A vendor management program is a framework for ensuring vendor relationships deliver value without creating unnecessary risk. A strong vendor management program leverages tools, processes, workflows, and clear guidelines to help your organization maximize the benefits of outsourcing while protecting itself from harm.
Vendors bring risks that can damage your organization’s reputation, finances, and operations. Just consider data breaches. A recent study found vendor data breaches increased almost 70% in 2023. From large national banks and automakers to hospitals and telecom providers – even the U.S. Treasury – vendor data breaches are everyday events.
How do you guard against a third-party data breach? You need to choose a vendor with strong cybersecurity and data protection measures – and the ability to demonstrate an ongoing commitment to maintaining them. The only way to do this effectively is by implementing a vendor management program.
A vendor management program is all about risk mitigation. It helps your organization identify potential vendors, perform risk assessments, negotiate favorable vendor contracts, and continuously monitor vendor risks.
Let’s explore key vendor management program details that will help ensure confidence in your vendor relationships.
Related: What Is Third-Party Risk? A Quick Look for Beginners
What Is the Purpose of a Vendor Management Program?
A vendor management program is essential for mitigating vendor risks and supporting your organization’s strategic goals. It ensures vendors meet your standards while delivering quality products and services. By defining clear expectations and performance metrics, a vendor management program holds vendors accountable for their performance.
With a robust program, your organization is better protected from risks like data breaches, financial instability, and reputational damage. It provides structured processes to identify the potential risks of working with a vendor, assess its ability to mitigate those risks, keep tabs on what the vendor is doing, and address potential issues before they escalate.
Although a vendor management program may seem like an added expense, it actually drives cost savings. With the right tools and processes, you can negotiate better vendor contracts, eliminate duplicate outsourcing, and avoid costly vendor-related problems.
Ultimately, a vendor management program offers a systematic way to manage the risks of outsourcing, ensuring your organization benefits from strong, reliable vendor relationships.
Related: 10 Types of Vendor Risks to Monitor
The Structure of a Vendor Management Program
To create an effective vendor management program, your organization needs the right structure. It begins with key roles and responsibilities.
These roles provide a clear framework for your vendor management program:
- Vendor owner (the first line of defense): Vendor owners are the individuals who regularly interact with vendors. As the primary point of contact, they address issues as they arise and serve as the organization's go-to experts on vendor products and services. Their role is critical in identifying and managing risks associated with vendor relationships. Vendor owners are responsible for monitoring performance, conducting regular reviews, and providing feedback to ensure vendors meet expectations and align with organizational goals.
- Vendor management team (second line of defense): This team oversees the vendor management program, providing guidance and setting clear requirements to ensure consistency. They’re also responsible for implementing vendor management across the organization. They develop vendor management policies and procedures and ensure they align with the organization’s strategic goals.
- Internal audit (third line of protection): Compliance and audit teams evaluate compliance with internal policies, regulatory requirements, and industry best practices. Auditors identify weak vendor management controls, noncompliance, and potential risk. They maintain the vendor management program’s transparency and accountability.
Related: Who Is Responsible for Third-Party Risk Management?
The Stages of a Vendor Management Program
A vendor management program should identify, assess, mitigate, and monitor vendor risks. Following a structured approach to vendor management ensures consistency when managing vendor relationships.
Here are the stages of vendor management:
- Onboarding is the first stage of vendor management, where organizations evaluate and select new vendors. Onboarding includes three key steps:
- Planning and risk assessments: Establishes business requirements and the need to outsource the activity. Roles and responsibilities for the vendor relationship are also set. Inherent risk and criticality assessments make it possible to understand vendor risks.
- Due diligence: A thorough due diligence process evaluates the vendor’s capabilities, financial stability, compliance, and overall risk profile. Reach out to the vendor for items like financial reports, a SOC report, policies and procedures, and business continuity and disaster recovery plans.
- Contracting: Set clear expectations and define service level agreements (SLAs) in the vendor contract. Contract provisions include a right to audit, data breach notification requirements, data protection requirements, and termination provisions, among others. Develop standard contract terms and conditions to use in the vendor contract.
- Ongoing monitoring is a huge component of any vendor management program. Closely monitor your vendor’s performance and risk profile to identify problems and new or emerging risks.
- Re-assessments: Collect due diligence documentation if there are changes in the vendor’s risk. The vendor should also review the inherent risk assessment and update it if necessary.
- Risk and performance monitoring: Regularly monitor and review the vendor’s risk and performance. Create a process to track SLAs and establish a monitoring and review schedule based on the vendor’s risk.
- Contract renewals: Track dates like contract renewals and expirations to ensure you have enough time to change the contract if necessary.
- Due diligence: All due diligence documents should be current and accurate. Some documentation (e.g., insurance certificates) can expire, while others evolve with business needs and the risk environment (e.g., business continuity and disaster recovery plans) so collect and review the most current documents.
- Offboarding a vendor safely and securely is essential when ending the relationship. It includes these three steps:
- Termination: Formally notify the vendor that the contract won’t be renewed.
- Exit plan execution: The exit strategy is determined during vendor onboarding. Execute the strategy, including returning or destroying sensitive data and removing vendor access.
- TPRM closure: Close out last steps, including paying final invoices and updating the vendor status in all systems.
A vendor management program protects your organization and sets your vendor relationships up for success. Assign roles and responsibilities to manage vendor relationships from beginning to end and follow the stages of vendor management for a consistent and effective process.
How can your organization develop a mindset to proactively manage vendor risks?
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