In a recent Deloitte survey, 52% of executives expressed outsourcing various business functions, such as manufacturing and supply chain procurement, and 76% of executives are outsourcing IT vendor functions, including cybersecurity and help desk support.

As outsourcing continues to become more commonplace, vendor management strategies will play a critical role in how well a company adapts to the changing landscape.

What is vendor management?

Vendor management refers to companies’ processes to optimize and streamline the working relationship between their internal team and third-party providers.

While it differs in every company, depending on the type of product or service that’s outsourced, vendor management encompasses everything from long-term contracts to routine monitoring. It spans the entire scope of the relationship, including initial research, assessment, and day-to-day coordination.

Ultimately, vendor management aims to help companies achieve cost savings, mitigate risks, and ensure that all third parties deliver on expectations and values.

4 Steps of effective vendor management

Companies that work with vendors typically have some sort of process in place, whether it’s ad hoc or a series of prescriptive steps. The most effective vendor management system usually involves the following:

1. Identify business requirements

All stakeholders should discuss and outline their goal in working with a vendor and the results a vendor is expected to deliver. Identifying the vendor’s proposed role can help assess its importance and highlight any other concerns the business needs to address before entering a new contract.

During this step, stakeholders can discuss budget constraints, timelines, certification requirements, and other vendor specifications. Companies that deal with multiple vendors can also determine whether there are existing contract terms that can be expanded to provide the desired service.

2. Evaluate and select vendors

Once the company has finalized its business requirements, it can search for potential vendors. This requires some time, as it involves collecting a range of vendors, assessing the quality of their previous work, sourcing prices, and other research tasks.

For some companies, deciding on the right vendor can be as simple as selecting the one that best fulfills the business requirements. Other times, a company may have a bidding process, where vendors within a consideration set are invited to submit proposals on how the requirements will be met.

No matter the process, vendors should be thoroughly assessed according to their capabilities and expertise, ease of communication, reliability, and overall value they offer the company.

3. Onboard your selected vendors

Approved vendors enter a contract stage, usually overseen by legal and finance teams, including payment paperwork and background checks.

Once this step is complete, vendors can be onboarded into the appropriate systems and business processes. All essential vendor information must be collected and inputted, facilitated by select points of contact managing the entire workflow.

Depending on the amount of access needed, vendor onboarding can take a significant amount of internal coordination and resources. However, onboarding sets the foundation for a successful supplier relationship and is one of the most important stages in vendor management.

4. Assess vendor performance

As with any business contract, vendors should undergo a periodic performance management check against initial business objectives. It’s important to have all stakeholders assess their individual interactions and experiences to evaluate all areas of the vendor management process.

Vendor management software can be used to pool the necessary information together in one place, making it easier to assess different factors. By looking at the full scope, including submitted deliverables and total vendor costs, companies can gain necessary insights to improve supplier performance and determine whether or not to renew the contract.

Challenges of managing vendors

Whether you engage one or multiple third parties, vendor and supplier relationship management can be a challenging process. Every vendor requires their own operational guidelines, evaluation, and review process. Understanding the challenges of vendor management can help companies see the most success.

Vendor compliance and reputation risk

All vendors come with their own modes of operation that must align with your own, particularly when it comes to regulatory compliance and quality standards.

These two factors, if not in sync, can lead to significant consequences. Making sure third parties adhere to all regulations required by your vendor risk management team can help prevent unnecessary exposure. If necessary, request the vendor to undergo an audit or submit adequate certification or other verification.

As for quality of work, this should ideally be verified during the vendor evaluation process through product samples or trial runs. It’s also recommended to perform random quality assurance checks, especially at the start, to determine whether the work continues to uphold your standards.

Decreased visibility

Perhaps the biggest change when working with vendors is lack of the visibility available with internal teams. Even with assessments and reports, a lot of information can slip through the cracks.

Lack of vendor automation

While working with vendors lightens a company’s workload, it creates new tasks that are frequently not addressed.

For example, companies often use manual methods to keep track of vendor contracts and information. If any information becomes outdated, there’s a high likelihood of important documentation or payments being sent to the wrong accounts. This only compounds when working with multiple vendors.

Setting up vendor management automations helps maintain updated information, such as upcoming contract renewals, expiring certifications, and vendor fees and terms changes.

Vendor management best practices

Even if your company doesn’t have complete control over a third party’s operations, there are several ways to optimize the vendor management process. Here are some best practices that can keep you and your vendors on the same page:

Establish a vendor management policy

Vendor management plays an important role that’s expected to scale even more in years to come. Companies should create a living document that outlines their vendor management policy to establish a reliable system.

A policy helps formulate initial guidelines and involves internal stakeholders in specific steps throughout the vendor management process.

Set vendor selection standards

In time, you will better understand what vendors are a good fit with company culture and are more likely to deliver value. It may be specific expertise, industry experience, or technical qualification.

Regardless of the criteria, a qualified set of standards can be applied whenever a new vendor is undergoing evaluation. Knowing what factors to consider can contribute to vendor management success, even if you only need one or two outsourced tasks.

Take a proactive approach

It’s easy to assume external contractors don’t need as much collaboration or feedback. However, nurturing relationships is a large part of effective vendor management.

Establish clear expectations from the beginning by sharing your business requirements and addressing any concerns or questions. Explain how your companies will work together and what key performance indicators (KPIs) will be used to measure success.

Even after the project kicks off, maintaining open communication can help further maximize the benefit of vendor relationships. Most importantly, give honest feedback and discuss areas of improvement, especially if any issues or problems arise.

Measure vendor performance

While vendors can help lighten the internal load of a company, they do require a separate managing and monitoring process.

Develop a way for stakeholders to evaluate vendor performance against the initial business goal and performance metrics to determine whether vendors are meeting expectations, underperforming, or delivering above the expected value. Companies can also look at cultural fit and how well the vendor was able to cooperate and adapt to unexpected changes.

A thorough assessment of the vendor lifecycle can provide guidance for a company’s upcoming contract negotiations and potentially secure better rates.

Final thoughts

Vendors can deliver great business value when correctly planned and supported like any other business function. Vendor management builds reliable processes and criteria to ensure a mutually beneficial business relationship.

By systemizing the evaluation, onboarding, and review process, vendor management increases the odds of success for internal and external teams.

This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.