Strategic vendor management: benefits, challenges & best practices

Business risk comes in many forms.

Companies regularly manage financial, economic, legal, competitive, and data security risks, but business leaders often fail to understand the risks associated with poor vendor management.

Inadequate strategic vendor management can lead to inflated costs, tech stack security issues, and cumbersome and complacent vendors who are slow to respond to your emerging business needs.

In this article, we’ll cover how a strategic vendor management strategy can help mitigate risk and cut SaaS costs. We’ll also provide up-to-date best practices for managing key vendor relationships.

What is strategic vendor management?

Strategic vendor management is the process of monitoring, reviewing, and maintaining relationships with your company’s most important vendors. Its primary goals are to reduce costs, mitigate organizational risk, and develop meaningful and mutually beneficial business relationships.

The key distinction here is the term ‘strategic’.

Strategic vendors are those which are mission-critical to your company’s ongoing operation. Without them, you’d need to pivot your business strategy, overhaul operations significantly, or cease trading altogether.

In the SaaS world, a strategic vendor might be a company that offers a product nobody else does. More commonly, though (because it’s rare in today’s software environment to find a competitor-free vertical), strategic SaaS vendors are those who are deeply embedded in your operational procedures.

Your CRM might be an example of this. Dozens of other platforms offer more or less the same features, but switching would require a complete overhaul, making them one of your strategic vendors.

In the physical product world, strategic service providers are often merchants of components critical to producing the goods you sell, like your raw materials vendor

Note that spend is irrelevant here: this vendor might be your smallest expense, but if they close shop or experience supply chain issues, you can’t build your product. In this case, they’re a strategic vendor.

Do you need strategic vendor management?

A vendor management strategy is critical for most businesses. It helps you select better vendors, streamline contract management, and on the whole, receive more value from each supplier relationship.

Whether or not you need a strategicvendor management strategy depends on factors like:

• Your industry and vertical
• Whether you sell a physical product or a virtual one
• How old your company is

Let’s say, for instance, you’re a craft beer brewery. You’ve been in business for 10 years now, and have established crowd favorites. One particular beverage makes up the majority of your revenue, and you need a specific strain of hops to brew it.

Only one hops supplier has this particular ingredient, so they’re one of your strategic vendors.

You also have important relationships with brewing equipment suppliers, and if you were to have to source that equipment from an overseas supplier, your costs would be a lot higher.

This is a case where you have a strong need for a strategic vendor management strategy.

On the other hand, let’s image that you’ve just launched a new e-commerce clothing store.

It’s easy to find replacements for each of your manufacturing suppliers, your ecommerce platform, and your ad management and marketing automation software. None of those vendors are deeply embedded in your operational processes yet (because you’re just starting out), so switching wouldn’t be too painful. In this case, it may be fair to say that you don’t have any strategic vendors.

Most companies will have strategic vendor relationships, however, so strategic vendor management becomes a must-have.

Benefits of strategic vendor management

The benefits of strategic vendor management extend beyond the bottom line. Let’s explore four of the most important gains that your company might experience once you implement strategic vendor management practices.

IT governance

A well-developed and documented strategic supplier relationship management strategy helps IT leaders ensure that tools are bought and maintained compliantly, reducing technological and security risk.

Risk management and mitigation

Security isn’t the only risk concern.

Strategic vendors are those which, without, you’ll struggle to continue operating in the same manner.

Strategic vendor management allows you to better understand supplier relationships so you can anticipate risk, and pivot quickly where required.

Mutually-beneficial relationships

The best vendor relationships are those where there is a mutual fit—where you’re an ideal customer for them, and they’re an ideal vendor for you.

Just as you have specific requirements when sourcing vendors, your suppliers use ICPs (ideal customer profiles) to ensure they’re working with customers that benefit their organization most.

If you fit their ICP, you’re contributing toward their organizational success as much as they are yours, which generally strengthens relationship and reduces the risk that they pivot away from the service you need most.

Vendor management strategies help you determine whether this relationship will be productive during vendor selection, and they will also keep tabs on fit as the relationship develops.

Cost savings

Yes, we said strategic vendor management is about more than the bottom line, but cost savings is still a significant benefit.

When you have a better hold on vendor KPIs, SLAs (service level agreements), contracts, and the relationship as a whole, you’ll be better positioned to negotiate pricing, pivot to a different supplier, or consolidate vendors should you need to.

For instance, if you identify early that vendor is regularly falling short of KPIs, you can use this as leverage to negotiate pricing, or take it as a signal that you need to terminate your contract with them.

