Blog  Vendor Management Best Practices

Vendor Management Best Practices

| Blog, Third Party Risk Management


Vendors perform a critical role for most businesses today. When the relationship between an organization and the companies and contractors with whom it does business is managed effectively, all parties reap the benefits. Creating and implementing a system of vendor management best practices gives everyone involved a clear road map that leads to open communications, clear expectations and mutual success.

Lay the Groundwork

Before you can even think about making and enforcing a vendor management plan, you need to get the lay of the land concerning your company’s baseline situation. An effective strategy is impossible without the following foundational attributes:

  • A contract life cycle management system
  • A centralized location or record where vender relations management (VRM) data is stored
  • An awareness of the vulnerabilities in your network system and the accompanying risks
  • A rudimentary understanding of your current VRM status
  • Awareness of who vendors are and the financial resources allocated to each.

Since no organization is perfect, there are always improvements to be made in your vendor management best practices. Accentuating your protocols involves determining what aspects of the relationship can be quantified and then tracking and measuring them.

Best Vendor Management Practices: Metrics

According to the Institute for Supply Management, there are five key areas of supplier management activity on which your company should focus. They include the following:

  • Spend visibility. How much money do you spend on each vendor annually? Knowing this enables you to understand which suppliers are most critical to your business and its performance.
  • Vendor classification. Segment your suppliers by categories such as high-value, important or mid-value and tactical or low-value. These divisions according to importance to your business can help you as you establish a vendor management template.
  • Collaboration. When you work closely with vendor partners, you can gain a more complete understanding of their business practices and culture. An ongoing, cordial relationship can help when the time comes for a vendor performance review. Furthermore, should the worst happen and a data breach or other challenges occur, a history of positive relationships can enable both parties to work together effectively throughout the crisis.
  • Vendor key performance indicators (KPIs). Without concrete measurements based on historical performance, a vendor will have no benchmarks and be unable to improve. Therefore, it is incumbent on you and your suppliers to agree on specific vendor management KPI indicators. These might include gauging performance against standards agreed upon in a contract, meeting measurable targets such as item quality or service level, expressed user satisfaction and business risk.

These KPIs should be tracked over time, and there should be a built-in mechanism that kicks in if the vendor fails to meet benchmarks. On a regular basis, all parties should meet to conduct formal performance reviews that include a scorecard quantifying how well the third-party vendor’s services are meeting expectations. 

In addition, your company should periodically evaluate how the supplier’s performance is affecting your bottom line and overall goals and objectives. Success happens when communication flows naturally among all stakeholders, with challenges and impediments being addressed when they arise.

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Risk Management

No matter what industry a business might be in or its size, risks are inevitable. For instance, an organization in the financial industry must constantly be on the lookout for software and data vulnerabilities that could compromise sensitive customer data. On the other hand, manufacturers need to keep vigilant about problems with their supply chain, environmental regulation compliance and product theft. 

Regardless of your individual situation, you need to implement a risk management strategy that considers all possible scenarios that could reasonably occur with suppliers and other vendors. For each of these stories, mitigation solutions should be found long before any real problems happen.

Vendor Security Posture KPI Concerns

These days, it is not just global organizations that manage, store or transmit customer credit card data that need to be concerned about cybersecurity. Combine that with the fact that more and more companies are outsourcing many of their functions to third-party vendors, and it becomes clear that measuring vendors’ security posture KPI’S is very wise advice indeed. The following are important metrics that should be the foundation of how to manage vendor best practices:

  • Implement a regular process to review all suppliers and vendors, determining which remain critical.
  • Evaluate all contracts to ensure that they include important cybersecurity benchmarks, specifying notification protocols in the event of a breach.
  • Require that all vendors purchase cyber liability insurance to protect you in case of a cyber attack.
  • Measure how long it takes a vendor to close data leaks and other vulnerabilities as well as the time required to respond to an actual security incident.

Ideally, the organization-vender relationship should be a fine balance, a mutually beneficial collaboration that helps all parties to achieve specified goals and objectives. Implementation of and agreement upon a comprehensive strategy for managing vendors should be a high priority for the stakeholders within your business. Once it is in place, all members of the team will have a clear idea both of your expectations and how you will go about measuring whether they have been met.

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