As a platform leader, negotiating vendor contracts is a critical responsibility that directly impacts business objectives. The relationships you build with your vendors can make or break your platform, and the terms of your contracts can have a significant impact on your portcos.
When our founder, Philip McNamara began his startup journey in Silicon Valley, like many other entrepreneurs, he had no Rolodex or a network or access to the right vendors that could meet his needs. So he made all the mistakes young startups make and ended up frustrated and at a loss because most of the vendors did not have his best interests at heart.
We know how hard it can be for startups to figure out this part of the entrepreneurial puzzle which is why the best VC firms typically assign their platform team to assist with vendor relationship management.
If you want to take out the guesswork and approach your vendor contract negotiations strategically, we've got you covered.
We're about to explore some proven strategies for negotiating vendor contracts that can help you secure the best possible terms for your vc platform. We'll also highlight some of the criteria you may want to have when making your selection. And best of all, we'll share some examples from brands you know to see the vendor negotiation in action.
But before we jump into all that, a working definition of what vendor management is and is not will be a strong starting point.
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Vendor management is everything involved in selecting and managing suppliers that a fund and its portfolio companies need to operate smoothly and reach intended objectives. The vendor management process is deeply complex, involving everything from choosing the right vendors, negotiating deals, getting contracts approved, controlling costs, reducing vendor-related risks, and ensuring fulfillment.
The vendors your fund and portcos need will vary considerably depending on resources, market type, business development objectives, etc. In the venture capital industry, we rely on vendors, aka suppliers, to provide myriad solutions, technology, and other services to achieve our business goals. It takes a lot of moving parts to run a successful venture fund, and that's why we need to ensure we're working with the best possible vendor partners.
Vendor management should be part of your platform strategy because this is one of the key things that can support founders during their launch and growth stage. A formalized post investment support that doesn't prioritize resources such as vendor management technology may not be a strong a value add as the platform team may desire.
Hence the need to ensure that as director of platform, your team goes above and beyond to proactively engage in contract negotiations. Why? Because finding the right solutions that generate cost savings for the portfolio companies often leads to better ROI for the fund and startups.
It may sound like a daunting task, but if you think about it, the biggest obstacle you face is becoming an effective communicator and strong negotiator. The upside to building healthy vendor relationships include but aren't limited to the following:
• Getting your portfolio companies the best deals in town
• Risk reduction of poor vendor services
• Decrease operational inefficiency
• Speedy vendor onboarding for new startups
However, you'll need to work on your communication skills and learn the vendor management process to hit that home run.
Effective vendor management involves selecting the right vendors, negotiating contracts, onboarding, monitoring performance, managing risk, and making timely payments.
Selecting the right vendors is the first step. It involves identifying vendors that can provide the necessary products or services and evaluating their reputation, experience, and pricing. You should conduct thorough research and evaluate potential vendors against specific criteria, such as product quality, customer service, and pricing. This can help ensure that you choose vendors that can meet the particular needs of your portfolio companies.
Once you've selected your vendor, negotiate a contract outlining the relationship's terms. This must include details such as pricing, delivery times, service level agreements, and termination clauses.
Contract negotiations should be conducted cautiously to establish clear expectations and ensure both parties understand their responsibilities. It's essential to review the contract periodically to ensure that it remains up-to-date and that any changes are documented and agreed upon by both parties.
After a contract has been negotiated and signed, it's time to onboard the vendor. You'll want to streamline communications with the vendor so that sharing information and coordinating activities aren't burdensome on your team, the startup founders, or the vendor's team.
Remember to facilitate a feeling of community and work on nurturing the new relationship between your startups and the supplier. That will ensure business continuity and a sense of partnership making it more than just purely transactional experiences. And where different people engage as partners, there's bound to be better exchange of services.
This is also a great time to provide the vendor with any necessary training or documentation to ensure they have the tools and resources to perform their duties effectively. The onboarding process should be carefully documented to ensure the vendor understands and can meet the business function and requirements.
Once the vendor is onboarded, monitoring their performance is good practice to ensure they meet expectations. Check-in with the relevant leaders to see if they are meeting agreed-upon KPIs, have follow-up meetings to ensure everyone is happy with the new relationships and ensure the vendor is promptly fulfilling their end of the deal.