Challenges in strategic vendor management

Any undertaking worth doing comes with its share of difficulties. Strategic vendor management is no exception.

Poorly managed vendors can become complacent

One of the issues that can occur when you fail to manage strategic suppliers adequately is vendors becoming complacent, incommunicative, and unmotivated to help solve your business challenges.

This is generally the result of a power dynamic discord. The vendor knows you need them or that you don’t regularly keep them accountable, so they don’t prioritize you as a customer.

Cost is not the only factor in vendor management

Some companies prioritize cost when assessing and managing vendor relationships, and this can be to their detriment.

In many cases, it's better to maintain the relationship with a slightly more expensive vendor committed to your needs than to jump ship for a cheaper offer.

Accessing vendor insights manually is near impossible

If you don’t have a centralized SaaS management platform for monitoring the health of vendor relationships, you’ll struggle to quantify aspects like vendor performance or identify hidden cost centers like shadow spend.

Strategic vendor management best practices

Incorporate these best practices into your vendor management strategy to keep your team laser-focused on your most important business relationships.

Gain clarity on who your strategic vendors really are

The first step is simple: identify which of your many vendors are the most critical to your ongoing operation.

Ask: if this vendor were to suddenly disappear, what would happen for us? Would we be able to continue trading? Would it be easy to pivot and find a new supplier?

If the answer to either of those questions is no, this is a strategic vendor, and they’re who you’ll focus on as you develop your vendor management strategy and process.

Share vendor management guidelines widely

If SaaS buying is limited to a procurement team, access to your vendor management guidelines may not need to be widespread.

However, in many organizations, department heads are responsible for sourcing suitable software solutions for their teams, meaning procurement is decentralized.

In this case, ensuring your guidelines are easily accessible to all within your SaaS management system.

Understand that vendor management begins with procurement

Strategic vendor management doesn’t just start once you’ve got a contract in place—it actually begins much earlier, during the SaaS sourcing stage.

As such, your vendor management guidelines should detail what characteristics define an ideal vendor for your company and which you’d like to avoid.

With these instructions in place, you can avoid unproductive vendor relationships from the get-go and minimize risk to your company.

Strategic vendor management process

Follow these three broad steps to build your first strategic vendor management process, then iterate from there as you identify opportunities to optimize.

1. Understand your strategic SaaS stack

Start by building a comprehensive picture of each of your strategic vendors.

Collect relevant data such as vendor and contract information, performance data, and market conditions.

Need help organizing your software vendors? Use our free SaaS stack template.

Use these four pillars to collect and analyze data pertaining to your most important long-term relationships:

1. Vendor profiles: Update these monthly to reflect market, performance, and relationship changes.
2. Dashboards: Your vendor management software should provide dashboardsto see real-time tactical performance management data.
3. Scorecards: Review these monthly to objectively analyze the most important measure of the partnership. This should also include actions for improvement.
4. Risk plans: Review and adjust annually (or as often as required by your risk policies).

2. Conduct initial vendor reviews

This step involves building a plan to communicate the data and insights you’ve gathered to each strategic supplier.

Schedule an initial review meeting with vendor stakeholders to share important aspects of the new vendor relationship management strategy you’re implementing. Now is a good time to put dates in the calendar for future meetings too.

Your meeting agenda should include, at a minimum:

• Monthly performance against KPIs and SLAs
• A review of solutions to past performance challenges
• Relationship reviews (quarterly) to discuss the more strategic, long-term aspects of supplier relationships
• Risk reviews (biannual) to report and update any vendor risks identified

3. Implement an action for strengthening vendor relationships

After conducting each initial vendor review, it’s time to implement an action plan.

This is about determining what changes are required to improve each relationship, how you’ll measure and report on key metrics, and how you’ll adjust the procurement process to ensure you bring on the right vendors going forward.

Vendor management software is your secret weapon here, allowing you to design a centralized digital location for effective vendor management.

Strategic vendor management with Vendr

To effectively manage each supplier in your vendor ecosystem, you need at-a-glance insights into vendor performance and relationships.

Managing this with spreadsheets is insufficient, especially as you scale—you’ll need a vendor management system and a strategic partner.

Vendr acts as your single point of truth for vendor management, and can help you:

• Offload workflow management, constant follow ups, and training
• Streamline and automatically organize inbound request flows
• Reduce time spent on smaller deals with minimal savings opportunities

You’ll also supercharge your SaaS procurement process, leveraging our unparalleled SaaS purchasing data to improve contract negotiation and keep software costs down.

Find out just how much you could save on SaaS with our free savings analysis.