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IT Vendor Management Process [8 Steps & Best Practices]

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Last updated on
February 14, 2024

A QUICK SUMMARY – FOR THE BUSY ONES

Vendor management process in a nutshell

TABLE OF CONTENTS

IT Vendor Management Process [8 Steps & Best Practices]

IT vendor management - a revolution in a business partnership

In a market dominated by outsourcing, it's natural for companies to work with multiple IT vendors responsible for specific areas. The average organization does business with 11 third parties, and as many as 37% of companies employ 1,000-5,000 external vendors. Collaborating with multiple parties provides a myriad of benefits, such as access to the best specialists, expanded capacity, increased efficiency and cost optimization. But how to manage multiple specialists from different organizations? IT vendor management comes to the rescue!

In this article we will go through:

  • components of IT vendor management, 
  • vendor management strategy,
  • challenges & best practices,
  • IT vendor management tools & technologies.

Five components of IT vendor management 

Vendor management is the ongoing process of organizing, optimizing and coordinating the cooperation with third-party entities working for your company. It ensures continuity of cooperation, communication improvement, knowledge consistency and responsiveness to errors as quickly as possible. It also guarantees transparency and gives you more control over the quality of scope execution. We can distinguish 5 components of IT vendor management.

1. Vendor selection and evaluation

Vendor selection and evaluation aspects

There's no vendor management without vendors to manage, so your first step should be to select and evaluate companies to work with. Define the scope of services in which you need support and decide how many companies you want to involve in the project. It's easier to manage fewer vendors, but it's also sometimes better to delegate different parts of the project to several companies that are masters in their field. Divide the scope of the project into areas and entrust, for example, development to an experienced software house, visual identity to a branding agency, and marketing and PR to a 360° agency. 

Choosing IT vendor step by step

  1. Identify project scope and skills needed.
  2. Do research on companies experienced in similar projects.
  3. Contact selected companies, and ask about their availability and offer.
  4. Create a table in which you describe the selected companies in terms of the criteria that are important to you (technologies, methodology, experience, reviews, etc.).
  5. Make a discovery call with 3-5 selected companies to discuss the project details, including price, turnaround time and size of the team.
  6. Start working with the perfect IT vendor!

2. Contract and SLA management

Every business cooperation needs a framework, and the contract sets this framework. It defines the terms of cooperation, the expectations and obligations of each party, and the level of service performance called SLA (Service Level Agreement). 

Contract and SLA management refers to the process of optimizing arrangements between the vendor and the client. It provides security for both parties, reduces risks, avoids additional costs and ensures a smooth workflow. IT vendor contract management includes analysis of the proposal, negotiation of terms and conditions, and control of compliance with the arrangements.

IT contract checklist

IT contract checklist
  1. Parties Involved, including the legal names and contact information of the buyer and the IT vendor.
  1. Scope of Work, describing products and services that the vendor will provide. This section should cover specific deliverables, project timelines, milestones, etc.
  1. Pricing and Payment Terms specify the overall cost and possible changes, frequency of payments, payment methods, and any applicable taxes or fees.
  1. Service Level Agreement (SLA) that outlines the performance standards and metrics the vendor must meet.
  1. Intellectual Property Rights address the ownership and licensing of any intellectual property involved in the project, including software, code, documentation, and other materials.
  1. Confidentiality and Data Security, including procedures the vendor must take to protect confidential information and data security. 
  1. Warranties and Liabilities provided by the vendor, as well as the limitations of liability in case of service/product issues.
  1. The termination Clause defines the circumstances under which either party can terminate the contract and the process for doing so. 
  1. Insurance coverage the vendor must maintain during the contract period.
  1. Subcontractors, if the vendor plans to hire subcontractors, require them to be identified, and outline their responsibilities.
  1. Compliance with Laws and Regulations ensuring the vendor complies with all relevant laws, regulations, and industry standards.
  1. Change Management, defining the process for handling changes to the scope of work, timelines, and pricing.

3. Performance management

To assess whether the quality of the vendor's performance is satisfactory and meets the arrangements, you need performance management. This area is usually the responsibility of a qualified Project Manager or Product Owner on the client side, who is able to verify that the vendor's declarations have been met. A key element of performance management are KPIs. These metrics allow you to assess the quality of project execution, e.g. cycle time, page load speed, number of products added, performance with increased traffic, server capacity, etc. Vendor performance management also includes costs and profitability monitoring.

