Vendor/Contract Management, a Controlled Risk

Companies primarily outsource when they need a service or expert, in a field that is not their specialty.  Financially it makes sense to bring in the expertise on a contract or assignment basis, rather than building the functionality within the company.

Prior to entering into any relationship, keep in mind, that there are concerns depending on the type of vendor you hire.  There are an endless number of service providers today, which include legal services, financial services, human resource services, technology services…  Every service includes its own specific risks which must be identified.  But risks common to all vendors include –

  • Employee quality – vendor employees requiring special knowledge, licensing, certification;
  • Privacy policy – sharing information regarding your processes and procedures, as well as customer information;
  • Business continuity – impact of a disruption in your vendor’s business on you; and,
  • Service quality – impact on your internal and external customers.

Vendor/contract management represents a Risk that should be managed and controlled actively.  Establishing your requirements and how you will work with the vendor, prior to entering into a relationship, would be time well spent.  General activities include –

Due diligence – Vet potential suppliers both individually and against their competitors.  Request references and perform a site visit.  Does the vendor have the ability to provide the services within the committed timeframe required, i.e. expertise and financial viability?  What systems does the vendor use and are they secure?   Are background checks performed on the vendor’s employees?

If you are satisfied after this review –

Draft Contracts – In addition to roles responsibilities, timeframes, payment terms, termination provisions, consider including a reciprocal nondisclosure agreement to cover the confidential information of both parties; requirements to maintain current knowledge and best practices, as well as maintain licenses and accreditations; Service Level Agreements with escalation process; and Liquidated damages in case of a breach.

Once contracts are signed, vendor activities must be monitored to ensure that elements of the contract are followed by both parties.

Measure Performance (Short-Run) – Closely monitor and assess the success at transitioning the vendor into your standard operating procedures.  Issues that arise should be dealt with immediately.

Measuring Performance (Long-Run) – Establish metrics to measure the vendor’s performance ongoing, this may include time lines, rate of conversion, and problem resolution.  Establish a survey process to understand the success of the initiative, ensuring your expectations are being met.

These general tips provide a framework to begin the process of hiring an external vendor.  As stated previously additional areas to examine will be related to the type of outsource provider you wish to employ.

Lastly, there may be a point when it makes sense to build the infrastructure within your organization. It always helps if you are able to understand that point prior to entering into any relationship.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.
© Copyright 2012 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!

Regis Quirin

Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

28 thoughts on “Vendor/Contract Management, a Controlled Risk

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  10. Great advice. Wish I had this kind of advice when I outsourced my billing to a medical management company, it would have saved me from alot of headaches.

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