How to Navigate Complicated Legal Issues in Vendor Management

As a result of some recent sweeping changes in vendor management and risk management, enterprises must recognize and address the complex legal issues that are bound to come up when working with vendors or third-party contractors.

Over the years, I have learnt a great deal about how to best navigate the complicated legal issues associated with vendor relationships. My experience has also taught me how to protect against these legal issues through effective risk-mitigation strategies.

In the sections that follow, I’ll share with you what I’ve learned over the years and show how to apply these lessons whenever your company considers working with an external vendor.

Choose Your Vendors Wisely

It is all too common that the frustrating legal issues encountered by enterprises could have been easily avoided with greater levels of due diligence during the selection process.

Prior to entering into any agreement with an external vendor, it is your responsibility to first ask yourself a simple question: Is an external vendor even necessary?

There is no shortage of reasons why you might consider an external vendor. Your organization might lack the experience, expertise, or capacity to accomplish a specific task, or perhaps your internal resources will just be stretched too thin.

With that in mind, the act of thoroughly evaluating your level of need is a critical first step, and it is one that should never be neglected.

Once you’ve made the decision to work with an external partner, you’ll have to perform due diligence in selecting the right vendor. This will require you to evaluate each vendor according to your organizational priorities in terms of the project’s specific requirements as well as its overall scope.

A Detailed Approach to Vendor Contract Development

The overwhelming majority of legal issues arise out of incomplete contractual development. The contract should eliminate, or, at the very least, minimize any inherent risks associated with a vendor relationship, including any financial, operational, or repetitional risks, to name a few.

The contract should detail payment terms and establish price-setting mechanisms, but it must also set clear, achievable, and measurable service-level requirements or expectations from the vendor. The contract should also clearly delineate legal liabilities, intellectual property rights — including on the distribution, use, or disposal of any relevant IP — and exit strategies or stipulations.

Perhaps most importantly, the contract must establish a model for governance over the vendor, as a host of legal risks come into play due to a lack of adequate vendor governance. Failing to establish a model for overseeing or managing the vendor will expose your enterprise to a whole host of complicated legal issues, all of which will surely lead to considerable costs.

With a governance model in place, your enterprise stands to gain a great deal, including from the improvements to vendor management and the risk mitigation made possible by such a model.

Risk Mitigation and Vendor Management

The governance model established in your contract ensures you are able to effectively manage the vendor, which in turn reduces your legal exposure, as well as a host of other risks that accompany any vendor relationship.

Without this stable approach to vendor management, your organization might encounter costly legal issues pertaining to the Statement of Work (commonly referred to as the “SOW”); terms, conditions, and technical specifications; data, progress, and/or status reporting; confidentiality and/or security; pricing, fees, and/or expenses; ownership rights; vendor audits, limitations of liability, and applicable law; and mediation and arbitration, to name a few examples.

Obviously, these represent just a handful of the potential legal issues you might encounter when partnering with a third-party vendor. It is in the best interest of your organization — as well as the vendor — to actively protect against these potential legal complications through the strategies I’ve detailed in this article.

Remember, the vendors you choose to work with and the management methods you employ will not only shape your organizational reputation; it will also exert a significant influence over your organization’s bottom line, and, ultimately, your company’s long-term viability.

What legal difficulties do you find in the vendor management process? How does your business overcome them? Let us know in the comments.