4 Relationship management

Business cooperation is not only about metrics and contracts but also about relationships. The buyer and the vendor at the beginning of a project become partners working towards a common goal, so transparency and good communication are crucial. Make sure that the vendor can openly talk not only about successes but also difficulties so you can find the best solution together. The basis is also your feedback and constructive criticism. Correct the direction of the work but don’t forget to appreciate the progress. Sometimes a simple "Good job team!" can raise morale and give a boost of energy. Take care of regular communication – weekly updates and a joint chat channel will ensure a smooth exchange of information. 

5. Risk management

According to SecurityScorecard Research, 98% of organizations globally have relationships with at least one breached third-party vendor and 59% of respondents faced a data leak caused by one of their suppliers. Data security violation is a serious and issue, so you can't count that it doesn’t happen to you – you have to be ready for a black scenario. 

Risk management is the process of planning and executing procedures when a security breach occurs or something goes wrong. Together with your vendor, plan a "What if..." scenario in which you determine what actions you must take when an undesirable situation occurs and who will be responsible for them.

Why you need a refined vendor management strategy

As Benjamin Franklin said, "By failing to prepare, you are preparing to fail.", so the most important task of a vendor management strategy is to keep your organization from chaos. As a Project Manager, Team Leader or other decision maker, you know what a challenge is to coordinate the work of many people. Including external companies in the process and planning a common workflow requires a carefully planned vendor management strategy that ensures quick and smooth cooperation. How to plan it step by step?

8 steps of the IT vendor management process

8 steps of the vendor management process

Vendor Matrix

Prepare a file in which you collect all key information about the vendors you work with, such as skills, scope of services, contact information and people, links to necessary files, saved emails with arrangements, etc. Update the table when you finish or start working with a vendor. Such a file will not only help you to keep things in order but will also make it easier to onboard new people in the company.

Vendor Onboarding

Thanks to the onboarding process your business partners can better understand your industry and project. Prepare materials (presentations, videos, articles, etc.) in which you discuss the characteristics of the sector you work in, your company's values and services, profile your customers and define where your project stands in the market. E.g., if you are a pet food manufacturer and want to design an app to help select the right product for cats and dogs, during the onboarding talk about your competitors, the demographics and behavior of your customers, and what values your brand you want to promote.

Robust onboarding is a key element of an effective vendor management process because it allows the staff of an external company to include your business context in the development process.

Internal team structure

To effectively manage the work of third-party vendors, you need to divide ownership and responsibility within your own organization as well. Determine who has ownership over specific areas of working with vendors such as billing, contract management, ongoing communication, approval of project stages, onboarding, etc.

Work management tools

Modern companies use many software tools to manage and optimize their work. To improve IT vendor management, choose these you will use together during collaboration. Some of the most popular tools that support remote collaboration are Google Workspace, Jira, Asana, Monday, Kissflow, Trello, and Slack.

Project schedule and milestones

Once everything between you and the vendor is up and running, it's time to break down the project into a timetable. Schedule and milestones will help you track progress and prevent delays. The project timetable should be planned together, taking into account the vendor's capacity, both parties' vacation plans and your company's long- and short-term growth strategy.

Acceptance procedure

One of the most common causes of project delays is an inefficient approval procedure. If the various stages of a project wait a long time for approval, the time of specialists on the vendor side is blocked and the software company cannot go further with the implementation. For this reason, a key element of effective IT vendor management is an optimized project acceptance process on the client side and a reduction in the number of decision-makers who control the progress of the work.

Regular updates and check-ups

Ongoing communication is a must in the vendor management process as it allows you to verify that you are on the same page and have a good understanding of the project scope. Regular meetings, such as weekly statuses and daily work recaps allow you to react to potential issues, complete information and provide feedback in an instant.

Defined communication channels

When working with a vendor, choose the communication channels that are most convenient for you and check them regularly to keep the workflow smooth. It is also a good practice to limit the people to contact and pass on messages that have been pre-determined internally. This avoids chaos and long discussions in messages. On the vendor's side, these people are usually the Project Manager and Team Leader, and on the client's side –  the decision-makers like the CEO, Product Owner and Technology Chief Officer.

