On average 35-40% of an organization’s expenses are accounted for by vendors, next only to employee compensation and benefits expenses. Yet, while we invest heavily in managing our employees’ performance, we choose to ignore our vendors’ performance. This is an opportunity to correct that mistake with a good Vendor Management Solution. Although most organizations are thinking about vendor management due to regulations, the real value of a Vendor Management system lies in managing not only vendor risk, but also vendor costs and performance. Selecting the right Vendor Management partner is an important decision facing many Financial Institutions at the moment.
In short, a good Vendor Management solution will ensure compliance with regulatory guidelines. But a great Vendor Management solution will not only satisfy your examiners but also increase productivity and generate cost savings.
Read on to find out what characterizes a GREAT Vendor Management solution.
- Risk Management - Despite the fact that there are many benefits to managing your vendors diligently, most organizations start to think about vendor management because of regulatory guidelines or pressure from Examiners. So let’s deal with that first.
All regulations suggest a three-pronged strategy to the risk management of third-party relationships.
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Risk Management Elements
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Risk Management Process
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Risk Assessment
Determine how important the vendor is to your organization and your ability to serve your members.
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Risk Scorecard- A set of questions to determine the criticality of the vendor. Based on the answers, the vendor is automatically assigned a risk level.
Examiners like software workflows because they ensure that a consistent process is followed across your organization to evaluate the risk of vendors.
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Due Diligence
Vendor Information and document collection. Due diligence efforts should be in-sync with the risk level.
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Risk Checklists- Standard checklists are created for each risk level and each vendor is automatically assigned a checklist when their risk profile is determined. Due diligence is generally performed by line managers. Providing them with a system to collect and organize documents increases your organization’s efficiency. Standard checklists will reduce coordination costs and prevent the collection of unnecessary documents.
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Risk Measurement and Monitoring Regularly assess the financial health, current risk, performance of the vendor. Create and follow up on risk mitigation steps where necessary.
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Risk Review Forms- A form with guidelines on evaluating the risk of a vendor. This step completes the compliance cycle. Making risk review part of the workflow ensures that you avoid the common error of just collecting documents and not reviewing them.
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While it is undoubtedly useful to have the compliance process mapped out on software, rigid software can become useless overnight if regulations change. Ensure that the scorecards, checklists etc. are customizable so that you can easily accommodate regulation changes.
2. Contract Management and Alerts – Ever missed a renewal date and gone into a contract for another year. A comprehensive contract management system should capture the critical information of all your contracts such as renewal dates and contract amounts.
- By capturing contract dates you can schedule alerts to ensure that you avoid auto-renewals on any contract. Every renewal is an opportunity to negotiate better terms and so it’s imperative to be aware of renewal and cancellation dates.
- Once your contracts are all uploaded and organized, you can engage consultants to assess your contracts and renegotiate them. There are several consultants specializing in uncovering such hidden savings but you need to get a system in place first to reap those benefits.
3. Document Management - Many organizations currently use spreadsheets for vendor management. The biggest drawback here is that spreadsheets cannot be used to manage documents. Your due diligence effort will inevitably require you to collect and store hundreds of documents and it is essential to invest in a good system to track and store these documents. A good document management system will increase the productivity of your staff, reduce paper costs and serve as a disaster recovery backup as well.
An approximation of the amount of data you will have to manage:
100 vendors = 400 documents = 600 dates
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4. Reports - Whenever you deal with a large volume of data it is important to have reports that can summarize and filter the data. Reports can give you a macro view of your organization’s third party relationships and inform your business strategy. Information such as ‘Number of critical vendors’ and ‘Number of in-house vendors’ are important considerations for various strategic decisions.
Reports are also helpful from an examination standpoint since it will be easy to retrieve and present to examiners the specific information they require.
*Ensure that the reports can be exported to spreadsheets for further analysis.
5. Decentralized Responsibility (Relationship Managers) - No single person can handle the entire due diligence workload by themselves. The most effective and meaningful way to manage the compliance process is to have different members of your staff manage different vendor relationships. This requires a system that has multiple users and role-based access. Role-based access is critical to a system like this which stores confidential documents such as contracts to ensure that sensitive information is protected.
6. Gather Staff Feedback on Vendors - Do you evaluate your vendors periodically like you evaluate your employees? Even if it is not necessary to perform a thorough assessment, shouldn’t you at least gather feedback from your staff on the vendor’s performance?
There are many ways to do this, including email and surveys. But the best way by far is to present your staff with a permanent forum through your Vendor Management system. For instance, a comments section on each vendor’s profile will give you invaluable information when it is time to renegotiate a contract.
7. Special Considerations from a Merger perspective - An often overlooked benefit of Vendor Management software is its usefulness in the merger due diligence process.
- An Excel Import feature will help you import a merger prospect’s vendor information into your system within moments, enabling further comparison and analysis to determine which vendors to retain.
- Once you have the merger prospect’s information in your system, a contract management system will help you quantify the outstanding vendor liabilities of the prospect. This is a vital part of your valuation of that business.
- The problem of auto-renewals is greatly magnified in a merger situation. Having a system in place to manage contracts and renewal dates becomes even more critical.
Choosing the right Vendor Management solution can have a significant impact on your organization. You will make the right decision as long as you think beyond compliance and consider potential benefits such as increased productivity and optimized contracts.
Please don’t hesitate to connect with our employees or customers to learn more about this project and its nuances.