for a particular IT product or service. While this activity from the discipline of vendor management can contribute to reducing IT operating costs for a business, it is unlikely to result in service excellence. To do that, vendor-management techniques must also be used to manage the continuous relationships with vendors to ensure the initial agreements are mutually beneficial for both parties. Using effective vendor-management processes will ensure vendor agreements delineate appropriate requirements for service, quality, cost and satisfaction that are aligned to an organization’s strategic goals and IT requirements. Vendor-management processes will also help an organization to select vendors capable of achieving these requirements, and then managing the delivery of the vendors’ products and services into the IT landscape. Applying vendor management will enable an organization to control IT costs, manage risks, and manage vendor performance, with delivery optimally aligned to strategic objectives and goals. Vendor management will help to avoid costly IT delivery failures and obtain the best value from vendors.

What are the steps of vendor management?

There are typically six high-level steps for vendor management. These steps should be executed in sequence, although it may be necessary to revisit each vendor-management step during a period of time, as the needs of an organization, IT requirements, and the capabilities of vendors evolve.

Establish business and IT goals

Before moving to step 2 of vendor management, it is crucial you establish the business and IT goals your vendors are expected to support, and how you will measure the success of your vendor-management activities. This should include defining performance metrics for your vendor-management processes. One key aspect is to understand the balance between cost and quality – is your goal for vendor management to reduce IT costs, and by how much? Or is it to improve service quality, and how is that defined? IT organizations should not proceed to the next step of vendor management until their goals have been fully understood and agreed at a senior level

Select vendors

The second step in vendor management is to select vendors that can best satisfy your requirements and support your goals. Making the best choices is critical to achieving your desired outcomes. Every vendor will have its own strengths and weaknesses, and different vendors will respond differently to being managed. Before making any selections, it is important to apply best practices to categorize vendors as part of your vendor-management approach. Vendor-management techniques that are appropriate for vendors that provide critical IT services, such as hosting services, are unlikely to be appropriate management approaches for vendors that supply commodity products, such as printer consumables. Once you have defined your categories and how they match with your goals, you should analyze the IT marketplace to identify potential vendors. Vendor management then requires a procurement exercise to be conducted to select vendors that fit best with your requirements.

Agree contracts with vendors

There is always a contract between a customer and a vendor. This may be a formal, signed contract with defined terms and conditions, or an implied contract created when an agreement is made to supply products or services. Understanding the types of contracts and the detailed obligations in them is a critical activity in vendor management, as without this understanding it will be very difficult, if not impossible, to manage vendors. For some types of vendors, especially those providing utility (such as electricity supply) and commodity services, the usual approach is to accept vendors’ terms and conditions. Unless you do anything different in this step of vendor management, when you place an order with a vendor, you are automatically accepting its standard contractual terms and conditions. These may not align with your goals or your strategy for vendor management. For vendors supplying critical services, or bespoke services including outsourcing, you may need the assistance of a specialist, such as procurement and legal experts, with this vendor-management step. If you do, then it is important these experts obtain knowledge of your goals, your IT landscape, and your ambitions for managing a particular vendor. Paying insufficient attention to agreeing contracts with vendors is the most likely cause of failure in vendor management.

Onboarding vendors

It is important to include onboarding vendors in your vendor-management approach for all categories of vendors other than those that supply utilities and commodities. Successful achievement of your goals requires having good management relationships with your vendors. Including onboarding activities in vendor management will help to develop those relationships and allow vendors to understand your organization, IT landscape, IT operating model, and your goals better. In a multi-vendor environment, your onboarding approach should also include introducing vendors to each other and encouraging them to work together where there are dependencies between their IT products and services. Service integrators are sometimes used to help with this aspect of vendor management, as they have experience coercing different vendors to work effectively together.  

Manage vendors

Once vendors are onboard, it is time to start managing the delivery of their IT products and services. The individuals in your IT organization responsible for vendor management should routinely monitor vendors’ performance and output against any service levels, ensure that any contractual requirements are being fulfilled, review any necessary changes to the contractual terms, provide feedback and develop continuous, positive relationships with vendors. The frequency and details of these vendor-management activities will depend on vendors’ categories, their importance to you, the current level of relationship and the willingness of vendors to engage with your management activities. Your vendor-management activities should start as soon as deliveries commence, delaying them until issues occur will lead to more challenging resolution and reduced service quality.