Continuous improvement

IT vendor management is not a one-time activity but an ongoing, dynamic process. Every company is different and has its own dynamics, culture, and communication style therefore there is no one-size-fits-all solution. The beginnings can be a bit bumpy, but finding a common language and developing a good workflow and business partnership will allow you to continuously improve the quality of cooperation. 

Vendor exit strategy

As Zig Ziglar said, "Expect the best. Prepare for the worst.", so if the cooperation with the vendor does not go well, have a strategy prepared for the termination of the contract. The terms of termination should include aspects such as transfer of intellectual property, including documentation, code and necessary files, training of your in-house team, notice period and warranty terms.

Best practices for effective IT vendor management process

Maintain transparency in communication

No client likes to receive bad news, and no vendor likes to pass on such. However, you can't let the company you're working with be afraid to give you information about problems or difficulties, so make sure communication is transparent and solution-thinking from the start. The more complete information both parties have, the better quality they can get.

Build a partnership relationship

The relationship with a vendor is more than that between a seller and a buyer. Working on a joint project for a long time, you become partners who can exchange knowledge experience and advice. You are the expert in your industry and know your company's needs best, while the IT company has expertise in digital solutions. Through trust and partnership, you create an unstoppable dream team.

Entrust IT vendor management to a competent person

Outsourcing allows you to gain access to a set of skills and expertise in almost any area, but you still need someone inside the organization to lead the collaboration. Ensure competence development and training of your employees in new technologies and project management. This way you will be able to better verify the quality of the services you receive and give more accurate feedback.

Challenges in IT vendor management 

Vendor Performance Issues

IT vendor performance may not consistently meet agreed service levels, leading to delays, poor quality, or other shortcomings in deliverables.

Tips

  • Set clear and measurable performance expectations in SLAs.
  • Regularly monitor and evaluate vendor performance using KPIs.
  • Conduct performance reviews with vendors to provide feedback and address issues promptly.
  • Foster open communication to understand any challenges the vendor may be facing and work together to find solutions.

Vendor Dependency

Relying too heavily on a single vendor for critical services or products can create a business risk of vendor lock-in.

Tips 

  • Diversify vendor partnerships and avoid over-reliance on a single vendor.
  • Develop contingency plans to mitigate the impact of vendor-related disruptions.
  • Consider building in-house capabilities for critical services to reduce dependency on external vendors.

Data Security and Privacy

Vendors may have access to sensitive data, raising concerns about data security and privacy breaches.

Tips

  • Conduct thorough security assessments of vendors to ensure they comply with data security and privacy regulations.
  • Implement stringent data protection protocols, including data encryption, access controls, and monitoring.
  • Require vendors to sign data protection and confidentiality agreements.

Tools and technologies for IT vendor management 

Many IT vendor management processes can be streamlined with dedicated software and tools. Here are some practical solutions to support business-to-business collaboration.

Kissflow

Kissflow is an all-in-one solution for vendor management. The software is highly customizable and supports users at every stage of the vendor relationship, from purchase to payment. The Kissflow dashboard can be shared by the client and the vendors to optimize cooperation.

Key features:

  • Vendor onboarding.
  • Performance monitoring.
  • Contract management.
  • Risk management.
  • Vendor evaluation and information.

Jira

Jira is a widely used project management software developed by Atlassian. It's designed to help teams plan, track, and manage their work efficiently, especially in software development and IT projects. The tool is very popular for internal teams and multi-company collaboration.

Key features:

  • Issue tracking.
  • Agile Project Management.
  • Customizable workflows.
  • Reporting and dashboards.
  • Permissions and access control.

Precoro

Precoro is a budget management solution designed to help businesses optimize their spending and generate savings. Its vendor management module stores all supplier information, invoices, and contracts in one place.

Key features:

  • Requests.
  • Approval process builder.
  • Invoice management.
  • Spending and budget monitoring.
  • Workflow customization.

Take your business collaboration to the next level

IT vendor management gives you an opportunity to expand your organization's capabilities on a scale never seen before. By combining formal issues such as contract management, scheduling, and management and risk strategy with interpersonal competencies like relationship management, trust and partnership you will gain an unstoppable expert team. 

Frequently Asked Questions

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Authors

Olga Gierszal
github
Software Engineering Editor

Software development enthusiast with 6 years of professional experience in the tech industry.

Leszek Knoll
github
CEO (Chief Engineering Officer)

With over 12 years of professional experience in the tech industry. Technology passionate, geek, and the co-founder of Brainhub.

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