If the vendor is not meeting their obligations, you should work with them to identify and address the underlying issues.
Vendor management also involves risk management practices. Here you want to identify potential risks associated with the vendor relationship and develop strategies to mitigate them.
Risks may include issues such as data breaches, product defects, or financial instability. Work with the vendor to establish processes for identifying and addressing risks and contingency plans in case of emergencies.
Finally, effective vendor management involves making timely payments to your vendors. You'll want to establish a systemized way of submitting invoices, reviewing them for accuracy, and making timely payments.
You should also maintain accurate records of all payments made to all vendors your fund works with and track their spending to ensure that they stay within budget.
Now that you have clarity on the process for your platform team let's share a few ways to get the best out of your vendor relations.
Before you start negotiating a vendor contract, knowing what you want to achieve is crucial.
The more defined and refined your requirements and goals, the better equipped you'll be to negotiate favorable terms with the vendor.
For example, when Amazon Web Services (AWS) negotiated a contract with Netflix, the two companies had different requirements and constraints. Netflix needed to scale its infrastructure rapidly to support its growing user base, while AWS needed to ensure that Netflix's usage didn't cause performance issues for other customers. By understanding each other's requirements and constraints, the two companies could negotiate a contract that met both of their needs.
As a platform leader, you likely have significant buying power. You should use it to your advantage when negotiating vendor contracts. By demonstrating your purchasing power, you can negotiate lower prices, better payment terms, and more favorable contract terms.
For example, when Facebook negotiated a contract with Microsoft for its Office suite, it used its buying power to negotiate a better price than the standard retail price. Additionally, Facebook negotiated a clause in the contract that allowed it to use the software on its own servers rather than relying on Microsoft's servers. This gave Facebook more control over its infrastructure and reduced its reliance on Microsoft.
Building solid relationships with your vendors can pay dividends when it comes to negotiating contracts. By cultivating a good working relationship, you'll be better positioned to negotiate favorable terms and resolve disputes quickly.
That's why it's critical for platform leaders to actively engage in networking events, host their own relationship-nurturing events and find ways to establish rapport with suppliers long before they have a need for their solution.
For example, when Walmart negotiated a contract with Procter & Gamble (P&G), the two companies had a long-standing relationship built on trust and mutual benefit. Walmart was P&G's biggest customer, and P&G was Walmart's largest supplier. By leveraging their strong relationship, the two companies were able to negotiate a contract that met both of their needs.
Getting multiple bids from vendors can give you leverage when negotiating contracts. Multiple options allow you to compare prices, features, and terms and choose the best vendor for your platform.
Additionally, having various bids can create competition among vendors, leading to more favorable terms for you.
For example, when the City of Los Angeles negotiated a contract for a new 911 system, it received multiple bids from vendors. By comparing the bids, the city was able to negotiate a contract that met its requirements at a lower cost than originally anticipated.
Service level agreements (SLAs) are contractual commitments that vendors make to provide a certain level of service to their customers. By negotiating SLAs, you can ensure that the vendor will meet your requirements and provide high-quality service. Additionally, SLAs can provide you with remedies if the vendor fails to meet their commitments.
For example, when LinkedIn negotiated a contract with Oracle for its database software, it negotiated an SLA that guaranteed a specific level of uptime and performance. If Oracle failed to meet the SLA, LinkedIn could receive compensation.
Given the nature of the venture capital industry and the portfolio companies funds manage, having an effective vendor management process and knowing how to negotiate is mission critical.
You need to know how to choose the right vendors, build relationships that enable you to get the best deals, and a system that facilitates performance monitoring.
Every fund will have different needs, requirements, and expectations, so it's best to be clear about your goals before approaching any vendor.
Once you've onboarded your vendors, streamlining communication and other administrative tasks becomes the key differentiator between chaos and high performance.
If you're looking for a proven solution to streamline your vendor management relationships, look no further. Book a free demo to see how easy it is to simplify the vendor management relationship with GetProven.
We're here to do the heavy lifting for you and your portfolio companies so you can focus more on the things that matter to you.
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