Review achievement of goals

The final step in vendor management is to review regularly if your intended goals are being achieved. This should be done at least annually. It is good vendor-management practice to conduct quarterly reviews during the first year of deliveries, as during these early stages it will be easier to influence any necessary changes either in vendors’ deliveries or in your vendor expectations. This requires strong working relationships with vendors, hence investing in the relationship management aspects of vendor management will pay dividends when influencing vendors to fulfill the agreed performance objectives.

How can vendor management help organizations reduce IT costs?

Careful selection of your vendors is the first-way vendor management can help you reduce costs. Establishing your goals as your first step in vendor management before selecting and accepting any vendors will ensure you understand how you want to balance cost and quality. If reducing IT costs is your primary driver, then this will help you focus your vendor-management activities on cost reduction. Cost reduction relies on establishing vendor contracts that can be managed to ensure cost control. Organizations that do not have effective vendor-management processes sometimes soon discover their vendors want to charge extra for items they thought were included in the contract. For example, a vendor providing hosting services might ask for extra payments to apply major updates to database software. Vendor management can avoid this situation by clearly determining your goals, selecting vendors that can support those goals, and creating contracts that fully specify what vendors will supply and how they will be managed.  

Vendor management can help an organization reduce costs by actively checking you are paying for what vendors are delivering. An example is a long-term contract in which a vendor has committed to refresh the IT technologies it uses as the technologies evolve. Unless your vendor-management activities check that this is being done, there is a risk that vendors will not do as they promised to save on costs. Vendor management can also avoid the situation where, through ignorance of the details of vendor contracts or poor management of them, you must do the activities vendors should be doing. This incurs costs. One example is where a customer organization uses resources to produce reports on service quality, using data they collect themselves because the contract with the vendor didn’t include any reporting requirements.  

Ineffective vendor management and lack of trust in vendors can lead to increased headcount and costs for you, as you continually check the quality of vendors’ services produced. This management overhead can be avoided by adopting the relationship-management approaches from vendor management to build trust between the parties. Having strong relationships with vendors and effective vendor-management processes can help negotiate better rates and provide access to product discounts and vendor technology innovations to reduce the costs of the services without compromising their quality.

Adopting vendor management can drive administrative cost savings. Centralizing vendor-management activities in one skilled function can achieve these savings and a central repository of data and information about current and potential vendors can reduce data duplication, work duplication and errors. These techniques also support efficiencies in the relationship-management activities of vendor management, using consistent approaches and one trusted source of information.


How can vendor management mitigate IT risks?

Vendors and, therefore, vendor management are critical to the success of any organization and the mitigation of IT risks. Just about every organization uses IT products provided by vendors. For some organizations, vendors run many of their IT processes and activities. All vendors, therefore, present a risk to the IT services used by an organization. Using vendor-management approaches can help to mitigate those risks, by establishing effective and repeatable approaches for the management of vendors. To receive the best value for your money and the lowest overall risk to your business, you should take a strategic approach to manage your vendors efficiently by adopting vendor-management practices. During the past, many organizations neglected vendor-management activities once contracts were signed. The continuity of IT services in any organization that does not actively manage its vendors after contracts are awarded is at risk, as, effectively, you are just assuming all will occur as planned, vendors will perform as you expected, and no problem or issues will appear. That is rarely the case.

The areas of risk that vendor management can help mitigate by the effective management of vendors include IT operational risks (dependent on their particular products or services), unforeseen costs, general cost control, regulatory compliance (such as license management), IT service continuity, a vendor ceasing to trade, loss of key vendor staff and poor vendor service performance. Vendor management can increase the visibility of risks in these and other areas, so they can be managed and controlled. Good relationships with vendors through strong vendor management can enable collaboration between you and your vendors to mitigate risk, as both parties would be affected if the risks materialize. Where such collaboration doesn’t happen, you can still benefit from vendor management by taking steps to mitigate any risks yourself, and, worst case, by choosing an alternative vendor. Using vendor management to track and measure vendors’ performance can identify adverse trends, so you can address issues before they affect your business, effectively managing the risks.

