Creating an Effective Vendor Contract Management System

For many organizations, one of the most challenging and overlooked areas of third-party risk management (TPRM) is the oversight of vendor contracts. Oftentimes, these agreements go through a minimal process of negotiating and signing, before being filed away until the renewal period. This can lead to increased vendor risks and negative consequences for your organization.

Vendor contract management is an essential system that will help ensure your TPRM program is operating effectively. The following tips and best practices will help you create an effective vendor contract management system that ultimately strengthens your TPRM program. 

What Is Vendor Contract Management?  

Vendor contract management is a process that involves several activities designed to oversee the legal agreement between your organization and vendors. These activities include the following:

• Negotiating terms – Vendor contracts often require negotiation to ensure both parties are clearly communicating their needs and expectations. This can help prevent ambiguity and minimize disputes after the contract is signed.
• Establishing controls – Your organization may require the vendor to implement certain controls like maintenance requirements or security procedures. Vendor contract management will ensure your vendor has a legal obligation to establish and maintain these controls. 
• Reviewing, approving, and executing – Vendor contract management assigns roles and responsibilities for reviews, approvals, and execution. Stakeholders will understand essential details, such as the timeline for review and approval, and the deadline for contract execution.
• Ongoing management and tracking – The tasks don’t end after the vendor contract is signed. It’s important to consider ongoing activities such as maintaining an organized vendor contract inventory, monitoring compliance with service level agreements (SLAs), and tracking termination and renewal dates.

Consequences of Poor Vendor Contract Management   

Although it can seem as though vendor contract management is just another burden on your TPRM program, consider some of the consequences you may face by not performing these activities. Without a system in place, you might be at risk for:

• Missed automatic renewal dates – Your organization could then get stuck with an under-performing vendor for another contract term.
• Unexpected price increases – Maybe your introductory rate is expiring, or the vendor is simply raising prices to keep up with inflation. These price increases may be unexpected without proper contract management.
• Loss of leverage – Your vendor may have been underperforming throughout the contract term, but poor monitoring practices mean you likely don’t have the leverage you need to renegotiate for better terms.
• Increased risks – Vendor risks are continually evolving, and vendor contract management gives your organization the opportunity to negotiate contract terms that will protect your organization, such as provisions around data retention and security. 

Common Challenges in Vendor Contract Management  

As with any other element of TPRM, there are often challenges that come from managing vendor contracts. 

Here are some challenges you may face and tips on how to overcome them:  

• Poor organization, storage, and tracking – It can be difficult to view and manage vendor contracts if they’re stored and tracked across multiple departments. Using a central repository for vendor contracts will keep them organized so they’re always available to track and review as needed.
• Inconsistent processes – Not all vendor contracts will require the same level of oversight, but using ad-hoc processes can lead to increased third-party risk. For example, a critical vendor contract bypasses the negotiation and review phase because there’s an immediate need for the service. As a result, the contract is missing a security provision and exposes your organization to elevated risk. The overall process of planning, negotiating, reviewing, approving, executing, storing, and managing a vendor contract should remain consistent throughout your organization.
• Insufficient monitoring – Many organizations find it challenging to continuously monitor their vendor contracts after they’re signed. Maybe there aren’t enough resources or there’s a lack of direction on what to monitor. Vendor contract management should include monitoring several elements of the vendor relationship, such as adherence to SLAs and any changes to performance or risk that could initiate penalties or termination. Successful vendor contract monitoring can be achieved by assigning roles and responsibilities early in the process. You may also consider using a software platform or tool to monitor vendor contracts.

Best Practices for Implementing a Vendor Contract Management System  

An effective vendor contract management system can offer many benefits, such as identifying potential cost savings and helping to enforce compliance. 

Here are some best practices to implement in your vendor contract management system:  

• Identify roles and responsibilities – Think about the various activities in vendor contract management and who will be responsible for performing each one. In general, this will involve your legal team, vendor owners, and vendor risk management team. You may also need to collaborate with information technology, procurement, and information security.
• Plan a negotiation strategy – Don’t wait until you sit down to negotiate with your vendor before planning out your strategy. For instance, are you using your own vendor contract template or starting with the vendor’s standard contract? Do you have any non-negotiables? How long are you willing to negotiate before agreeing to the terms or walking away? 
• Determine key provisions – Every vendor contract should contain certain baseline elements, such as the scope of service, term, pricing, ownership and license, dispute resolution, and events of default. Critical and high-risk vendor contracts should contain additional provisions, including information security, data protection and processing, disclosure of critical fourth parties, and business continuity and disaster recovery planning and testing. 
• Use an effective storage platform – Vendor contracts should ideally be stored in a centralized location that’s accessible to multiple stakeholders across different departments. This allows for better visibility of important contract details like SLA compliance and expiration dates. 
• Set up automatic reminders – With so many vendor contracts and different terms, it’s easy to miss key dates like auto renewals or expirations. Automatic reminders can help notify you of these dates, so you can review the contract mid-term. These reviews can also help you decide next steps, whether that’s renegotiating for better terms, allowing the contract to auto-renew, or proceeding with your exit strategy.
• Document the process – Always remember to formally document your vendor contract management process in your TPRM program. Documenting the process helps ensure stakeholders understand the expectations and are informed of their responsibilities. This documentation can also show auditors and examiners that your TPRM program includes this essential component of vendor contract management. 

Overall, an effective vendor contract management system will support and strengthen your TPRM practices. Your vendor contract is one of the best tools at managing third-party risk, so it’s essential to understand how to manage it properly.