Terminating Vendor Contract? Best Practices to Offboard Third-party Vendor

Third-party vendor offboarding (termination) is the process of removing a vendor from your financial and administrative records when you end your vendor contract or a relationship with that vendor. The hardcore fact is too many business owners find themselves locked into long-term vendor contracts without the flexibility to terminate on reasonable terms. For business owners facing this situation, here are a few tips to assist in reasonably terminating a contract and some strategies for preventing such a situation in the first place.

Should you terminate the vendor contract?

If you are on the verge of exiting or terminating supplier contracts, ensure you should not do it carelessly. When you have long working relationships with suppliers, there is a loss (and sometimes cost) associated with ending any contract with a supplier. Even in some cases, commercial agreements and clauses can make it more complex. So it is always best to end supplier contracts as a last resort only, not on a routine basis and when you want to terminate, be sure of your legal position.

Instances where terminating with a supplier is a logical option.

• Failure to meet contractual terms and obligations
• Changes at the end of suppliers like unable to meet supply demand
• Constant problem with receiving defective goods / below-standard services
• Change in commercial terms which may not be in your best interest, e.g., rise in prices
• Poor performance when it comes to quality and timely delivery of goods/services
• Supplier bankruptcy, merger-acquisition, or considerable management change
• Availability of cheaper (or more reliable) service elsewhere

No matter what, in your vendor contract, you should have a termination clause wherein you should be able to walk away from bad service ASAP. In your supplier contract, there should be an inclusion of a service level agreement (SLA). The SLA should set out the expected standards of service, mutual responsibilities, and conditions for termination.

How to offboard vendors while terminating vendor contracts?

Suppose you have evaluated all criteria and decided to end the contract due to either inconsistent and unsatisfactory performance or high costs and sub-standard quality. In that particular instance, it may be worthwhile to speak with them first. There are good chances that suppliers to pause the termination may offer options to resolve the issues or reduce the price to keep your custom. In anyways, if you are terminating vendor contracts, follow the best practices to offboard the vendor.

Offboarding vendors — best practices

• Document the supplier’s failures and lapses
• Evaluate the contract and review the termination provisions
• Appraise all the possible threats to your business and have risk mitigation strategies in place
• Consider an exit plan that will minimize the potential for disruption.
• Confirm when ending a contract may be valid, the length of notice you will need to give, and figure out any penalties that may apply if you terminate the contract early.
• Consult with your suppliers about any disputed or outstanding payments and come to a consensus on resolving it
• Ensure proper use or return of confidential information and intellectual property rights

Closing Note

In all, exiting a supplier relationship early can cost you a considerable sum. Hence, beware of signing contracts with excessively high exit fees. Consider seeking legal advice when drawing up important vendor contracts or have an intelligent contract management solution to handle the workflows. Don’t let yourself be ever trapped in a bad deal.

Download this Ready-to-use vendor onboarding and termination checklist to manage the full lifecycle of vendor relationship management while also ensuring security & compliance.