By Roy E. Hadley, Jr., Adams & Reese
Most businesses use vendors in some form or fashion. Whether it is the small coffee shop that has a vendor that delivers goods from the distributor or a multi-national healthcare company that has thousands of vendors, the success of the vendor relationship is key to the success of these businesses. How companies manage these vendor relationships can be fraught with peril if not properly executed and managed. This article will attempt to set forth some of the key areas that I have found in successful vendor relationships in my work over the years.
Vendor relationships can be broken down into numerous areas. The most important of these include:
- Relationship Development
- Contract Management
- Performance Management
- Risk Management
- Financial Obligations
The Relationship Should Be Front And Center
First and foremost, companies should look at vendor relationships as partnerships. In this vein, vendor relationships are often described as a marriage with both partners looking to make the partnership work for the benefit of both, while simultaneously having their own self-interests.
This view is critical to a successful vendor arrangement. Often, these relationships are governed by contractual obligations, namely who will do what, how, when, etc. And a lot of importance is correctly placed on the contractual underpinning of the relationship. However, while important to the relationship, the ability of the company and the vendor to communicate is probably more important. As such, effort should be given to communicating regularly with vendors to assess how the relationship is going. Companies should not wait until something goes wrong before picking up the phone and speaking with their vendors. Conversely, vendors should adopt a similar attitude and regularly check in with their customers to ensure that the relationship is going well and to spot any small problems before they get to be big problems.
Contracts Are Key
Secondly, the parties should make certain that the underlying contract is in place and is properly configured for the delivery of the underlined goods and/or services. In my opinion, while not as critical to the overall success of the relationship, having the proper contract in place gives the parties a sound framework upon which to operate. Legally speaking, however, in the event of a dispute, the language of the contract generally controls and, as such, should be given proper attention before the relationship is entered into by both parties. I note that oftentimes parties to disputes are very good friends before a dispute but are mortal enemies once a dispute arises. Again, a proper contract can give the parties a framework for dispute resolution, which potentially will allow the parties to continue to work together in good faith while simultaneously dealing with any issues.
With respect to contracts, the parties should make sure that the normal issues and concerns are addressed in the contract. These include, but are not limited to, the delivery of the goods and services, quantity and quality, pricing, performance metrics, penalties for failing to achieve performance goals, indemnification, liability, and other related items, including insurance. All of these are very important as they set the framework for how the parties will interact with each other. That said, the parties still need to communicate and regularly check-in with each other to potentially avoid or mitigate disputes before they arise to a level which leads to litigation between the parties. I often say to people that if you need to pick up the contract to resolve a dispute, things have gotten worse than they should have been.
Performance Management And KPIs
Performance management is the third leg upon which vendor management relationships depend. Performance management deals with how the goods or services will be delivered. This includes key metrics such as quality, delivery times and other service metrics. It is crucial to make certain that performance management is properly dealt with in a contract as any goods or services are only as good as what is actually delivered and what is delivered in a timely fashion. If you need 100 widgets delivered every day by 5:00 p.m., your assembly line may shut down if you only get 50 widgets or if the 100 widgets are delivered at 7:00 p.m. Again, quantity, quality and timing are often critical in the delivery of any goods and services.
Additionally, vendors and companies should make certain that any penalties and/or adjustments are included in any contract. These include key performance indicators and other metrics. It is often said that if it cannot be measured then it is not happening.
Managing Risk Is Crucial
Risk management is the fourth leg of the multi-legged stool called vendor management. Risk management deals with who assumes the risks inherent in any transaction. Oftentimes this includes insurance, liability metrics and risk of loss. It is worth noting that risk management also can be used to reduce and mitigate these risks.
I note that increasingly cybersecurity is at the forefront of risk management. More and more, most functions are underpinned by some sort of computer or information technology operations. Any disruptions to these networks can have catastrophic effects on the operations of a company or a vendor. As such, more attention needs to be paid to cybersecurity not only with respect to the contract but also with respect to the actual operations and security protocols of both the vendor and the company. I note that many breaches at companies occur through the services or networks of their vendors. As such, companies need to be hypervigilant and aware of their vendors’ cybersecurity procedures and should actively engage in monitoring those procedures.
Governance is an important issue that should be addressed with respect to the vendor/supplier relationship. Governance underpins how the parties will act together toward the common goal. This may include escalation procedures, whether matters are arbitrated or mediated and change of control procedures. All of these are critically important to the operation of any vendor relationship and should be thoroughly thought through during the contractual negotiation phases of the relationship. Governance can have a long-lasting impact on the success of the relationship if it is not properly addressed.
Money Is Always Central To Every Relationship
Finally, companies and vendors need to thoroughly vet the financial obligations and considerations in any vendor relationship. As previously mentioned, like a marriage, both parties are entering into a relationship with the goal of it being mutually beneficial. That said, however, both parties will have their own self-interest and need to make sure that their individual needs are met. Like a marriage, if one party is unhappy or if the relationship is not furthering their individual purposes, the relationship will not work. There is nothing like seeing a great vendor relationship fall apart because one party or the other is losing money in the relationship. Again, this is a consideration that needs to be thoroughly addressed and thought through during the negotiation stage.
Like “A Beautiful Friendship”
In conclusion, vendor relationships can be great for both parties. However, a lot of work must go into the planning and execution of great vendor relationships. Again, first and foremost, great relationships begin with communication and vendor relationships are no different. More than anything, parties need to make sure that they are communicating with each other through all phases of the relationship, from initial discussions to termination.
While the above list and thoughts are not exhaustive, they do provide a solid framework for entering into and thinking about vendor relationships. As Humphrey Bogart said in the movie Casablanca, “this is the beginning of a beautiful friendship.” That is how we all should look at vendor relationships.
About The Author
Roy E. Hadley, Jr. is an attorney with Adams and Reese (Atlanta) who serves as independent counsel to companies, governments, and boards on cyber matters, helping them understand and mitigate legal risks and exposures to protect themselves and those they serve. He has previously served in the corporate roles of general counsel and chief privacy officer, as well as special counsel to the president of the American Bar Association and special assistant attorney general for the state of Georgia. He may be reached at Roy.Hadley@arlaw.com.