Early in my sourcing career, I was handed what my director called “a small cleanup job,” and it turned out to be my first real lesson in vendor management. The company was a professional services firm with about 600 people across four offices, and finance simply wanted to know who we were actually paying. It sounded like a week of work. However, it took me most of a quarter.

Because that project shaped how I work to this day, I want to start there before getting into the methods I use now.

The Spreadsheet That Changed My View of Vendor Management

When the spreadsheet was finally done, we had 1,140 active vendors. Eleven of them were staffing agencies. Similarly, nine were different print shops. In addition, we were paying for the same project management software through four separate contracts, because four practice leads had each signed up on a company card and expensed it. Worse still, one of our “vendors” was a freelance designer who had left the country two years earlier and was still getting a monthly retainer, since nobody knew who owned that relationship.

None of this was fraud. Instead, it was just drift. Every one of those decisions made sense to the person who made it on the day they made it. Taken together, though, they added up to a supplier base nobody could manage, and that is the problem I want to talk about here.

Good vendor management doesn’t start with software, scorecards or a policy document. Rather, it starts with a smaller, deliberate list of suppliers you actually understand. After that, everything else gets easier.

Why Supplier Lists Grow Without Vendor Management

No one wakes up and decides to run 1,100 vendors. Instead, supplier bases grow quietly, and in my experience it happens in three main ways.

Decentralized buying

First, there’s decentralized buying. Department heads have budgets and deadlines, so asking procurement feels slower than just buying the thing. In professional services firms this is especially common, because so much of the spend is indirect: software subscriptions, contractors, recruiters, event venues, research subscriptions and marketing agencies. As a result, none of it gets the scrutiny that direct materials get in a manufacturing plant.

Acquisitions

Second, there are acquisitions. When one firm buys another, it inherits every supplier the acquired firm had. Integration teams naturally focus on clients and people first, so the vendor list gets merged into the ERP and forgotten. Industry glossaries describe the same pattern: organizations frequently find themselves with fragmented supplier bases that grew organically through decentralized purchasing, acquisitions, or history.

Emergency onboarding

Finally, there’s what I call “emergency onboarding.” A key vendor drops the ball, someone panics, and then a second supplier gets set up in 48 hours to cover the gap. Eventually the crisis passes. Nevertheless, both suppliers stay on the books forever.

Consequently, every one of these paths ends in the same place: a vendor master file full of names, many of which nobody in the building could describe if you asked them.

What Poor Vendor Management Actually Costs You

People usually hear “consolidation” and think it’s about getting a discount. Pricing leverage is certainly real; however, in my experience it’s often the smallest of the benefits. The bigger costs of a bloated supplier base are the ones that never show up as a line item.

Administrative weight

Every active vendor needs onboarding paperwork, tax documentation, banking details, insurance certificates, a contract (if you’re lucky), invoices processed and payments released. Then, at some point, it needs offboarding too. Multiply that by a thousand, and your accounts payable team is spending its days on suppliers who represent a fraction of your spend.

Lost leverage

Likewise, when you split $400,000 of staffing spend across eleven agencies, none of them sees you as an important client. Therefore, you get their B team, their standard rates and their slowest response times. In contrast, put that same spend with two or three agencies and you become a client they fight to keep. Writers at Inbound Logistics make the same point: by consolidating and lowering the number of suppliers and implementing strategic sourcing methods that encourage competition, purchased costs are lowered and your buying power is enhanced.

Invisible risk

This is the one that keeps me up at night. Each vendor you add is another company holding your data, your client information or your reputation in its hands. Indeed, Deloitte’s research on third party risk has shown for years that this is not a theoretical concern. Their 2023 global survey drew on insights from over 1,300 TPRM leaders spanning 40 countries, and one of the more sobering findings was that only one-quarter (27%) believe their organisational budgets have increased to keep pace with the increasing complexities of third-party risk management. In other words, most companies are being asked to watch more vendors with the same or fewer resources. So cutting the number of vendors you have to watch is the most direct fix available.

Weak accountability

Furthermore, when a project goes wrong and three suppliers each touched part of it, you’ll get three versions of whose fault it was. With one accountable partner, on the other hand, there’s one phone call to make.

The Old Idea That Still Runs Modern Vendor Management

Anyone who has sat through a procurement certification has met Peter Kraljic. In 1983, while serving as a director at McKinsey, he wrote an article for Harvard Business Review that still shapes how sourcing teams think. His central argument was that companies needed a total change of perspective: from purchasing (an operating function) to supply management (a strategic one).

His portfolio matrix sorts what you buy into four groups based on two questions. First, how much does this purchase affect profit? Second, how risky is the supply market behind it? Together, those questions give you routine items, leverage items, bottleneck items and strategic items.

I bring this up because it’s the single most useful tool I know for deciding where consolidation makes sense and where it doesn’t. After all, consolidation is not a blanket rule. Instead, it is a decision you make category by category.

