7 Actionable Ways To Build Stronger Relationships With The Vendors Servicing Your Portfolio Companies (Why It Matters For PEs)

Private equity firms often face challenges in managing vendors for their portfolio companies. The old way of dealing with vendors—being purely transactional—just doesn't cut it anymore. Here's what we know for sure: If you shift to a relationship-based approach, you'll see greater value creation and cost savings.

But don't just take our word for it. Here's what ongoing research is revealing.

1. Improved Performance: According to a McKinsey & Company report, companies that focus on strong vendor relationships see a 20-30% improvement in vendor performance metrics, such as on-time delivery and product quality.
2. Increased Innovation: A study by Bain & Company found that companies with collaborative vendor partnerships are 60% more likely to develop innovative products and services. These innovations often lead to new revenue streams and competitive advantages.
3. Cost Savings: Research from PwC indicates that firms with well-managed vendor relationships can reduce procurement costs by up to 10-15%. These savings come from better pricing, improved efficiency, and reduced supply chain disruptions.

The jury is in. Better relationships mean better outcomes for your private equity firm and the companies you manage. In this article, we'll show you 7 actionable ways to build stronger vendor relationships and why it matters.

The Problem with Transactional Vendor Relationships

Traditional vendor relationships are often purely transactional. This means that the focus is on getting the cheapest price or the quickest deal. From the vendor's standpoint, they don't care much about providing sustainable value as long as they get the signature on the dotted line and invoices can begin flooding in. This practice leads to very unhealthy outcomes because it relies on short-term thinking.

That's why we often see problems like inconsistent quality, poor service, or inexplicable charges that typically grow as time goes on.

In the end, your portfolio companies end up missing opportunities for innovation and savings, and what's worse, tension and distance brews between leaders on both sides of the table.

Now, we know what you might be thinking. Who has time to manually manage and nurture all the different vendors that our companies need? That's where technology—specifically, a vendor management solution—becomes a strong ally. You don't need to constantly or manually stay on top of your vendors; you just need to pick the right vendor management systems that will afford you the kind of vendor communication you need to foster great relationships. More on this in a bit.

Why Relationship-Based Vendor Management is Better

Building strong, relationship-based partnerships with vendors means thinking long-term. When you develop good relationships with your vendors, they become partners who are invested in your success. That's why it was no surprise to us that the research by McKinsey & Company and Bain & Company shows that firms with strong vendor relationships experience greater growth.

We'll illustrate with an example.

An old client shared how their performance was impacted by shifting from a transactional to a relationship-based approach. Initially, they were focused purely on getting the cheapest and quickest deal, and that often meant switching vendors frequently because once they noticed a vendor was no longer living up to the original agreement, they would find someone new.

It seemed like a good idea, until they started suffering from inconsistent product quality and problems with their procurement process, which created a lot of unhappy customers for their portfolio company. After changing their strategy and choosing to work with a few key vendors across all their portfolios, they saw significant improvement.

They were able to secure more favorable agreements since they had invested more in the relationship with the various service providers. That ultimately drove up customer satisfaction, and today, it's boosted their market position and profitability. This is the power of thinking long-term and investing in relationships.

7 Actionable Ways to Build Stronger Vendor Relationships

Now that we can appreciate the value of establishing strong vendor relations, let's get practical. Yes, you ought to seek out vendor management solutions that facilitate better relations, but that's not all you must do. Your firm needs to commit to the implementation process and the performance tracking of new initiatives to ensure internal teams follow through and reap the benefits of said relationships.

There are many ways to approach this shift, but here are seven that we've seen work regardless of firm size and unique needs.

1) Communicate Clearly and Frequently

Regularly scheduling check-in meetings with your vendors is crucial for maintaining strong communication and fostering mutual understanding. Consistent and clear communication helps to prevent misunderstandings and ensures that everyone remains aligned and informed.

Practical Tip: Schedule monthly or quarterly meetings to discuss performance, expectations, and upcoming needs or changes in a timely manner.

