Editor’s Note: Part I of this article was previously featured on PM Boulevard and addressed best practices for laying a foundation for a Vendor Management Program. See the Related Articles (top right) to access Part I. Part II, here, focuses on the vendor selection process.

A key component of a mature Vendor Management Program (VMP) is to drive accountability into the decision making process, whether it is centralized in a corporate function or decentralized in the business unit line management. Requiring Business Units to prepare a detailed and complete justification document for new vendors will force business managers to clearly think through their requirements. All vendors must be selected based on objective evaluation standards.

The selection process needs to allow for some degree of flexibility based on various factors, including overall costs, project risks, and complexity. Following is a collection of sample selection questions. To implement an effective process, a centralized unit needs to have the authority to review all decision requests for new vendors.

Business case/justification (sample questions)

1. Describe in detail the current issue or challenges that require the external provider.

2. Indicate the type of product or service that will be provided and how this service will solve the current business issue.

3. Describe how this service supports one or more strategic business objectives.

4. Describe how this service improves the current operational environment, e.g., improves internal controls, complies with legal/regulatory requirements, enhances customer experience, provides new products, etc.

5. Indicate why this service cannot be performed by in-house staff.

6. For vendor contracts over X number of dollars, please indicate if we have prepared an RFP in accordance with bank standards. Please attach the RFP.

7. If an RFP is not applicable, please provide a summary of your business requirements.

Vendor assessment (sample questions)

1. Describe the full range of products and/or services provided by the vendor.

2. Has this vendor performed similar tasks successfully in the enterprise or at a similar organization? Please describe.

3. Please list the vendor’s current customers for this solution.

4. Provide a summary of at least three vendor references and contact information.

5. Indicate if technical staff evaluated the vendor’s technical capability. If not, please provide the reason.

6. Describe the details of any lawsuits pending against the vendor for non-performance of contractual obligations.

7. Please advise how you determined the vendor’s financial viability. Have the last three years of audited statements been reviewed, and are there any circumstances disclosed by said statements that could preclude the vendor from completing its obligations? If so, by which internal organization? Please comment on the circumstances.

8. Does the vendor or its affiliates have an existing customer relationship with the institution? If so, please describe.

9. Does the vendor provide knowledge transfer as part of their offering? Please describe.

10. Have we drafted provisions within the proposed contract to terminate the contract at will for non-performance?

11. Has the legal department reviewed and approved the vendor’s employment contract?

Cost/benefit analysis (sample question)

1. Provide a detailed cost/benefit analysis detailing how this service will provide a positive ROI to the company.

Vendor Scorecard: Performance Monitoring

Vendor scorecards should be established to continuously monitor and assess strategic vendors. Monitoring and assessment requirements should be tied to a comprehensive risk assessment that includes minimum criteria such as total spend, access to customer data, financial stability, provisions for business continuity planning, etc. External certifications such as SAS70 will likely be required for high-risk vendors. All vendor selections should be tracked and actively managed in a vendor management repository. On-site reviews and audits will need to be conducted for external vendors to test and verify risk assessments and associated control environments.

Periodic performance reviews

The evaluation of existing vendors is an on-going process. Each business unit engaging outside vendors needs to designate an individual or group responsible for evaluating the effectiveness of vendor performance. The frequency and depth of the evaluation will depend upon the scope and risk exposure of each vendor. A sample evaluation form is presented below.

Guidelines need to be developed to assist the business unit in completing their evaluations. A business unit must provide a detailed explanation of the reasons why a vendor scoring in the poor category is still being retained. The results of these assessments should be stored in the vendor management system to track positive and negative trends.

Governance Structure

A VMP needs to have a formal governance structure to ensure that the program is achieving its objectives. The following table is a summary of the key roles and responsibilities.

Conclusion

The role of the Vendor Management Program is rapidly changing in financial institutions. Historically, the VMP has served as a control function that existed primarily to negotiate down costs of services and leverage the buying power of the institution. Those activities are still important, but the role is much more strategic; the VMP should be seen as a strategic service provider that proactively partners with the lines of business, technology, program management, and finance to help identify, select, monitor, and report on partner relationships that are critical to the enterprise. The VMP leadership must thoroughly understand the strategic goals and objectives for the organization and provide a key role of strategic alignment, operational risk management, and cost containment.

The leading VMP teams across the globe proactively work with both internal business units and vendors to foster strong and synergistic partnerships that result in innovative solutions. Many host vendor strategic management conferences to ensure that the key vendor partners understand the strategic priorities of the institution. They also constantly monitor the environment for new or emerging risks and partner with the internal stakeholders to help ensure that clear SLAs are established with the vendor partners, performance is measured, and issues are addressed promptly and completely.

In today’s rapidly changing global financial services market, Vendor Management should be viewed as a key leadership function that bridges and aligns internal business, operations, and technology leadership with external vendor partners that are critical to the success of the organizational vision and mission.

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