How I apply the matrix to vendor management in a services business

  • Routine items (office supplies, courier services, catering, basic print): consolidate hard. Ideally, keep one or two suppliers per category, preferably through a catalog or a purchasing card program. As a result, these should take almost none of your time.
  • Leverage items (laptops, standard software licenses, travel, commodity cloud storage): because many suppliers can deliver them, you pool volume and run competitive bids. Consequently, this is where most of the pricing gains come from.
  • Bottleneck items (a niche compliance tool, a specialist translator for a rare language, a single certified auditor in a region): since few alternatives exist, you do not cut these to one. Instead, you secure them with longer contracts and, where possible, a qualified backup.
  • Strategic items (your core IT managed service provider, your main staffing partner, the platform your consultants deliver client work on): these get the deepest relationships, the most executive attention and the most careful risk planning.

Generally, when I review a supplier list, roughly 70 to 80 percent of the vendor count sits in the routine and leverage boxes. That’s where most of the clutter lives, and therefore it’s where most of the cleanup happens.

How I Run a Vendor Management Consolidation Program

After doing this at several firms, I’ve settled into a process that works whether you have 200 vendors or 2,000. Admittedly, it isn’t glamorous. Still, it holds up.

Step 1: Build a vendor management census before you build the strategy

You cannot manage what you cannot see. So first, pull every payment made in the last 24 months from accounts payable, corporate cards and expense reports. In fact, card and expense data matter more than people expect, because in professional services a surprising share of vendors never touch a purchase order at all.

Next, clean the names. For example, “ABC Staffing,” “ABC Staffing Inc” and “ABC Staff Solutions” are probably the same company. Then group everything by parent company and by category. Although this is tedious, it’s also where you’ll find the duplicate software contracts and the forgotten retainers.

Step 2: Classify spend and find the long tail

After that, sort vendors by annual spend. Almost always, you will see the same shape: a small group of suppliers carrying most of the money, plus a long tail of hundreds of vendors each billing a few thousand dollars a year. That tail is your first target, because those small vendors often cost more to administer than the value they bring.

Then map each category onto the Kraljic quadrants. Above all, be honest about which suppliers are truly strategic. Every business owner thinks their vendor is irreplaceable; however, usually only two or three actually are.

Step 3: Talk to the people who use the suppliers

This is the step most sourcing teams skip, and it’s precisely why consolidation programs fail. For instance, if you cut a practice lead’s favorite research subscription without asking, you’ve made an enemy and probably a new rogue purchase.

Instead, I sit down with each major budget holder and ask three questions. What do you buy and why? Which suppliers would you fight to keep? And which ones would you be happy never to hear from again? Surprisingly often, the answers are more useful than the spend data.

Step 4: Go to market with volume, not just requirements

Once you know which categories you’re consolidating, run a proper sourcing event. Specifically, bundle the volume you used to spread across many suppliers and put it in front of a short list of qualified ones. Naturally, suppliers respond very differently to “we’re bringing $600,000 of annual spend to one or two partners” than to a one off request for quote.

Meanwhile, evaluate on total cost, not unit price. That includes service levels, account management, invoicing accuracy, data security posture and how easily they integrate with your systems. After all, the cheapest bid that creates three hours of invoice reconciliation every month is not cheap.

Step 5: Transition carefully, then close the door

Give exiting vendors notice and a professional exit, since you may need them again someday and your reputation in a supply market matters. Then move work to the new partners in phases, with clear handover dates.

Finally, close the door behind you. Deactivate exited vendors in your ERP. Also, update your purchasing policy so new vendor requests have to justify why an existing contracted supplier won’t work. Otherwise, the list grows back within 18 months. I’ve watched it happen.

The Vendor Management Mistake Nobody Warns You About

So far I’ve been enthusiastic about consolidation, so let me be equally clear about its dark side. In short, you can end up with too few suppliers.

Concentration cuts both ways

When you shrink a supplier base, each remaining supplier carries more weight. That’s the point, of course. But it also means each one’s failure hurts more. The SupplyChainBrain think tank put it well in a piece warning that what looks like supplier excellence at first may become supplier concentration risk in the end. Moreover, the same author makes the point I’d want every sourcing team to hear: the goal is not to stop consolidation, but rather to understand the point at which efficiency starts to erode resilience.

Two suppliers on paper is not two sources

There’s also a subtler trap. Having two suppliers on paper doesn’t mean you have two independent sources. For example, if both of your IT support vendors run on the same cloud platform, or both of your staffing agencies source contractors from the same subcontracting network, then a single outage takes out both. Simfoni’s procurement glossary names this exactly: the main mistake is equating approved supplier count with real resilience. Accordingly, good teams check whether multiple approved suppliers rely on the same sub tier source, region or logistics corridor.

Similarly, one manufacturing risk guide gives a striking example of assessing each supplier separately as moderate risk, only to discover six critical suppliers operate in the same industrial park. In professional services, the equivalent is discovering that your payroll provider, your document management system and your client portal all sit in the same hosting region.

