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What Is the Process of Vendor Management?

4 min read
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The process of vendor management is the systematic way third-party relationships are selected, vetted, onboarded, managed and maintained. It requires an array of internal and external effort to assure that such relationships work to improve, and not inhibit, the overall success of your organization.

Here are a few of the most important facets of vendor management: 

  • Planning and developing the overall program (Policy)
  • Establishing a vendor database
  • Vendor selection, risk assessment and due diligence
  • Ongoing oversight and risk mitigation
  • Internal and external communication

The Process of Vendor Management

The process of vendor management is much like a well-choreographed dance. Every participant must know their role, how it works with others and understand specific cues. There’s also a lot of work which must be undertaken behind the scenes… long before you bring vendors and external parties into play.

Let’s go through six important action items throughout the vendor management process:

1. Plan and Set Expectations.

You’ll want to focus on building out your governance documents such as policies, program and/or procedure documentation. This is a critical, foundational component of vendor management and will include details around how you’ll provide oversight to your vendors. As you develop these, you’ll want to determine how your program is organized – which could be centralized, de-centralized or a hybrid vendor management approach.

Pro-tip: It’s critical to your program’s success to set expectations starting from c-suite and all the way throughout the organization. There are many components that play a part in the process, like business line owners, subject matter experts, legal, compliance, information security, IT and business continuity. Each “gear” in the vendor management machine should have a good idea of what their roles and responsibilities are.

2. Streamline the Day-to-Day.

Daily performance management is typically best managed by vendor or product ‘owners’ within the lines of business. They’re truly the “front line,” and are able to give an accurate, up-to-date, first-hand account of what’s going at the vendor level. 

The lines of business should be able to:

  • Maintain daily vendor communications
  • Highlight red flags
  • Oversee and manage any pending issues

The second line of defense, the vendor managers, should gather risk and due diligence information for vendors, and use the data and reporting from the first line to deliver a broad overview to senior and executive leadership and the third line of defense, the audit team, ensures everyone is working within their own policy guidance.

Establishing the flow and routine of the day-to-day, from the first line of defense (i.e., business lines) to the second and third lines helps maintain a healthy culture of communication.

3. Manage Pre-Contract Due Diligence.

Before you even think about signing any dotted lines, there is an essential pre-contract phase which needs to be established. This is a necessary and critical step in safeguarding your organization and establishing an efficient, well-oiled vendor management process.

This includes:

  • Vendor vetting
  • Due diligence
  • Risk/control(s) assessment

One of the most important tasks that occurs during this period is determining the level of risk each vendor may pose to your organization. Of course, not all of your potential vendors may be critical or high-risk, but all vendors that fall within your vendor management scope must be evaluated. While risk assessments and due diligence are best conducted pre-contract, they’ll continue well after you’ve onboarded a new vendor.

Bottom line, due diligence helps your organization avoid the heartache and back-breaking aftermath of selecting the wrong vendor and ensures the ones you do have continue to toe the line. 

4. Initiate Contract Negotiation.

Once you’ve completed the necessary due diligence on your roster of potential vendors and have a short list of viable candidates, it’s time to move forward with contract negotiation, the operative word being “negotiation.” This is all about ensuring the correct language is used in the contract and setting the necessary expectations for your new vendor(s).

Without ensuring all the proper terms and agreements are included in the contract, all that blood and sweat you put into the risk mitigating, pre-contract work could be for nothing, and ultimately may leave you wide open to other unforeseen risks.

5. Oversee Ongoing Monitoring.

It’s important to determine how your organization and the vendor will participate in the oversight process.

The oversight process should include:

  • Regular review of SLAs
  • Issue management
  • Periodic review of vendor due diligence documentation
  • Maintaining a log of any changes, issue management communications and data for the board and senior management.

6. Report and Take Action.

One of the most important components of an effective vendor management process includes reports and identifying action items. As a part of the oversight process, your vendor management team should be flagging areas of concern and keeping a tracked record of issues. Ultimately, these items should be regularly synthesized and presented to both the board and senior management, when appropriate. From there, other actions, such as remediation or termination, may be decided upon.

When it’s done well, the vendor management process helps leverage skills and products which allow your organization to grow and/or operate more efficiently while simultaneously safeguarding your personnel, customers and organization as a whole, from a variety of risks. 

Learn more about how your peers are managing the vendor management process. Download the whitepaper.

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