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Outsourcing Vendor Management: When Does It Make Sense?

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In today’s world, it can be increasingly difficult to navigate issues such as industry competitors, natural disasters, and obstacles in the supply chain. As challenges continue to arise, it may be time to consider whether leveraging external expertise is the right choice for your organization. By outsourcing vendor risk management, for example, your organization may be able to minimize costs, improve risk management outcomes, and reap the consequential benefits.

When it comes to third-party risk management, the statistics don’t lie. In the research found in our State of Third-Party Risk Management 2022 Whitepaper, 61% of respondents stated that they have between one to five employees running their vendor management programs. In addition, 46% revealed that they're managing between 101-500 vendors. With so many responsibilities, it’s no surprise that vendor risk managers are overwhelmed and have trouble juggling their priorities. However, in our current environment, the number of responsibilities will not decrease, and it might be time to consider outsourcing your third-party risk management.

FTE Cost Analysis

According to the Small Business Association (SBA), the typical cost of an FTE is 1.25 to 1.4 times the salary, depending on certain variables like benefits, insurance, and other employee perks. Employees with industry expertise will demand an even higher premium, impacting your profit and loss. It’s important to keep in mind that as your portfolio of vendors expands or contracts, your vendor risk management work volume may be unpredictable.

Even if you build a business case that justifies hiring an FTE, you will need to consider how many people you will need. How will you fill all expertise gaps? Should you hire a smaller team of experienced experts, or a larger team to address the capacity issue? While there is a steep learning curve for an inexperienced vendor risk manager, a smaller team might not be able to manage all the responsibilities in a timely manner. There are many components that you will need to consider.

Lack of Subject Matter Expertise and Vendor Risk Management Capacity Are Real Issues

While experienced vendor risk managers are always an asset, it is extremely difficult to find a single manager with comprehensive knowledge and expertise in every area of a vendor risk management program.

10 Areas Within a Vendor Risk Management Program Scope:

  1. Contract Management
  2. Research and Negotiations
  3. Business Continuity and Disaster Recovery
  4. SOC Report Analysis
  5. Financial Analysis
  6. Regulatory Compliance
  7. Performance and Relationship Management
  8. Line of Business Interaction
  9. Board Reporting
  10. Federal and State Regulatory Exams

This list isn't comprehensive, but can give you a good idea of the scope of expertise needed for a successful vendor risk management program. It's unlikely that every item will be in your vendor risk management department's skillset. And, even if you’re lucky enough to employ a unicorn or two, it's unlikely they’ll have the capacity to do it all.

In many cases, vendor risk management departments will require pulling in subject matter experts from other departments within the organization. For example, the risk managers may ask an information security expert to review a vendor’s SOC 2 report and evaluate cybersecurity measures. However, these experts have their own priorities and tasks that need to be completed within their department. While experts are working on their own projects, the vendor risk management team will be left waiting, leading to due diligence and required risk assessments being forgotten, lost in the shuffle, or left further behind among other activities.

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Maturing Your Program as a Vendor Management Officer

Whether your vendor risk management team faces difficulties with understaffing or lacking in diversified expertise, it's necessary to find a proper solution so that your organization can perform the required due diligence, reports, and assessments.

Outsourcing to Access Expertise and Improve Capacity

What are the benefits to outsourcing your vendor risk management? Is outsourcing the best solution for your organization, and will it solve your issues with capacity and gaps in expertise?

There is a lot to consider, and you will need to make the best choice for your organization to improve efficiency and your bottom line. Let’s go over how outsourcing can benefit your organization.

Outsourcing can help accomplish the following:
  • Track and manage contract renegotiation and renewal dates
  • Support vendor risk monitoring
  • Collect and organize vendor due diligence questionnaires and documents
  • Provide the review, analysis, and qualified opinion of vendor controls through the review of:
    • Financial Reports
    • Evidence of regulatory compliance
    • Systems configurations, access management, and cyber security controls
    • Independent third-party reports, including SOC documents
    • Business continuity and recovery plans and test results
    • Privacy policies and practices
    • Vendor risk management practices and fourth-party inventory

How Outsourcing Can Help Overcome Internal Vendor Management Hurdles

Many organizations are starting to realize that recruiting and hiring additional FTEs can be difficult, expensive, and doesn't always successfully address unpredictable vendor risk management's workload or expertise needs. The truth is that strategic vendor risk management can deliver more with fewer resources, often on a pay-as-you-go basis.

When considering if outsourcing portions of vendor risk management is right for your organization, there are several benefits to consider. First, it can lead to greater efficiency by improving the vendor due diligence reviews' quality, consistency, and timing. In these instances, your organization can reap the benefits of your vendor relationship sooner, saving time and effort for your other departments.

Second, outsourcing allows your team members to play to their strengths and focus on important tasks such as vendor risk framework, internal oversight, and compliance with the program. Instead of having to sort through a mountain of tasks, your team can prioritize big-picture items that will strengthen your organization.

Outsourcing is a great resource that will allow you to contain your employee costs while still meeting the regulations and objectives to create an effective vendor risk management program.

More Effective Programs and Reduced Costs

Though many organizations fail to prioritize their vendor risk management programs, it is necessary to protect your organization from detrimental consequences. An effective program can help defend against the costs related to inconsistent contract management, poor vendor quality, inadequate vendor business continuity/disaster recovery, improper management of customer complaints, and preventable regulatory fines, to name just a few.

Overall, outsourcing your vendor risk management is a strategic alternative to hiring FTE, by offering the expertise, specialization, and capacity required to meet your risk management needs. At the end of the day, your bottom line will benefit and outsourcing your vendor risk management services has never made more sense.

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