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Success in any business depends on relationships, and a key one is the one held with vendors. The demarcation between employees, contractors, and vendors is changing, typified by the Google acronym TVC (for Temporary, Vendor and Contractor), and large companies have playbooks for vendor relationship training. A typical enterprise business has an average of 5,800 third-party vendors, a number predicted to grow by 15% by the end of this year.
And yet, vendor management is subject to old-school methods that put growth at risk. This vast network of multi-tier suppliers is increasingly essential for daily business operations, and the stakes of managing it are rising.
Key vendors, inadequately managed
Third-party vendors have long been the lifeblood of businesses of all sizes. From outsourced production to outsourced tasks — from the procurement department to the desk of the CIO — sourcing and securing vendors is a mission-critical activity. However, business is changing.
For example, software-as-a-service (SaaS) has predictably matured, and customer demand has increased for SaaS experiences, both internally and externally. Software is a key driver or facilitator of most business operations, including product management, finance, marketing, customer success, systems, sales, and so on. In tandem with this development has been the everyday use of technologies that incorporate machine learning (ML), artificial intelligence (AI), and more.
Bottom line? As technology advances, specialized services are required to go to market with sophisticated offerings. Almost no business will develop an in-house department to manage every component of the tech stack. Instead, they hire vendors. As the specialties increase, so does the vendor count. This single illustration is replicated over and over in every industry in every business in the world.
Crucial though they may be, vendors are usually not managed or mismanaged. There are three major consequences to this reality.
1. Disorganized or inaccessible data
The rate of innovation in the last decade has been fast, but many of the vendors and contractors who support it have paper contracts in file cabinets and exist as an entry on a spreadsheet. A 2020 Deloitte survey showed that 90% of organizations rate visibility into extended supply networks as being moderate or very low. Most companies have neither a centralized database of vendor contracts nor an efficient way to analyze data.
2. Limited growth
Strategic vendors are critical to driving transformation but innovation projects can be difficult to plan, govern, and scale. Disparate data and unknown stakeholders slow down the decision-making process, making it impossible to progress at a competitive pace.
3. Limited supplier collaboration
Vendors provide valuable goods and services. In fact, most companies’ operations would be disrupted if even a handful of vendors dropped out. Outdated or inefficient systems undercut this important relationship, often making it impossible to even find contact information for a supplier, much less communicate directly with a point person.
A new way: vendor relationship management
A new category of technology is emerging to address the prevailing issues: vendor relationship management (VRM). A company called Terzo takes credit for VRM. Mimicking the qualities of a customer relationship management (CRM) system long used by marketers, VRM addresses the three historical challenges of managing vendor relationships:
1. Making data visible and comprehensible
Terzo’s VRM platform combines machine learning (ML) and natural language processing (NLP) to first analyze the language and inventory data found in contracts. This goes beyond digitization, enabling better data storage/access, interpretation, analysis, and sharing.
2. Unlocking growth opportunities
Vendors shouldn’t just be handled in transactional interactions. These are relationships that contribute to long-term strategy and growth opportunities. For example, the Terzo platform has a framework to extract data using a multi-OCR approach with NLP, then correlate inventory data like software licenses and usages. The goal is to highlight areas to rationalize spending or to find digital transformation opportunities. It isn’t just about what a vendor does today, it’s about the future and potential, and only with the right tools can that insight be unlocked.
3. Collaborating to innovate
It’s a mistake to think of vendors as nameless, faceless entities. Rather, they should be seen as valuable partners in growth. Brandon Card, CEO of Terzo, explains it like this: “You need to build trust with the strategic vendors you rely on so you can get the most out of the products and services they offer. More importantly, organizations recognize vendor collaboration as the most effective path to faster innovation.”
A 2020 survey by McKinsey of 100 large organizations reported that companies that regularly collaborated with suppliers had higher growth, lower costs of operation, and greater profitability than industry peers.
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