What are the benefits of vendor management?

Put simply, the benefits you can achieve from carefully designed, planned and executed vendor management include increased customer satisfaction, reduced costs, rapid issue and incident resolution, improved service quality, better vendor service and a reduction in your efforts to manage your vendors. While it can be difficult to compare directly and account for the time, money and energy used to nurture a positive vendor relationship directly against your IT functions bottom line, vendor management will help you achieve your budgets, maintain customer satisfaction, and deliver your IT goals.  How you do vendor management will be invisible to your internal customers, as in their eyes you yourselves are the internal provider of IT services. If you don’t do vendor management, however, or you don’t do it very well, then your customers will blame you alone for any failures your vendors' cause.

What are the best practices for vendor management?

There are many best practices for vendor management. The selection and application of these will depend on vendors’ categories, your organization’s vendor-management skills, your IT landscape, the available budget and the benefit of applying each practice to your organization. It is important your vendor-management activities always achieve the correct balance between cost and effort of application versus the expected benefits. You must also consider vendors’ likely attitude to being managed. Some vendors, especially large ones and those providing commodity services, will prefer to manage their deliveries and may resent any attempts by you to apply vendor-management techniques once contracts have been awarded. Where this is the case for any categories of vendors, it is important to establish if it is worth attempting to impose vendor management on them. If you are receiving good services and good quality products from a vendor, then that may be sufficient to achieve your goals, and any additional vendor-management activities might not add any value.


Relationship management design

For vendor categories where you want to retain the vendor, it is important you design how you plan to add relationship management to your vendor-management approach. Developing relationships with these key vendors starts well before you start to manage them, it starts the first time you engage with vendors. This is likely to be during the early steps of vendor management, during the preparatory work for vendor selection. Consider how you want vendors to perceive you. If you want to be seen as having a mutually beneficial vendor-management approach, then from the initial meeting with any vendor you should focus on communicating this message clearly. If during your first meeting, the vendor recognizes you have an attitude of being in charge, then that could be the vendor’s perception for a considerable period of time and the vendor may prove difficult to manage. Vendors who want to work as a partner with their customers may even sever their relationship after the first vendor-management engagement if they think working with you will be challenging.

Design the vendor selection process

The vendor-management process begins by selecting the right vendors for the right reasons. The vendor-selection process can be both complicated and emotional if you haven’t decided how to approach and manage it from the start. You should have resources available, and with the appropriate skills, to analyze your IT and business requirements, agree on the selection criteria, search for prospective products and vendors, lead the team to select the best vendors for your needs and design a usable contract, and then successfully negotiate the contract with the vendor and possibly its legal team while simultaneously ensuring you don’t compromise your goals. If you proceed with selecting vendors without any preparation, then it is unlikely you will achieve the optimal result from vendor management, and you may be in breach of any procurement laws in your country, especially if you are in the public sector or regulated industry. The vendor selection part of your vendor-management approach must allow sufficient time to execute each step, reviewing progress as you proceed and continually checking alignment with your goals and IT landscape. Trying to select vendors quickly just to satisfy a deadline usually results in failure. If your vendor-management approach requires the use of tenders for vendors to bid for work, then setting unrealistic timescales for vendors’ responses will limit your selection as vendors decide not to bid. Vendors need sufficient time to understand your requirements for both the products and services they will provide and your proposed vendor-management approach, establish if they are able to fulfill them and then create an understandable tender. If time pressures compromise any of these, then the important vendor-selection step in vendor management is unlikely to give you the best outcome.

Evaluating potential vendors

During the design phase of vendor management, you should agree on the criteria to assess one potential vendor against another. Once you start to look at individual vendors, be careful to concentrate on how well the vendors match your selection criteria and don't allow vendors’ sales talk to sideline you. Many vendors will do and say almost anything to win your business. This may include putting their “experts" in front of you, who may try and sell you products, features, and services you don’t actually need. Focus your evaluation on your requirements and probe vendors to affirm the requirements can be fulfilled. Stay in charge of the evaluation activities of vendor management, don’t let vendors drive the pace or the agenda. It is a good idea to use a multi-stage evaluation process in vendor management. While this may seem to require more time to execute, it is more likely to ensure your vendor-management approach selects the best vendors for you. The first stage is to submit a high-level set of requirements to potential vendors and ask them to respond. These should contain key differentiators that will help you eliminate early vendors that are unlikely to be appropriate. Examples are price, IT standards, security requirements and willingness to work with your vendor-management approach.

