Using vendors, or third-party companies and individuals that provide goods or services, is common across many industries and an operational and strategic necessity when meeting an organization’s goals. Depending on the type of vendor—a goods vendor, IT consulting firm, or Software as a Service (SaaS) provider, to name a few—the benefits vary, from cost savings and enhanced expertise to expanded business reach and access to advanced technologies.
However, working with a third-party service provider, or TPSP, comes with risks, and in some industries, there is significant regulatory oversight. That’s why having a solid vendor management program is essential. Depending on your industry and organization’s size, resources, and types of vendor relationships, your vendor management program might look different from the next.
Before you readjust your current vendor management program or start building one from scratch, consider the most important parts of the lifecycle, common mistakes, and tips for creating a robust, successful program.
The vendor management lifecycle
Vendor management is the process organizations and companies use to manage the risks of third-party vendor relationships. Often, these relationships come with unexpected outcomes or obstacles, which are also addressed in vendor management. For example, a vendor may miss a deadline or fail to reach a projected goal.
While some problems are minor, others can have major consequences, including lawsuits, regulatory enforcement actions, fines, and reputational damage. That’s why it’s crucial to continuously identify, measure, monitor, and mitigate risks through your vendor management program, which includes the following steps:
- Risk assessment. The first phase involves analyzing any potential risks associated with outsourced activities. Identify whether your organization has in-house resources to manage vendor relationships and whether a vendor qualifies as a critical vendor and needs extra oversight. Risk and compliance software can help identify and manage risk across many areas, including third-party risk management (TPRM).
- Due diligence. Research your vendors’ financial condition, experience, and internal controls. This step may require reviewing documentation, compliance management systems (CMS), and any publicly available information. Remember that due diligence is essential even for existing vendors, as past performance doesn’t negate the need for continued evaluation for future activities.
- Contract negotiation. There’s more to a contract than pricing. Ensure the documents outline the rights and responsibilities of both parties in comprehensive terms and details. Topics to include in negotiations include confidentiality, dispute resolution, data privacy, and transparency with fourth-party vendors. Best practices involve centralizing vendor contracts and highlighting key provisions, though these details will vary depending on your industry.
- Ongoing monitoring. Vendor management is a continuing process that requires the regular assessment of a vendor’s performance and compliance with contractual obligations. Steps include monitoring service quality, financial controls, and adherence to legal requirements.
Common vendor management mistakes—and how to address them
Whether you’ve engaged with vendors for years or you’re looking to onboard new third parties, there are some common mistakes to avoid:
- Inadequate due diligence. While it can be time-intensive, thoroughly vetting vendors is vital to mitigating risks and reducing the chance of unexpected challenges. Ensure your team thoroughly reviews a vendor’s compliance policies and history. Some of this information will be available publicly, while for some you’ll have to request other documents. If the vendor hesitates to share information your organization needs for compliance, that may be a red flag.
- Failure to document the process. Contract negotiation is crucial, but if you don’t document expectations, you’ll have no benchmark to measure the partnership’s success. Also, depending on the vendor type and your industry, they should ensure their compliance practices are thorough and current.
- Choosing inexperienced or uninformed vendors. Not all vendors are created equal and depending on the vendor’s experience or expertise in a specific area, these gaps can lead to significant risks and consequences. For example, suppose a mortgage lender hires a marketing company to manage its advertising initiatives. In that case, the vendor may not be aware of federal regulations, such as the Truth in Lending Act (TILA) and the Truth in Savings Act. These mistakes can trigger regulatory scrutiny.
How to elevate your vendor management program
Now that you know the steps in the vendor management lifecycle and the biggest mistakes to avoid, it’s time to build (or reevaluate) your vendor management program. While every vendor management program looks different, the elements below apply to multiple industries and sectors.
- Establish clear objectives. What’s the mission of our vendor management program? What do we want to accomplish regarding compliance, performance, and risk management? Consider these questions as you define the short-term and long-term goals of the program.
- Create vendor performance metrics. Your organization can only measure performance with metrics. Develop key performance indicators (KPIs) to evaluate a vendor’s performance in achieving set objectives, such as timely delivery, work quality, and adherence to compliance and contractual requirements.
- Develop a standardized vendor management process. Innovation is the hallmark feature of an exciting new product or service, but reinventing the wheel is not the best use of time or resources when it comes to establishing a consistent vendor management program. That’s why many organizations have a standardized approach to the lifecycle to ensure consistency and thoroughness. Vendor management software helps manage these relationships, from onboarding and risk assessments to contract management and ongoing due diligence.
- Establish exit strategies. While not always pleasant, terminating vendor relationships is sometimes the best path forward. Outline the process for exit strategies, including data transfers, ongoing obligations, and communication with stakeholders. Having this information as a future resource will help streamline the process and make it easier for all parties involved.
A well-structured vendor management program is crucial for organizations aiming to navigate the complexities of vendor relationships. As you embark on or refine your vendor management journey, remember that a proactive approach, ongoing monitoring, and due diligence are critical to mitigating potential risks and uncovering valuable opportunities that can drive your business forward well into the future.