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What Is a Vendor Management Program?

3 min read
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When we say, “vendor management program,” what we really mean is a plan established to protect your organization from vendor risk. When you outsource a product or service to a third-party vendor (or even to a fourth-party vendor) you’re exposing your organization to a whole host of risks, including financial, operational, reputational, transactional and more. Sounds a wee bit concerning, doesn’t it? Well… that’s because it can be. Don’t panic quite yet. Let’s take a moment to review some pretty important vendor management program details and it should all get a bit clearer.

What Is the Purpose of a Vendor Management Program?

First, remember that a vendor management program’s purpose is three things to instruct senior management and the lines of business:

  • Control cost
  • Drive service excellence
  • Mitigate risks throughout the vendor lifecycle

Always keep those 3 elements in mind as you go forth on your vendor management journey.

3 Lines of Defense in Vendor Management

Ok, now, let’s move on to your three lines of defense. They come into play a lot in a vendor management program:

  1. The first line of defense: Your front line, aka the business units, are the ones who interact day-to-day with your vendors.
  2. The second line of defense: This is your vendor management team who oversees the vendor management program.
  3. The third line of defense: This is the compliance and audit team who will evaluate the program provide updates on any changes that need to be made.

6 Stages of Vendor Management

The 6 stages of vendor management help us better shape what a vendor management program is and why it’s so important. These stages are scoping, inherent risk and criticality assessment, due diligence and residual risk determination, vendor selection and contract management, ongoing monitoring and termination. Guiding vendors diligently through this lifecycle is truly what a vendor management program is all about.

Here’s why:

1. Scoping is the first element that needs managed in any vendor management program. Scoping is essential in getting the best of your third-party risk management resources.  You need to define what a vendor/third party/provider is to you and in turn determine the scope of relationships that should and should not be a part of this lifecycle.

2. Inherent risk and criticality assessment are vital to a comprehensive third-party risk management program. In order to understand the risk a vendor poses your organization; you must consider the relationship and evaluate all considerations of outsourcing. In this stage the goal is to understand the most amount of risk the engagement could pose, and how critical they are (or will be) to your organization.

3. Every program involves gathering and analyzing due diligence and determining residual risk. This means reaching out to the vendor to obtain items like financials, SOC reports, policies and procedures, business continuity planning reports and more. And then, taking it a step further, thoroughly review the information provided to verify that it meets expectations. You can use your first line of defense to help you obtain the documentation and internal subject matter experts to assist with reviewing (e.g., CPA for financial reviews, IS team to review SOC assessments) before determining the remaining (or residual) risk.

4. In the vendor selection and contract management phase, you’ll want to choose the best vendor, and then go through the process for administering sound written agreements with third parties which include negotiation, change management and ongoing maintenance. Contractual standards must be developed and are an important element of a vendor management program. So, for example, always set forth in contract your organization and vendor’s responsibilities and expectations. In addition, consider things like negotiation, contract start dates and end dates and more. This is something that needs to be managed and a vendor management program helps with that.

5. Ongoing monitoring is a huge component of any vendor management program. It’s extremely important to continuously monitor the vendors you’re managing and assess their risk to see if anything new has happened.

6. Last, there is termination.  If the vendor relationship has come to an end, it’s time to ensure exit strategy requirements are met and to notify the vendor so they can update contract non-renewal.

There’s so much to a vendor management program. Understandably, it can be overwhelming. However, with the right knowledge and tools, it can become a lot clearer.

Read 10 best practices that all really strong vendor managers follow. Download the infographic.

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