Written by vendor management professionals
The VMO plays a key part in increasing your return on investment (ROI) with vendor relationships. Properly utilizing a VMO will increase company efficiency, reduce vendor spend & risk exposure and allow the business units to focus on their core business functions.
While there are no magic formulas in this article to determine exact ROI, using a VMO throughout the vendor lifecycle will provide multiple advantages and ROI in four primary areas.
Auditors typically recommend that a review process is in place for submitted invoices. The best practice is to have the business owner ensure and approve that the vendor performed the work, then have the VMO team review the invoices to ensure costs match the contractual terms. Once approved by the VMO, then the check is cut for payment.
During an audit of a department's invoicing process, I saw that that department was only sparingly auditing their largest vendor's invoices. After performing an in-depth audit of the vendor, I was able to find erroneous & duplicate charges that totaled $17,000.
Most AP systems should have controls in place to put a cap on specific expenses, along with an approval process for any exceptions. It is imperative to engage the VMO with vendor invoice fees to ensure whenever prices change or whenever there are new service fees. If these functions are not utilized, you could be at risk of paying more for services than what was negotiated in the contract.
Even if your AP system does extract vendor pricing from active contracts within the VMO database, it is still a best practice to randomly audit vendor invoices to ensure they match the current contractual pricing. There are times when pricing may not be updated in the AP or the invoice is submitted under a different code/rate.
During an audit of an AP system that had caps fees along with a per occurrence cap, it was identified that all caps were not complete and the approvals for exceptions lacked proper research. I identified $13,000 in errors in the first 6 months.
A new vendor should only be selected when the need for their service or product is deemed superior to the in-house alternative. Cost justification (ROI), vendor efficiency and risk also have to be identified prior to selecting a vendor.
The VMO should be engaged as soon as the vendor need is determined. The VMO should review the type of service requested to see if there is currently a vendor that performs the same service in a different department. Eliminating vendor duplication provides a lower total cost by increasing the preferred vendor's volume of services and thus better discount opportunities.
Furthermore, using the VMO as a non-biased party eliminates favoritism and subjectiveness when scoring the RFP, performing diligence, assessing risk and evaluating the business requirements. By selecting the best vendor in an objective fashion, your company should recognize long-term financial benefits.
I had a request come across my desk to add a vendor for a service that could have been performed in-house. After reviewing with the IT department, it was determined that IT could create the program in less than 20 man-hours. This saved the company $47,000 annually.
During contract negotiations, the VMO should have all the requirements, terms and SLA's from the business to negotiate the contract. This frees up the business owner's time during the negotiation process and limits their role to the final sign-off. The VMO should be the company's de facto expert in handling all aspects of negotiating contracts — resulting in the best cost, terms and SLA's possible.
At a previous company, my team saved over $4.1 million annually by renegotiating older contracts. We were able to accomplish this by knowing the business, being aware of current market prices and having excellent negotiation skills.
The business unit should handle all day-to-day dealings with the vendor. The VMO should manage the relationship at a higher level to ensure compliance with terms and conditions and work with the vendor to resolve any issues.
Ways the VMO should manage the relationship:
The VMO should conduct vendor risk reviews to identify and manage threats the vendor may pose to the company. Risk reviews protect company assets, income, employees, customers, reputation and its investors.
It is a best practice to use a non-biased party to review vendor performance. The VMO can assess the performance of the vendor by objectively discussing it with all departments that interact with the vendor — or, at the very least, the key stakeholders. A performance scorecard quantifies the vendor's service, quality, efficiency, incidents and SLA's in a manner free of any biased opinions. The performance review should also be shared with the vendor to create a partnership that will deliver results.
SLA's should be identified in the contract and contain material repercussions for the vendor if they don't perform. When negotiating SLA's with the vendor, identify the risks to your business and help set what the penalties should be.
SLA's are only as good as the monitoring of the data — the VMO should handle monitoring, especially if the contract contains monetary penalties. If you are not monitoring SLA's you could be throwing money out the window.
There will likely be incidents where a vendor is not performing to the SLA's, has violated a term in the contract or is not compliant with the risk review. The VMO should work with the vendor to resolve any such incidents so that the business owners can focus on their key functions.
Tracking incidents and monitoring vendor action plans is a perfect way for the VMO to evaluate the vendor at a high level.
I was overseeing a vendor site that had below-average customer service scores. By using action plans and holding the vendor accountable, we were able to increase customer service scores by 25 points and elevated them into the top 5 call centers.
A VMO can manage vendor utilization and reduce costs in several ways:
At a previous company, I identified seven vendors performing the same services. We decided to keep three vendors for benchmarking purposes, eliminated the other four vendors. By negotiating better rates with the remaining vendors, we saved $5.4 million annually.
Contract renewals are imperative to eliminating risk. If a contract is expired and the vendor has an incident, this could expose your company to monetary damages and a hit to your company's reputation.
Both company-led reviews (risk, performance, and audit) and vendor-led reviews (SSAE 16, ISO 27001, etc.) have to be managed and documented. Certificates of Insurance must always be current and provide suitable coverage. Failure to have up-to-date, commensurate documentation could also expose your company to unnecessary risk.
The more a business owner can focus on their actual job, the more efficient they'll be and the better the company's performance will be. Properly utilizing vendor management to maximize company profits is an intense, detail-oriented process, and shouldn't be part of an employee's overall position.
Paul Boone is an experienced VMO manager. Connect with Paul on LinkedIn.