Negotiating Vendor contracts: Strategies for platform leaders

As a platform leader, vendor contract negotiation 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, 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 negotiation 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 successful 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.

Need an automated process to do all the heavy lifting? See how Proven is helping VC firms just like yours provide better solutions to their portfolio companies.

What is vendor management in venture capital?

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 to 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 a myriad of 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 like vendor management technology may not be as 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.

The vendor management process:

Effective vendor management involves selecting the right vendors, negotiating contracts, onboarding, monitoring performance, managing risk, and making timely payments. 

Selecting Vendors

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 each prospective vendor against specific criteria, such as product quality, customer service, and pricing. This can help ensure that you choose suppliers that can meet the particular needs of your portfolio companies.

Contract Negotiations

After carefully selecting your vendor, it is time to engage in detailed negotiations to draft a comprehensive contract that clearly outlines the terms of your business relationship. This is where your vendor negotiation skills come into play.

This contract should encompass specific details such as pricing arrangements, precise delivery schedules, service level agreements, and contingency plans for termination. Don't leave anything to chance, and as much as possible, use specific, actionable terms in the contract. Be diligent throughout the negotiation process so as to lay the groundwork for transparent expectations and to ensure that both parties have a thorough understanding of their respective responsibilities.

Also, don't overlook the importance of regularly reviewing the contract to guarantee that it reflects the current needs of the company and to ensure that any modifications are formally documented and mutually consented to by all parties involved.

Vendor Onboarding

Following the successful negotiation and signing of a contract, it is time to transition into the vendor onboarding phase. Streamlining communication with the vendor is of utmost importance in this phase to ensure that the exchange of information and coordination of activities are seamless and do not pose any unnecessary burdens on your team, the startup founders, or the vendor's team.

This is where we encourage you to create a sense of community and actively cultivate the budding relationship between your startup and the supplier. This approach not only ensures business continuity but also fosters a genuine sense of partnership, elevating the interaction beyond mere transactional dealings. When all parties engage as collaborative partners, a more robust exchange of services becomes possible.

Moreover, it presents an excellent opportunity to deliver any essential training or documentation required by the vendor to equip them with the necessary tools and resources for effective performance. If you haven't yet invested in a platform that allows for streamlined onboarding and automated processes, consider creating a documented process that demonstrates how a new vendor should be onboarded. That way, your portfolio companies, especially the new, inexperienced ones, can hit the ground running with maximum efficiency and fewer misunderstandings between them and their new vendors. Ideally, though, you want to invest in a platform that takes this burden from your shoulders and simplifies both vendor onboarding and performance monitoring across all companies.

Monitoring Performance

Once the vendor is properly onboarded, monitor their performance 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. The sooner you can spot discrepancies or subpar performance the easier it is to fix these issues before they escalate and hurt the startup's performance.

Managing Risk

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.

Payments

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 the vendors your portfolio companies work 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 tips and vendor negotiation strategies to get the best out of your vendor relations.

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Strategies to negotiate better vendor contracts

#1: Know What You Want

Before you start negotiating a vendor contract, knowing what you want to achieve is crucial.

• What are the essential features and capabilities you need from the vendor?
• What are your budget and timeline constraints?
• What's the ROI of getting this vendor?

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.

#2: Leverage Your Buying Power

As a platform leader, you likely have significant buying power. You should use that to your advantage when negotiating 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.

#3: Build Strong Relationships

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.

#4: Always Get Multiple Bids

Getting bids from multiple 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 much lower cost than originally anticipated.

#5: Negotiate Service Level Agreements (SLAs)

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.

That ensured that LinkedIn's critical operations would be supported by reliable service, and it provided a clear framework for addressing any issues that might arise further down the line.

#6: Don't Forget About the Exit Strategy

While it's important to focus on getting the best start to a vendor relationship, it's equally crucial to negotiate terms regarding the end of the contract. This is something many people overlook or forget to do at the start. The exist strategy includes termination rights, transition services, and penalties for early termination. Being clear about the exit strategy upfront can save you from potential conflicts or unexpected costs down the line.

For instance, when Spotify was negotiating a contract with its data center provider, it included terms that outlined the process for data migration and service continuity in the event of contract termination. This foresight ensured that Spotify could maintain its operations without disruption if it needed to switch providers.

#7: Utilize Technology for Efficiency

In today's digital age, leveraging technology can streamline the vendor management process significantly. Using portfolio and project management platforms that are easy to integrate or working with a solution that comes with inbuilt contract management functionalities can help keep track of negotiations, contracts, and performance metrics. This not only saves time but also reduces the risk of errors and ensures compliance with agreed-upon terms.

A notable example is how Adobe uses electronic signature technology to expedite the contract signing process with its vendors. This not only speeds up the negotiation phase but also creates an efficient and auditable trail for all contractual agreements.

Conclusion

Given the nature of the venture capital industry and the portfolio companies funds manage, having an effective vendor management process and knowing how to succeed in vendor negotiations is mission critical.

Implementing these best practices, negotiating vendor contracts becomes an easy thing. As long as you choose the right vendors, you can build and maintain relationships that enable you to get the best deals and integrate 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 simple solution to streamline your vendor management relationships, look no further. Try Proven for free to see how easy it is to simplify and enhance your vendor relationships.

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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