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The Importance of Vendor Management Systems for Procurement Professionals

Written by Mikael Lindmark | Feb 7, 2024 10:38:39 AM

Discover why Vendor Management Systems (VMS) are crucial for procurement professionals in optimizing their vendor relationships and streamlining their procurement processes.

What is a Vendor Management System (VMS)?

A Vendor Management System (VMS) is a software platform that helps procurement professionals manage their relationships with vendors that supply people, either as time and materials temps/contractors or through a statement of work. For many organisations the procurement of people/people services have become one of the top 3 spend buckets.

A VMS provides a centralized database to store vendor information, such as contact details, contract terms, and performance metrics. It also allows for effective communication and collaboration between the procurement team, hiring managers in the business and the vendors.

By using a VMS, procurement professionals can streamline their vendor management processes and improve efficiency. They can easily track vendor performance, monitor compliance with contract terms, and ensure timely delivery of services. See below an automated distribution set up - sending the right vacancy to the right suppliers:

A vendor Management systems becomes the backbone for your procurement processes around your business Non FTE workforce - we often refer to that as your contingent labor.

You might have put preferred vendors in place and run sourcing events to rationalise your vendors and their commercials, but without a standardised process for buying contingent labour and a VMS to enforce that process you will find that over time the business isn't buying from the preferred vendors, and certainly not at the rates procurement fought hard to get.

We often found that a good practice was the CFO communicating to the external vendors and internally that an invoice that didn't come through the VMS would not be paid. This drove compliance with the vendors and internal stakeholders that were happy buying from the vendors they historically had built relationships with as opposed to the vendors procurement had put on the PSL and negotiated terms with

Enhancing Vendor Selection and Onboarding

Vendor Management Systems play a crucial role in enhancing vendor selection and onboarding processes. With a VMS, procurement professionals can create vendor profiles and evaluate vendors based on various criteria, such as cost, quality, and delivery capabilities.

Furthermore, a VMS enables efficient onboarding of new vendors by automating the documentation process and ensuring compliance with legal and regulatory requirements. It streamlines the vendor approval process and reduces the time and effort required for vendor onboarding.

By leveraging a Vendor Management System, procurement professionals can make informed decisions when selecting vendors and seamlessly onboard them, thereby improving the overall vendor selection and onboarding process. Managing how much spend sits with each vendor becomes a strong lever, and giving a vendor access to your demand in new locations or countries can deepen the realitionship.

As you implement aVMS for the first time we advise that you onboard your existing vendors with their current T&C's. By doing this you are maybe for the first time capturing objective data around their relative performance visavi your preferred vendors.

This allows for a fact based conversation with your business stakeholders around what suppliers the business should use and use more of. 

Streamlining Procurement Processes

Vendor Management Systems streamline procurement processes by providing a centralized platform for managing all the relevant documents in the procurement and payment process. Purchase orders - by an integration into Ariba P2P - or if you don't have a P2P system by using the approved "Workorders" or "SOW" documents as a de-facto purchase orders. Time and expense sheets as well as deliverables from an SOW and finally invoices. Below is a good example of an end to end process flow:

Think of a VMS as a private market place where all the stakeholders in the process has visibility to the same data at the same time - workers, suppliers, hiring managers, procurement, hr and finance. This makes everything so much easier!

Through automation and digitization, a VMS eliminates manual paperwork, reduces the risk of errors, and improves process efficiency. It allows procurement professionals to easily track the status of orders, monitor vendor and rate compliance, and generate reports for analysis and decision-making.

By streamlining procurement processes with a Vendor Management System, procurement professionals can save time, reduce costs, and improve overall operational efficiency. Suddenly being able to measure process time typically reduces sit.

One of the biggest process gains comes from digitising the payment process. Most Buyers use self billing where they raise the suppliers invoice on their behalf. Thereafter setting up consolidated monthly invoices by supplier massively reduces the burden on the AP teams in finance. I pay one monthly invoice per supplier independent of how many contractor I had.

When you are trying to enforce spend control as a finance team (whether you are using Purchase Orders or Project based cost accruals) having the control points flow in the process from work order to timesheet to invoice is a bon - you remove the need for invoice reconcillition that in a non digitised process can be a big burden on your finance team. 

Improving Vendor Performance and Relationship Management

Effective vendor performance and relationship management is essential for procurement professionals, and Vendor Management Systems facilitate this process.

With a VMS, procurement professionals can track and measure vendor performance against key performance indicators (KPIs) and contractual obligations. They can identify underperforming vendors, address issues promptly, and take necessary actions to improve performance. See example Supplier KPI in graph below:Moreover, a VMS enables better communication and collaboration with vendors, fostering stronger relationships. It provides a platform for sharing feedback, resolving disputes, and negotiating favorable terms and conditions.

By utilizing a Vendor Management System, procurement professionals can improve vendor performance and build long-lasting, mutually beneficial relationships with their vendors.

Measuring and Managing Cost Across the Business

Vendor Management Systems help procurement professionals measure and manage costs across the business.

By centralizing vendor information and contract terms, a VMS provides visibility into costs associated with each vendor. It allows procurement professionals to analyze spending patterns, identify cost-saving opportunities, and negotiate better pricing terms. See below and example of rate benchmarking:

Many Fieldglass clients use open book arrangement with the suppliers to really ensure that they were paying a reasonable price for the quality of contractor they needed. Being able to calculate how cost builds up from pay rate to bill rate shines a light on whether you are paying a reasonable bill rate for the worker or overpaying. As you can imagine if there is no visibility as a buyer you are alway going to pay more rather than less... A VMS also helps you manage the total spend including overtime and expenses for contingent workers

Another big cost driver was around the level of skills, competency and experience the individual contractor possessed compared to what was needed to get the job done. Both suppliers and hiring managers loved a really competent candidate that came with a higher pay and bill rate. Having the data to be able to see what a competent enough contractor would have cost the business compared to the one that the hiring manager choose can be a compelling tool in a discussion between procurement and the business.

On the consulting side there are many opportunities to better manage cost - most organisation sole source the wast majority of their consultancy projects and the projects typically gets delivered as a time and materials project. Moving the needle even a little bit here can have a substantial cost impact. The ability to tightly manage changes/revisions of scope for an SOW project allows for a stricter control of scope creep and ultimately the overall cost of the project

Ensuring Compliance and Mitigating Risks

Vendor Management Systems play a vital role in ensuring compliance and mitigating risks associated with vendor relationships and engaging contingent workers. See below and example that tend to drive a lot of conversation around compliance:

A VMS helps procurement professionals enforce compliance with legal and regulatory requirements by storing and tracking vendor contracts, certifications, and performance records. It alerts procurement professionals of contract expiration dates, ensuring timely renewal or termination.

Furthermore, a VMS enables risk assessment and management by providing insights into vendor performance, financial stability, and reputation. It helps identify potential risks and implement mitigation strategies to protect the business.

By utilizing a Vendor Management System, procurement professionals can ensure compliance with regulations, minimize risks, and safeguard the reputation and operations of the business.

A lot of the more operational compliance topics historically have been seen as sitting with HR - Co-employment, IR35 classification, Offboarding and shutdown off access to systems and facilities therefore I have elaborated more on them in my HR centric blogs by not being onto off these issues can be very costly for the business so perhaps finance and procurement should be involved to make sure mitigation happens where the risks are the largest and the likelihood of the risk manifesting itself is higher