A Beginners Guide to Vendor Management and Ways to Tackle the Key Challenges
Major vendor management challenges
With the rising scope, scale and complexity of vendor relationships and services, there is a proportionate increase in the risk related to them and the importance of effective vendor management. A key competency for every enterprise to possess is that of managing external vendors. Some of the most common vendor management challenges faced by companies include:
Inadequate vendor selection might occur during the operations phase when there is a non-fulfillment of core vendor contractual obligations. Due diligence prior to closing the contract can help mitigate this risk and provide the enterprise gain a better picture of the long-term delivery capabilities and sustainability of the vendor. Failure to conduct adequate vendor selection exposes the enterprise to considerable costs associated with replacing the vendor, potential revenue loss, and ineffectiveness of financial penalties.
A contract that does not cover all the aspects of the relationship that need to be managed up front is a major sustainability threat to the contractual relationship. A major financial risk associated with this threat is neglecting to detail payment terms and price-setting mechanisms. Other operational risk includes missing exit strategies in the contract or ineffectively communicating clear, measurable requirements to the vendor. Several legal and compliance risk could arise when the contract fails to detail liabilities or does not stipulate any intellectual property rights or specifications on the use, disposal, and distribution of software and data.
Inadequate detailing of requirements
Inadequately setting up and detailing the requirements can have a huge impact on the proper execution of services by the vendor. Organizations that focus on solutions themselves instead of defining the requirements and giving freedom to the vendor to propose the optimal solution could face operational, financial, legal, and reputational issues in the long run.
Over reliance on a specific vendor
An enterprise’s vendor management strategy has a considerable impact on their business activities. Relying excessively on a specific vendor, especially for business-critical tasks, increases operational risk including the lack of in-house knowledge and demotivation of employees and. This consequently increases the financial risk.
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