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4 Stages of the Vendor Lifecycle

3 min read
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Often times, many view the vendor lifecycle within the confines of signing the vendor contract and implementing a vendor product or service and then terminating the contract. However, the contract is only one component of the vendor lifecycle. It’s crucial to consider the steps of managing a vendor throughout the entire relationship with your organization.

Deep Dive Into a Developed Vendor Lifecycle

Before we dive into the 4 main stages of the lifecycle, keep in mind it’s important that your organization first defines what a vendor, service provider or third-party is to them, and therefore determine what relationships are in scope for this process.

There are 4 main stages of a vendor's lifecycle, and each contains many subsequent steps. Let’s review:
  1. Inherent Risk and Criticality Assessment: Before you even begin working with the vendor, you must determine its inherent risk and criticality. Here’s a brief explanation of each term:
     
    • Inherent risk: Typically measured on a scale of low, moderate and high, this risk is based on the nature of the relationship and doesn’t include any precautions or controls.
    • Criticality: A vendor will either be critical or non-critical, depending on how essential it is to your business operations. Simply put, your organization or customers would be significantly impacted if your critical vendor’s products or services failed to meet your expectations.
  2. Due Diligence and Residual Risk Determination: Prior to entering a contractual relationship with a vendor, you must perform the proper due diligence, apply any appropriate controls and then determine if the resulting residual risk is acceptable to your organization. It’s important to engage with vendors so that you are even more aware of the pros and cons each vendor has to offer in their industry.

    On each of the contending vendors, be sure to perform the vendor vetting process by taking the following steps:
    • Review the third party's financial history.
    • Check for any reputational risk or consumer complaints.
    • Run an OFAC check and essentially give the vendor a thorough “background check”.
    • Document your steps well and share with the board or approval committee before making the final decision.
  3. Vendor Selection and Contract Management: After you’ve thoroughly vetted your vendor and have made the best choice for your organization, it’s time to negotiate the contract and begin working with them. What does this include? Contract management, ongoing monitoring, periodic risk assessments and due diligence maintenance are all necessary to remain compliant.

    Remember these vendor selection and contract management tips:
    • Continue to review the contract to verify if the vendor is meeting expectations and service level agreements.
    • Stay on top of upcoming renewal notice periods or contract expirations.
    • Monitor the vendor’s risk level by completing an annual risk assessment.
    • Last but certainly not least, the most current due diligence should be always on file, such as SOC reports and financials, by reaching out to the vendor prior to the expiration and an analysis should be performed on each to verify the results are sufficient and that you’re confident continuing business with the vendor is acceptable.
  4. Ongoing Monitoring: This stage is often neglected, but crucial to remember within the vendor lifecycle as risk fluctuates. You’ll want to ensure that you’re prepared for any contingencies that may create new vendor risk. Things like unmet service level agreements (SLAs) or data breaches can be better identified and managed through ongoing monitoring, lessening the potential for a serious event.

    These practices can help establish a strong process:
    • Run reports on a regular basis
    • Track your SLAs so you’re notified of any discrepancies.
    • Complete risk assessments periodically.
    • Schedule reviews based on inherent risk.
    • Ensure that all departments adhere to your internal third-party risk management policy.

These 4 stages are a repeatable process within the vendor lifecycle that continues unless you determine it’s time to terminate the vendor contract. If the vendor relationship is no longer needed or is simply no longer working out, that's when you take steps to end the relationship, based on your exit strategy. Be sure to identify what happens to any confidential information after the relationship ends.

Understanding and following the four stages of the vendor lifecycle will set you up for a successful vendor partnership.

 

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