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Outsourcing

Outsourcing Vendor Management: When Does It Make Sense?

Jan 30, 2019 by Venminder Experts

Does leveraging external expertise make sense in a tight margin environment? In an environment of increasing competition with shrinking margins, there's valid reasoning that leadership might consider other cost containment initiatives.

While it’s accepted in the financial services industry that core products or fulfilment services tied to a transaction may make economic sense, we encourage you to take a closer look at your ongoing full-time employee (FTE) costs.

FTE Cost Analysis

Research has shown that the actual cost of an FTE is approximately 1.4 times that of the salary when you consider benefits, insurance and all other employee perks. Industry expertise demands a higher premium and will impact the profit and loss. It’s also why we find some managers taking on multiple roles within an organization that doesn’t allow them to focus on their core duties. Sooner or later, something is going to give.  

With that in mind, a fully experienced vendor manager may be an expert in just a few areas. Consideration should be given to how you can satisfy the requirements of a robust and well-documented vendor management program. So, the vendor manager may need help.

10 Areas Within a Vendor Management Officer’s (VMO’s) Scope:

  • Contract Management
  • Research and Negotiations
  • Business Continuity and Disaster Recovery
  • SOC Report Analysis
  • Financial Analysis
  • Regulatory Compliance
  • Performance and Relationship Management
  • Line of Business Interaction
  • Board Reporting
  • Federal and State and GSE Audit Meetings

This isn’t an exhaustive list, but it provides some idea of the vast scope and expertise required to successfully run a vendor management program. Unless each item is in your vendor management department skill set, you may want to think about ways to mature your program, and as a result, contain employee costs and leverage industry experts all the while meeting the regulations and your own internal risk management objectives.

Maturing Your Program as a VMO

The number one way to mature your third party risk program is to be strategic. A vendor management team may be understaffed or lack the true expertise to meet the regulatory requirements.

By focusing on shifting some of the heavy lifting in the oversight process allows you to complement your existing program while you can focus on the strategic aspects of oversight. 

3 Scenarios Where It Makes Sense to Outsource Vendor Management

It makes sense to outsource vendor management if your team doesn’t have the expertise to:

  1. Review a 200-page financial report
  2. Understand nuances within a SOC report
  3. Know the regulatory compliance risk that each vendor type is prone to

The learning curve can be steep for an inexperienced vendor management team, and savvy vendors will quickly gauge if they’re dealing with an experienced vendor manager or not. The role of the vendor manager is to manage risk and manage the vendor. If the vendor manager does not have the adequate knowledge or training, it may show up in the quality of the assessment reports. Knowledge gaps will ultimately highlight the overall commitment for the executive board to hire the right internal staff.

Outsourcing Can Help Overcome Internal Vendor Management Hurdles

Vendor management is sometimes viewed as a non-profit generating line item but by taking a closer look at your current staffing levels, expertise and successfully outsourcing key functions when expertise or bandwidth isn’t readily available internally, you’ll be able to deliver on the premise of doing more with less.

This strategy can be applied to complementing a program where the vendor management function is being handled by another department that lacks the time to perform those duties because of their core responsibilities and equally where the department is top heavy in one discipline.

If your vendor management department today hasn’t performed any level of due diligence but has a well-oiled contract management process, then realistically you do not have a vendor management department, you have a contract management department. A regulator will identify that gap in your program during their first department interview.  

The cost savings of vendor management outsourcing will become apparent when compared to annual FTE costs. Today, vendor management as a pay-as-you-go service has never made more sense.

Take a look at the state of vendor management now in 2019. Download our whitepaper now.

state-of-third-party-risk-management-2019

Venminder Experts

Written by Venminder Experts

Venminder has a team of third party risk experts who provide advice, analysis and services to thousands of individuals in the financial services industry.

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