How a Vendor Management System Works and Why You Need It

For every third-party vendor an organization uses, there are often many employees, fourth parties, and nth parties behind it. The current business landscape is becoming more interconnected as organizations rely on vast networks of vendors, suppliers, and contracts.  

This reliance on third parties and expanded supply chains increases the risks an organization faces. In fact, a recent study showed that third-party vendor and supply chain data breaches increased by 68% over the course of one year. Managing these vendors and their risks can be challenging, particularly for organizations that use hundreds or even thousands of vendors. Identifying, assessing, managing, and mitigating each vendor’s risk, while also monitoring their vendors’ risks, can seem almost impossible. 

Many regulators have also taken note of these increased vendor and supply chain risks. For many organizations, vendor management is no longer a suggestion – it’s a requirement. To effectively protect your organization and meet regulatory requirements, a vendor management system can be a critical service for your organization to use. In this blog, we’ll talk about what a vendor management system is, why you need it, and how a vendor management system works.  

Related: 14 Ways Vendor Risk Management Software and Services Help

What Is a Vendor Management System? 

A vendor management system is a software as a service (SaaS) solution designed to help organizations manage their vendor relationships as well as the risks associated with the products and services those vendors provide. These systems offer the capabilities to decrease your organization’s workload, provide innovative automation, manage your vendors through the entire lifecycle, and monitor new and emerging risks. Many vendor management software providers also offer professional services such as vendor risk controls assessments, due diligence documentation collection, and more. 

By using a vendor management system and services your organization can be better protected from vendor risks without feeling overwhelmed by large vendor inventories. With the right system in place, your organization can focus on more important vendor management tasks.   

Related: Best Third-Party Risk Management Platform Features

Why You Need a Vendor Management System  

As organizations increasingly turn to technology to offer more advanced products and services, the same expectation should be applied to your vendor management program. Many regulators, examiners, and auditors expect vendor management processes to be sound and efficient, moving away from time-consuming and manual processes like spreadsheets, which can be error-prone.  

Related: A Business Case for Third-Party Risk Management

Here are some reasons why your organization should invest in a vendor management system: 

• Less manual effort – Not only are spreadsheets time-consuming to create, it’s also a challenge to track and update each spreadsheet. These solutions can’t be maintained over a long period of time and can often lead to more errors and confusion between stakeholders. A vendor management system offers one centralized place to store, manage, and track data.  
• More cost savings – Instead of paying employees to spend time on small administrative tasks, a vendor management system can take care of that work. This can lead to significant cost savings, as it reduces the time spent on administrative tasks, minimizes errors, and improves efficiency.  
• Room to grow and scale – A vendor management system can scale with your organization. Your vendor inventory size will likely only continue to grow, and your vendor management processes will continue to evolve over time. A vendor management system can be scaled to include more vendors and changed processes. As your vendor management program matures, a system can provide consistency across the vendor inventory and limit any rework required to scale your program.   
• Centralizes document storage – It can be confusing for stakeholders to navigate where vendor information is held when it’s in multiple places. This can often be a mix of emails, documents, and spreadsheets that’s challenging to track down. A vendor management system provides a centralized place to store vendor contracts and due diligence information, which is easier for stakeholders to find and access.  
• Manages the entire vendor lifecycle – Vendors need to be onboarded, continuously monitored, and then offboarded as necessary. A vendor management system provides one place for your organization to track each vendor. It provides solutions like initial risk and criticality assessments, risk intelligence, contract management, and offboarding procedures.  
• Automates reporting – A vendor management system can provide customized templates and reporting automations, which makes it easier to report on your organization’s vendors. Instead of spending time on ad-hoc reports, you can create a customized set of reports to address vendor risk data points. These data-driven insights help your organization make better decisions on vendor relationships and your vendor management strategy.  

How Does a Vendor Management System Work? 

Now that we’ve covered why you need a vendor management system, let’s discuss how it works. The right vendor management system will meet your organization’s specific needs and goals. For example, if your organization is lagging behind in its vendor onboarding process, you may want to look for a system that offers due diligence document collection and automated processes for onboarding. A vendor management system should help your organization achieve its goals and manage vendor risks efficiently.  

Here are 5 key features to look for a vendor management system: 

• Configurable features – Since your organization has its own unique needs, a vendor management system should offer configurable features. You should be able to tailor system features and functionality to meet your organization’s needs, including workflows for stakeholders, and risk assessments with your organization’s scoring preferences.  
• Customer support and training – A vendor management system should offer ongoing support to ensure your organization is taking advantage of the features to use the system and services efficiently. This should also include comprehensive training in how to use key features of the system. Support from a vendor management system helps ensure smooth implementation and then continuous improvement.  
• Automated tasks and reports – This feature will save your organization from investing in manual efforts that are prone to errors. Routine tasks like due diligence document collection, vendor management reporting, email requests and reminders, and workflows should be available to automate.  
• Contract management – A vendor management system should include capabilities to create, store, and track vendor contracts. This should include tracking deadlines to ensure important dates aren’t missed and key contractual terms the vendor should meet.  
• Subject matter expertise – As your organization assesses vendor risks, subject matter expertise is a critical component. They provide valuable insights into the vendor’s risks and controls and offer guidance on the vendor’s risk rating. However, many organizations may not have access to experts in every area of risk. Many vendor management systems offer the service to supplement this missing expertise for your organization. These experts can help navigate vendor relationships, ensure compliance with industry standards, and offer input on your vendor management strategy.    

As more organizations rely on broad networks of third-party vendors, a vendor management system offers a solution to improve efficiency and better manage vendor risks. Investing in a vendor management system will save your organization from time-consuming tasks, scale with your organization as it grows, and manage vendor risks from the beginning of the relationship to the end.