Retain flexibility

Some vendors may want an exclusive relationship or one that restricts your opportunities to work with other competing vendors. This will limit your vendor-management options and should be avoided, regardless of how attractive vendors try to make it. Vendors can seem competent and willing to co-operate during the early stages of the vendor-management selection process but could change the delivery quality and challenge your vendor management once they have made their planned profit. The risk of this happening is higher in long-term outsourced and managed-service contracts. Short-term contracts with renewal options should be preferred over long-term contracts, as these facilitate vendor replacement and changes to your vendor-management approach. You should always be open to making contract changes at vendors’ requests, provided the overall benefits to you outweighs any downsides. Accepting a change can benefit your vendor management during the long run,  as it shows good faith on your part and your willingness to understand vendors’ positions and working towards a vendor-management approach that is mutually beneficial to both parties.

Continual performance monitoring

Do not assume that once the contract has been awarded your vendor relationships will proceed according to plan and contracts will be executed exactly as specified. Your vendor-management approach must include continual monitoring of vendors’ performance and service level achievement from day one. The monitoring of vendors should include verification that all of your requirements are being fulfilled, but, in particular, those most critical to your business. These will depend on the specific products and services vendors are providing, but typical examples are time to deliver products, service quality, and service availability. Your vendor-management approach should also include the continuous monitoring of the achievement of the terms and conditions on which you’ve agreed. An obvious requirement is your payments to vendors, according to the remittance schedule in the contract, but some contracts will also include other requirements you, as the customer, is expected to honor. If your vendor-management system doesn’t also pay attention to these requirements, then your vendor relationships could be adversely affected. A best-practice vendor-management approach is to use “balanced scorecards” to evaluate vendor performance. These are where softer aspects of performance, such as willingness to co-operate, are evaluated in addition to more tangible measures, such as service-level achievement. Using a balanced set of evaluations in vendor management provides a much better view of how vendors are performing and support improved relationships.

Continual two-way communication

Active and effective two-way communication is the key to success in all steps of vendor management. You should not assume vendors intimately know your IT operating model or can read your mind. Using carefully designed, established and maintained lines of communication between you, as the customer, and your vendors as a fundamental part of vendor management will help to avoid misunderstandings, maintain positive relationships and support the proactive resolution of issues before they become problems. Every vendor is different, however. You should take the time to understand how they would like communications to work. A good approach in vendor management is to use a combination of face-to-face communications, verbal communications and email. You should always check all communicated messages have been received and understood, especially if a vendor is from a different culture or country. Without this confirmation, vendor management will be more challenging.

Categorizing vendors for effective management

To be successful in vendor management, you must understand there are several different types of vendors, each requiring different levels of management. A monolithic approach to vendor management, where attempts are made to manage each vendor exactly the same, will not be successful. Your approach to vendor management must initially create specific categories, according to the different types of IT services, products and criticality to your business. Once this has been done, you should define the detailed vendor-management activities required for each category. Risk-management techniques can be useful for this definition. For each category, identify the risks that could affect your day-to-day IT delivery, such as a vendor failing to deliver a new software version according to the schedule, failure to achieve service levels, or the vendor ceasing to trade. Then, identify what vendor-management activities you will use to manage and mitigate each risk. These management activities will vary according to the vendor categories you have created. For example, you have created a category for off-the-shelf software products, but one vendor fails to deliver or proves difficult to manage, you can then easily source the products from another vendor. For application services, however, that have been customized for your needs, it is likely to be challenging if you want to source an alternative vendor when you have management issues or delivery failures.

Typical categories for vendors are:

Integration vendors

These vendors provide services to manage the integration between different technology products and services. The integration will be specific to your needs, hence your vendor-management strategy for this category should aim to retain these vendors, as they are likely to be critical to your business and will be challenging to replace.

