Vendor Contract Management Best Practices
A single business is not an isolated box, fully self-sufficient in serving the needs of its customers.Â Every single business needs to buy goods and services, whether something as ordinary as office goods or something more particularized like a custom product or service. Buying requires contracts, and contracts require management. This is the vendor management process: storing, organizing, negotiating, renewing, and terminating contracts with a business’s various suppliers.
Vendor Management Best Practices
In a small business, vendor management is often run by the controller who handles things like:
- Negotiating vendor contracts.
- Paying suppliers.
- Supplier management.
- Vendor risk assessment.
- Storing contracts and vendor information.
- Cultivating vendor relationships.
In a larger business, vendor management is handled by procurement. Procurement professionals generally work with purchase orders that can include multiple vendor contracts under a single purchase order adding complexity to the process.
Both controllers and procurement frequently run into common problems during the vendor management process that ultimately can cost a business money unnecessarily in the short term or in the long term. Many of these problems would be mitigated/solved by implementing an AI powered automated vendor management system which would also allow companies to realize their business goals.
Effective Vendor Management Can Provide Relief
While vendor management may sound simple enough in the abstract, real-world events like COVID-19 can complicate things. Due to unexpected lulls in the economy, companies have been forced to scramble, looking for temporary or permanent relief. First and foremost, companies wish to find relief from their obligations to their suppliers and creditors, making controllers and procurement the heroes in the fight to keep the company afloat.
Hidden within supplier contracts are several avenues through which a business might find some economic relief. For example, a company might seek relief through a Force Majeure clause, which could excuse payment obligations under the current situation. Or, certain contracts might have conditions that allow for termination upon notice.
If the answer is not found within the contract itself, procurement and controllers may simply be forced to reach out to each individual supplier to renegotiate the contract, in part or entirely. They could renegotiate payment terms, contract scope or duration, or fully terminate the contract. All in all, vendor management could be the key to easy savings or immediate relief during these or future trying times.
Common Problems in Vendor Management
Even without external events like COVID-19, businesses are looking to maximize efficiency. For a smaller company, a controller may only be one employee, and thus a minimal cost. But every company wants to scale, and growth means more suppliers, more contracts, more dedicated procurement staff, and therefore more cost.
Relying solely on a small agile team carries its own risks. Standard practice at small businesses is the use of spreadsheets to manage renewal and termination dates and clauses that require manual entry of a purchase or a supplier contract. Manual data entry is only 60% accurate, and those errors can lead to missed deadlines, missed rebates, and missed obligations. Moreover, it is costly in terms of paying interns and paralegals for data entry work.
In addition, a growing business can miss out on savings by inundating understaffed and under-resourced purchasing departments with large volumes of contracts. Contracts, after execution, are often filed away and quickly forgotten. Spreadsheets tracking expiration and renewal dates go un-monitored. Companies can quickly find themselves paying for products for years after they stop needing them. Or, on the flip side, missing a renewal deadline could lead a company scrambling to resupply a key service or good.
Contract negotiation, especially for a growing company, can lead to more vendor management hurdles. A single controller may not be able to negotiate all the key terms in every contract, and may not have the time to ensure that each contract that comes in on a third-party’s paper conforms to the company’s compliance standards. This could lead to non-standard payment terms, automatic renewal in what should be a one-time buy or a pilot program, or substandard goods. All of these pain points could result in increased liability or prices for the company in the near future.
Finally, many companies, due to the sheer volume of their supplier contracts, are leaving money on the table by not taking advantage of rebates hidden within contracts. Rebates are devices suppliers put in their contracts to incentivize purchases. They are essentially a way to get some money back after making the purchase.
However, rebates generally require some sort of condition to be met in order to take advantage of them, the simplest being affirmative notification. In order to access these rebates on a yearly basis, controllers have to go back through the contract to look up the procedure, and many rebates are small enough that they do not justify the controller’s time or energy, and many go unclaimed. But, if you add up all of these small rebates, companies discover that they are leaving plenty of free money on the table due to a simple lack of resources in the purchasing department.
Evisort: A Prime Vendor Management Software Tool
Evisort is a contract management software, powered by artificial intelligence (AI), that can be used by purchasing to mitigate all of the above problems. Evisort pulls contracts from across the organization into a single repository, where all can be used to search for terms like Force Majeure clauses that contain words like “pandemic.” This sophisticated search and filter function allows a procurement department to make highly targeted searches such as by vendor contracts by expiration date, size, renewal mechanism, or Force Majeure clause.
The key to scaling a company is to make its employees more efficient and to have them focus on work that matters. AI is a principal way to do this: “AI can . . . be used to help deal with global value chain issues, such as deciphering large amounts of foreign data. Another way is by analyzing assessments, audits, certifications and credit scores to aid in supplier selection and supplier relationships to ensure compliance, especially in industries or regions with heightened supply chain risks.” Properly harnessing new technology like AI in a timely way is a key way for a company to maximize its procurement department.
Evisort tracks contract deadlines and renewal dates, and can be configured to send automatic alerts to the appropriate people who need to take action. Evisort’s AI extracts metadata from a contract and automatically enters it into the system, saving hours of manual labor, and doing it with much higher accuracy. During negotiation, Evisort can take a first pass reviewing a document, highlight risky terms, explain what risks each clause carries, and suggest changes, saving the procurement or legal person hours of work.
Finally, Evisort includes an incredibly powerful optical character recognition (OCR) tool. Unlike most OCR tools, Evisort layers on top proprietary AI that can read tables in PDFs or scans, and can accurately extract data into a word document, making the data searchable and actionable. This makes every rebate table, in every contract, immediately accessible, enabling companies to take advantage of the thousands of dollars in savings that otherwise would have been forgotten.
In short, controllers and procurement departments play vital roles in cutting costs, supplying the company, and creating value. However, they are limited by the resources allocated to them. Evisort is an affordable solution to a wide array of common problems every purchasing department faces and pays for itself almost immediately.
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