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How a Vendor Management System Works and Why You Need It

7 min read
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If you asked Robin Dunbar, a British anthropologist who invented “Dunbar’s Number,” he’d tell you that the cognitive limit to the number of people you can maintain stable relationships with tops out at 150 people. It should be easy to keep up with 150 friends, relatives, coworkers and acquaintances, right?

If you have five friends, you have 10 bilateral relationships; scale up to 50 friends and you have 1,225 bilateral relationships. If you have the max number of friends Dunbar’s number postulates you can keep successfully, you will have about 3,675 bilateral relationships.

Think about this from a vendor management perspective too – third, fourth and, yes, even fifth parties…and now you’re getting the picture.

Dunbar’s Number is the foundation for today’s social networking. Think, Facebook, Instagram, LinkedIn and virtually all online social networks. Even technologies and Blockchain have roots in Dunbar’s Number.

Why This Matters in Vendor Management 

How does Dunbar’s Number have anything to do with vendor management? 

A single third-party vendor will typically have the following people working the deal at various points throughout the vendor management lifecycle:

  • Sales Rep
  • Account or Relationship Manager
  • Business Development Individual
  • IT/Technical Support
  • Project Manager
  • And finally, of course, the ever-present member of the vendor’s management team that’s always there if you need someone to escalate an unresolvable issue to

Let’s say there will be at least five people for every third-party vendor. Even if one person is supposed to be the Single Point of Contact (SPOC) for that vendor, there will be several people associated with every vendor. Remember, the average small to medium-sized organization has 245 vendors, give or take a few. That’s a lot of vendor and individual relationships to keep track of and manage.

Why Spreadsheets Won’t Cut It as a Vendor Management System 

Regulators, examiners, auditors and sound business practices all dictate the establishment and ongoing development of a functional vendor management or third-party risk program. They expect the process you establish to be sound and efficient. Here’s why spreadsheets should NOT be used in vendor management.

Requires Herculean Manual Efforts

Attempting to establish or operate a vendor management program using spreadsheets is an exercise in futility. You may get one spreadsheet filled out one time. However, the reality of the heroic effort it’s going to take to keep that spreadsheet up-to-date hits you in the gut so hard you have trouble maintaining consciousness.

Spreadsheets, small database programs like Microsoft’s Access and other so-called solutions DO NOT WORK. Been there. Done that. Got the T-shirt. Again, these solutions can’t be sustained over a long period of time. The effort it takes to keep those solutions current will burn you out faster than the effigy of the burning man dissolves into ashes every year.

Too Much Constant Monitoring

Think about it this way. When you get to 30 vendors, with even just a few people on the vendor’s team, you pretty easily find yourself at Dunbar’s magic number of 150. What happens if your organization has multiple contracts with one vendor? The number of vendors stays static while the number of products and services probably goes up. Every contract will, more than likely, have five people associated with it, and often times, you will utilize a vendor for more than one product or service. Each product/service you’ve contracted must be assessed as part of ongoing monitoring.

Complex Document Storage

We have the added dimension of the contract. First, we must store those documents somewhere. Someone using the spreadsheet solution will probably try to use a share drive or Microsoft’s SharePoint for document storage. If you go down this path, you will have access control issues. Meaning, you’ll likely have to limit access to just yourself. In which case, by doing this you become the single point of failure and the bottleneck everyone has to pass through to gain access to vendor management documents. Yes, you can grant access to “certain other individuals” to ease your burden and open the funnel a little wider, but you have to be cautious with access.

With this method, unfortunately, documents begin to disappear. Documents begin to get misfiled, moved, accidentally deleted and overwritten. Again, an idea that is doomed to failure and you’ll be able to measure the time from inception of the vendor management program to the abject failure of the program in months, not years.

Difficulty Tracking Significant Dates

Oh, but there’s more! How do you keep track of all the dates that you are responsible for on all those contracts? How are you going to keep from missing critical dates? You won’t. You’ll definitely miss a few. Unfortunately, it’s inevitable. Contracts have, at a minimum, start dates, end dates, renewal notice time periods, problem resolution timelines and termination timelines to keep track of.

It's Nearly Impossible to Manage All These Relationships (Well) Without a Vendor Management System

Let us bottom-line it for you. Vendor management is a basic organizational function every soundly managed business needs to have fully operational. Third-party risk management is a step or two up from basic vendor management. Vendor management doesn’t function without a system. If you don’t have a solid platform for vendor management, you’re going to fail.

Having very difficult conversations with management about funding for the resources necessary to operationalize a vendor management program are easier than making yourself available to the industry. Not having a vendor management platform is a career limiting move.

How Does a Vendor Management System Work?

Now that we’ve covered why you need a vendor management system, let’s discuss how one even works. The first rule of thumb is to never have multiple systems for vendor management.

It’s simple: your vendor management system (VMS) needs to be able to handle all of your organization’s vendor management and third-party risk management requirements. Period. End of story. There’s too much riding on any platform that is tracking your third and fourth parties.

6 Recommended High-Level Vendor Management System (VMS) Components

There are six components to watch out for:

  1. There should be contract storage, due diligence documentation storage, the ability to create and manage risk assessments in any manner your organization chooses, the ability to setup notifications on timelines of your choosing and the sole platform for managing all your vendor management regulatory requirements.
  1. Your VMS organization must be transparently honest. In this life, you either have character or you are a character. Sometimes, it’s hard to find an organization that has character. When you chose a VMS, choose one that has people with character standing behind their product.
  1. Your VMS must have excellent customer setup and support. If you have a question (and you will), someone must be there to help you solve the problem.
  1. Your VMS should be easy to learn and extremely intuitive to use. A solid VMS will always be complex internally, but that’s not something you want to see. You don’t want something that’s going to be a beast to use.
  1. A VMS that is a SaaS (software as a service) platform for your organization. That is, one that is cloud-based. The cloud-based platforms give you flexibility, business continuity and disaster recovery capability. All of which your organization should require.
  1. A VMS that is capable of handling unlimited number of contracts as well as capable of tracking any number of dates for each contract. They will offer you access controlled document storage.

10 Must-Haves in a Vendor Management System

In addition, any vendor management system worth its salt should be able to perform all of the must-have features below:

  • Ease of use
  • Admin/setup/configuration for your use
  • Flexible capacity limits
  • Storage and retrieval of contracts and other documentation
  • A vendor portal for questionnaires
  • Parent/child relationship management for a vendor’s products
  • Product tracking
  • Fourth party tracking
  • An extensive and flexible notification engine
  • Flexible risk management functionality

A vendor management system helps create efficiency across your organization but also protects your organization from risk and unnecessary expenses due to failure to properly monitor vendors.

Vendor management may seem like a large investment, but there's a huge ROI. Download the eBook.

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