Bespoke vendors

These are vendors you use to create products and services that are customized for your needs. This includes traditional outsourcing, where a third-party organization assumes responsibility for applications and services that you previously developed in-house. It also includes a managed-service provision where the vendor provides you with customized services to defined service levels and vendors that supply applications developed to your specification. Your vendor-management approach for this category must recognize the challenges of replacing the vendor if you have issues, as specific changes have been made, and you are not purchasing standard off-the-shelf products or services from the vendor.

Standard vendors

Standard vendors provide services based on configurable standard applications, where the customer does the configuration itself. The vendor provides a support service for the customer’s base product. An example is a payroll application where the customer can configure specifics, such as analysis codes, but cannot change the payroll processing logic. Vendor management for this category should be customized to recognize these vendor characteristics, as it is much easier to replace a vendor in this category. If the services and products are critical to your business, however, then your vendor management should aim to retain the vendor by building a long-term relationship with it.  

Commodity vendors

Any vendor that provides a product or service that is widely available and isn’t configurable is a commodity vendor. The vendor-management approach for this category should be “lightweight,” as it would be easy to find alternative vendors if issues are experienced. Examples of this category include those providing off-the-shelf software application products, computer hardware and utilities, electricity and broadband vendors, and internet service providers. Some of the commodities may be critical to your business, and where this is the case, your vendor-management approach must account for this. This could be as simple as instituting management controls for vendors of these critical commodities to ensure they are always paid on time, otherwise, they could cut supply, such as wide area network connectivity.

Developing strong relationships with vendors

To maximize the benefits from your vendor-management processes, you must take a strategic approach to develop and maintain relationships with your vendors. For vendors of utility and commodity products, this could be as simple as paying bills on time, but for all other vendor categories, it is important to have good and mutually beneficial relationships with the vendors you don’t want to lose. Sourcing and onboarding vendors are challenging activities in vendor management, as there is no value in repeating the process just because you failed to be attentive to relationship management bad enough for you to part company with a vendor. Vendors want revenues, but without a good relationship, they may just deliver the minimum requirements, and not provide the value you anticipated. The following relationship-management activities will help you maximize the return from your investment in vendor management:

Shared information

If you want your vendors to help you, then you must provide them with information relevant to their needs. This has to be in a form they can easily understand, not full of your organizational jargon and acronyms. In vendor management, it is a good idea to provide all vendors with a glossary of all the non-standard words and abbreviations you use. Other useful information includes IT landscape, user demand forecasts, IT operating model, and all other relevant information that could affect vendors’ service delivery or will help you manage vendors.

Common priorities

Your vendors must understand your priorities, both in terms of achieving your goals and your vendor-management strategy. For some of your vendors, the priority will be purchasing IT products and services at the lowest cost, for others, your priority will be high-quality services, with cost as a lower priority. Your vendor-management approach must be capable of identifying the relevant priorities for each of your vendors, which should then be shared with them.

Encourage joint development and innovation

For your key vendors with whom you expect to have a long-term and strategic relationship, it is a good idea in vendor management to work together on developing the strategy for their IT products and services. One way to do this is to have joint management meetings with each vendor. Using this technique in vendor management will give you access to vendors’ expertise. They can provide valuable insights and innovative suggestions to maximize your value from their products, which could give you a competitive advantage.

Develop long-term relationships

Most vendors want long-term, profitable relationships with their customers. If they recognize that, in your vendor-management approach, you do not want the same, then vendors are unlikely to invest in a relationship with you. The best value comes from developing long-term partnerships with trust and commitment between both parties.

Aim for win-win

Vendor management is not like a battle where there are winners and losers. For good relationships, both customer and vendor must gain something from the partnership. Using heavy-handed vendor-management tactics and language with vendors are unlikely to help the relationship. If vendors believe they have been unfairly or unjustly treated, then this perception is likely to lead to resentment and loss of any co-operation. In any situation, look for a solution that benefits both parties.

Understand your vendor

To establish the best relationships in vendor management, it is useful to understand your vendors thoroughly: what drives them, what are their business goals and aspirations with you, what jargon and abbreviations do they use and what constraints do they have, especially from any subcontractors. Understanding where your vendors’ costs are fixed and where they can be discounted can be very useful in vendor management when negotiating prices.