2) Invest in Long-Term Partnerships

When selecting vendors, opt for those who are committed to growing alongside your business. Cultivating long-term partnerships can result in advantageous pricing, exclusive deals, and the opportunity to collaborate on innovative solutions.

Practical Tip: Look for vendors who align with your company's values and goals, and consider signing longer-term contracts with them.

3) Involve Vendors in Strategic Planning

Consider inviting your key vendors to actively participate in your upcoming strategic planning sessions. By involving them in these sessions, you can gain access to their valuable insights and feedback. This not only demonstrates that you highly value their input, but also signals that you view them as strategic partners rather than just suppliers. Acting this way builds trust and alignment, leading to more cohesive and effective collaboration on long-term goals.

Practical Tip: Schedule annual or semi-annual strategic meetings in which selected vendors can discuss upcoming projects, challenges, and industry trends with your leadership team.

4) Recognize and Reward Good Performance

Acknowledging and rewarding good vendor performance by providing public recognition, monetary incentives, or additional opportunities for collaboration not only shows appreciation for their hard work, but also motivates them to sustain and surpass their current level of performance. This encouragement fosters a positive working relationship and drives vendors to continually strive for even better results, ultimately benefiting both parties involved in the partnership.

Practical Tip: Implement a vendor recognition program or offer performance bonuses for outstanding service.

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5) Create Joint Business Plans

Collaborating with your key vendors to develop joint business plans is a great way to establish a strong and mutually beneficial partnership. These plans should clearly outline the shared objectives, strategic goals, and specific actions that both parties will take to achieve success.

By defining the responsibilities and key performance indicators (KPIs) for each party, you can ensure alignment and accountability throughout the partnership. This collaborative approach fosters a sense of shared purpose and encourages both parties to work together towards achieving common objectives, ultimately enhancing cooperation and driving mutual success.

Practical Tip: Work with your vendors to create a joint business plan document that includes targets for sales growth, innovation initiatives, and process improvements. Review this plan regularly.

6) Engage in Co-Innovation Projects

Engage in collaborative innovation projects with your vendors to create mutual benefits. By working together, you can jointly develop new and groundbreaking products, enhance operational processes to increase efficiency, and explore untapped markets to expand your business reach. This collaboration can lead to a symbiotic relationship by which both parties thrive through shared success and innovation.

Practical Tip: Set up a co-innovation team with members from both your company and the vendor's team. Regularly brainstorm and work on projects that can lead to mutual benefits.

7) Leverage Technology for Enhanced Collaboration

Leverage a cutting-edge collaboration tool or—even better—a vendor management system with in-built communication features—to enhance communication and collaboration with your vendors. Make sure you choose tools that facilitate seamless interactions, enable the sharing of crucial documents, and allow for project progress tracking. If the software includes a vendor risk management feature, that's even better, since you can grow your relationship while still taking care of third-party risk management.

Embracing these technologies promotes real-time collaboration, minimizes communication lags, and guarantees alignment among all parties, ultimately fostering more effective and fruitful vendor relationships.

Practical Tip: Implement collaboration platforms like Slack, Microsoft Teams, or specialized vendor management software like Proven.

Conclusion

Shifting from a transactional to a relationship-based approach with the suppliers that help your portfolio companies thrive will not happen overnight, but it is good to be intentional and purposeful right off the bat.

Realize that as with any relationship-building effort, it is a multifaceted effort that goes beyond the obvious strategies of most use. The most important thing is to be genuine about your initiatives and efforts. Leveraging technology and using software that offers vendor management features that help you streamline communication, reporting, and other critical aspects isn't just a nice to do but a must-have if you don't want to spend inordinate amounts of time managing people. So, if you are serious about finally getting better control of those vendor expenses and if you want to make informed investment decisions, consider switching your current strategy and seek to build mutually beneficial relationships with the companies that help make your portcos perform more efficiently.

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