A Complete Guide to Vendor Management System Software

Vendor management systems help companies manage their non-payroll workers (suppliers, vendors, contractors, and consultants). Vendor management software supports the entire lifecycle of a vendor from sourcing the subcontractors or contingent workers directly or through staffing agencies, assisting with the distribution of orders, the consolidation of billing, and easier tracking and compliance reporting.

This article is part of our guide on independent contractors’ management.

What is a Vendor Management Software?

Vendor management is a term that describes the processes organizations use to manage their suppliers, who are also known as vendors. Vendor management includes activities such as selecting vendors, negotiating contracts, controlling costs, reducing vendor-related risks and ensuring service delivery.

The vendors used by a company vary considerably depending on the type of the organization, its industry and its size. According to Aberdeen research, 72% of US companies have a single program for contract labor management and professional services sourcing & procurement. 

With 42% of workforce spend now going to external talent and contingent workers , companies need a holistic view of their external workforce more than ever before to better support the growth of their business.

There’s a huge difference between Vendor Management Systems (VMSs) and Freelance Management Systems (FMSs), as FMSs are designed to provide employees the tools and the autonomy they need in order to leverage the freelance economy productively. VMSs are used by procurement departments to automate their own internal process, and not to simplify the processes for the entire organization.

Early Vendor Management Systems Software

One of the first vendor management system (VMS) was PeopleNet , which was a Ford Motor subsidiary which used both manual and automated operation processes. With time PeopleNet became completely automated VMS application and managed almost $200 million of staffing funds at Ford.

The second most noted VMS was b2bBuyer funded by MSXI. It was later incorporated into the Bartech Group’s VMS, and turned in to Fieldglass, in 2006.

Fieldglass is today owned by SAP and is one of the leading VMSs. It is a modern version cloud based system.

The Benefits of Vendor Management Software

Enterprises have always relied on non-payroll workers, but in the past those workers were blue collar and all knowledge workers were full time employees and were considered as part of the intellectual property of the company. Companies didn’t want to work directly with those blue collar workers so they hired them through vendors. A vendor is basically a company who vends contingent labor.

The most common type of vendor in the 80s and 90s were vendors working with a variety of vendors like Managed Service Provider (MSP), Vendor on Premises (VOP) and Employer of Record (EOR).

A Managed Service Provider (MSP) do not recruit contingent workers themselves, but work with a group of vendors that can supply their clients’ needs. this put the MSPs in a more neutral position that a single vendor as they can compare the efficiency and proficiency of each vendors for each type of work.

A Vendor on Premises (VOP) is a vendor placed at the client’s place of business. They either hire the contingent workers directly or work with their own vendors and suppliers to meet the clients’ needs. A VOP has a strategic advantage due to its proximity and most times has an exclusivity with the client ‘forcing’ other vendors to work through them.

An Employer of Record (EOR) hires employees (not just contingent workers) on behalf of their clients and takes legal responsibility for all legal and tax compliance issues. Using an Employer of Record allows companies to legally and efficiently engage with international workers either in a new country or state, without having to set up a local entity or risk violating local labor laws.

Since the freelance economy revolution started, in the last decade, processes has started to rapidly change. The main reason is that contingent workers today are not only blue collar, but are mainly knowledge workers. There are multiple reasons for this trend (technology has becomes branched and complex and business need to help of a wide variety of experts for short term projects, millennials prefer to be self-employed, expert retirees are reentering the workforce etc.) This has led yet another evolution of VMSs to include a solution to work with knowledge workers are are freelancers and independent contractors that refuse to be hire through a vendor.

#1 Automation, automation, automation

Workflow automation goes a step beyond the standard workflow improvement. It generally refers to having an intuitive, integrative, and intelligent digital program deployed along your business. A VMS can streamline the tasks involved in various processes, before organizing the latter. Automated processes can aid sourcing, vetting, assignment management, project management, on-boarding, off-boarding, and invoicing. It simplify the process of extending assignments or contracts, managing expenditures, and responding to new opportunities, but more importantly it can save significant time for many departments across the enterprise . As the contingent workforce grows, it’s crucial that businesses maintain vendors and contractor records just as they do for full-time staff.

According to Richard B.Renckly’s Human Resources , using a vendor management system can reduce internal and labor costs by 20-30%.

#2 Focus on Compliance

Enterprises must meet harsh compliance requirements internally and externally every single day. From governmental regulations that vary from country to country and even state to state to corporate wide on-boarding policies. A vendor management systems software can help enterprises enforce strict rules and policies worldwide and mitigate compliance risks.

A VMS contains all of your information and is able to perform automated audits in various compliance issues. It can leverage important reminders, such as VISA expirations, tenure notices or a licensing course requirement, create controls around relevant approvals and manage system, data and on-site access for all of non payroll workers.

#3 Limiting Cyber Threats

Malicious actors who wish to access the vendor supply system of a company can do so by hacking its VMS. A variety of insights can be obtained and leveraged by corporate “spies” in order to gain a competitive advantage over a company if they have access to its VMS. To combat this kind of intrusion, one of the more recent trends in VMS is implementing measures within a VMS designed to limit cyber threats.

#4 Tighter Budget Control

A lack of visibility and control over their contingent workforce management programs leads the vast majority of businesses to end up overpaying for their on-demand talent. This adversely affects margins and profits.

A VMS offers your company the reporting and analytics tools you need to identify where you may be overpaying or underpaying your temporary workers. You’ll be able to see whether your company is paying more or less than the market rate for temporary workers and staffing supplier markups.

How to Choose a Vendor Management System Software?

No one VMS is similar to other so it is increasingly important to understand your business internal processes and external compliance requirements before starting the evaluation process. Our advise is to focus on the below 5 processes. Understand how your company is currently handline these processes, what are the challenges and the end goal. Then you can pick the 3-4 most relevant VMSs and compare between the solutions on how well they your company shape these processes.

  • Easy vendor onboarding – register vendors and contractors and register on-site, equipment, system and data access.
  • Comprehensive vendor rating – build a catalog of vetted vendors and contractors to shorten time to fill.
  • Vendor self service – enable your vendors to easily update their information, and get alerts on order and payment details for better efficiency.
  • Quick vendor screening – verify vendors data like business reports, financial and credit risk data and contractors data like KYC/AML and background checks.
  • Workforce classification in the US, UK and additional countries are legislating new freelance laws to ensure companies won’t classify their employees as contractors. Your VMS must provide with a tool to ensure you are correctly classifying your contingent workers.

Workforce classification in the US, UK and additional countries are legislating new freelance laws to ensure businesses won’t classify their employees as contractors. Your VMS must provide with a tool to ensure you are correctly classifying your contingent workers.

How do I set up a vendor management system

It usually take more than 12 months to deploy a vendor management solution throughout the enterprise, and even then only after meticulous planning. Most vendors will charge separately for the implementation process due to its complexity and duration.

To set up both vendors and companies for a successful relationship you need to take many parameters into consideration when defining your implementation plan. 

Ensure your implementation plan doesn’t only include detailed definition of internal business processes, it should also include clear ethics rules, easy to follow bidding processes, a framework for project timelines, milestones and check-ins.

Written by
Stoke Talent


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