My working rule

Therefore, here’s how I balance it. For routine and leverage categories, consolidate aggressively. For strategic and bottleneck categories, however, consolidate to a primary partner while keeping a qualified secondary option warm. That might mean giving a backup supplier 10 to 20 percent of the work, or simply keeping a signed master agreement in place so you can switch in weeks instead of months.

Vendor Management for the Suppliers You Keep

Consolidation buys you time. What you do with that time, however, is what separates a vendor management program from a vendor list.

Tier your vendor management relationships

Not every supplier deserves a quarterly business review. Instead, I usually run three tiers. Strategic partners get quarterly reviews with senior stakeholders on both sides, shared goals and an annual planning session. Preferred suppliers, by comparison, get a semiannual check in and a scorecard. Meanwhile, transactional suppliers get automated monitoring and a contract renewal review. Likewise, the Workday team describes this idea as a core practice, pointing to differentiated management, centralized governance and data driven performance tracking.

Measure the vendor management metrics that matter

I’ve seen scorecards with 40 metrics that no one reads. So pick four or five KPIs per category instead. For a staffing partner, for example, that’s time to fill, candidate quality (measured by how many placements finish their assignment), fill rate, invoice accuracy and responsiveness. For an IT provider, on the other hand, it’s uptime, ticket resolution time, security incidents and project delivery against plan. Then review them together, with the supplier in the room.

Write contracts you can actually manage

Every strategic contract should have clear service levels, a defined process for when those levels are missed, data handling and security terms, and exit provisions. Notably, exit terms are the clause people forget, yet it’s the one you’ll wish you had when a relationship goes bad. After all, signing a contract with no plan for leaving is like hiring someone with no notice period.

Keep one vendor management source of truth

In addition, contracts, insurance certificates, security questionnaires and performance data should live in one place that procurement, finance, legal and IT can all see. It doesn’t have to be expensive software, either. With a consolidated base, a well structured shared system can work for a midsize firm.

Treat suppliers like partners

When your list is short, you can actually invest in the people on it. So share your forecasts, tell them about upcoming projects early and invite their ideas. In fact, some of the best cost savings I’ve ever delivered came from a supplier who knew our business well enough to suggest a better way of doing the work, not from a negotiation.

What Good Vendor Management Looks Like When It Works

Back to that professional services firm with 1,140 vendors. Over about 14 months, we brought the active list down to just under 400. Staffing went from eleven agencies to two primary partners plus one specialist for niche technical roles. Similarly, print went from nine shops to one managed print provider. Meanwhile, the four duplicate project management contracts became one enterprise agreement at a lower total cost than the four had been.

The savings were real, and naturally finance was happy. However, the change people noticed most was quieter. Accounts payable stopped working late at month end. Legal reviewed fewer contracts and, as a result, reviewed them better. Later, when one of our staffing partners had a data handling issue, we knew within a day, because that partner had a named account manager who called us directly. Under the old setup, by contrast, we might have found out from a client.

Ultimately, that’s the real case for fewer suppliers. It’s not just a smaller bill. Rather, it’s knowing who you work with, what they’re doing for you and what happens if they stumble.

Where to Start Your Vendor Management Cleanup on Monday

If this feels like a big project, start small. First, pull your last 12 months of payments, including card spend. Next, sort by vendor and count them. Then pick the category that looks the messiest, usually software, contractors or office services, and look for duplicates. Finally, talk to two or three budget holders about what they actually need.

You’ll find something worth fixing in the first week. You always do.

In the end, vendor management is not about controlling suppliers or squeezing them on price. Instead, it’s about building a supplier base small enough to understand and strong enough to rely on. Fewer suppliers, chosen on purpose and managed with care, really do mean fewer headaches.

Vendor Management FAQ

What is vendor management?

Vendor management is the ongoing work of selecting suppliers, negotiating contracts, monitoring performance and risk, and managing the relationship until the contract ends. For a solid overview of the core activities, see UpGuard’s guide to vendor management best practices.

How many suppliers should a company have?

There’s no single right number, because it depends on the category. Routine purchases can often go to one or two suppliers, whereas critical services usually need a primary partner and a qualified backup. The Kraljic portfolio approach is a practical way to decide category by category.

Does vendor consolidation always reduce costs?

Usually, but not automatically. Pooled volume improves leverage, and fewer vendors also means less administrative work. However, savings disappear if you choose on unit price alone and ignore service quality. Inbound Logistics explains how consolidated procurement lowers costs when it’s paired with competitive sourcing.

What is supplier concentration risk?

It’s the exposure you create when too much of a critical service depends on one supplier, or on several suppliers who share the same underlying source. Simfoni’s definition of concentration risk covers how to spot and measure it.

How do I stop the vendor list from growing back after consolidation?

First, deactivate exited vendors in your systems. Then require a justification for any new vendor request, and route software and contractor purchases through procurement. In addition, regular reviews help. Ramp’s vendor management best practices include practical controls for the full vendor lifecycle.

Why does third party risk matter so much in vendor management?

Every supplier with access to your data, systems or clients extends your risk. Accordingly, Deloitte’s global third party risk management survey tracks how organizations are dealing with this growing exposure.

References