Why Do You Need a Vendor Management Policy

The Federal Acquisition Regulation defines a “vendor” as an entity with which the government has or will enter into a contract, grant, cooperative agreement, or other transaction to obtain property or services for the direct benefit or use of the government. All organizations that perform work for the federal government or purchase goods/services from third parties are required to monitor and evaluate their vendors to ensure critical functions, such as security, quality assurance, cost control, and business continuity plans are in place.

The need for a vendor management program exists when an organization finds inadequate resources or insufficient knowledge, skills, or capability to manage its involvement with third parties effectively. One consequence of ineffective processes is the increased risk to your agency, mission, and employees. Vulnerabilities include:

  • Improper performance of work or services.
  • Mismanagement of funds and assets.
  • Fraud.
  • Loss of intellectual property.
  • Violations of security and privacy laws and regulations.
  • Other legal concerns.

One way to minimize these risks is to establish a robust vendor management program.

The Purpose and Importance of Vendor Management Policy

So what exactly is a “vendor management policy”? A well-defined and implemented vendor management policy is a critical component of any organization’s overall governance framework. Effective policies are not just about implementing regulations, but instead provide:

  • The foundation for developing strong internal controls.
  • Managing risks associated with third-party business relationships.
  • Setting expectations for vendors and coordinating partner relationships across the enterprise.

The purpose of a vendor management program is to establish processes and procedures for managing the risks associated with contractors, subcontractors, and other third parties with whom your agency has business-related interactions. A well-managed vendor management process enables an organization to accomplish its mission efficiently while mitigating associated risks.

A Vendor Management Policy (VMP) ensures that a vendor-supplied product meets the security requirements, adheres to the security policy, and complies with other organization policies such as privacy and confidentiality. The VMP documents all known aspects related to all software products, services, or hardware systems provided by a vendor to an organization.

A comprehensive yet fundamental VMP will ensure that vendors have implemented processes and procedures to enhance security from the initial development phase of products or services to its implementation, operation, retirement, and disposal phases. A vendor provides different levels of security (e.g., risk, maturity, or assurance levels) depending on the product and its involvement with an organization’s business processes. A VMP will identify these levels and aims for a higher level of security to be implemented through contractual means. The benefits of implementing a VMP include:

  • Giving the organization better control over its vendors’ practices. It is helping the organization determine what security-relevant activities and products a vendor use in providing its service or product.
  • Aiding the organization in evaluating the security level of various contracts with vendors.
  • Giving guidelines for identifying suitable vendors to work with based on their commitment to security.

Things to Consider When Creating a Vendor Management Policy

The policy document should provide an overview of the process for managing vendor risk in general, including initial selection (e.g., developing the request for proposal), ongoing monitoring, contract management, and ongoing due diligence. It should also describe the organization’s approach to managing specific types of vendor risk. Consider the following things when developing a VMP:

  1. Define a vendor risk management policy at the organizational level.

The policy development process is a group effort that includes representatives from across the organization. It should be discussed in detail during an organization-wide meeting to involve everyone who can contribute to the process. It will ensure all aspects are considered, including the necessary supporting procedures. The group should also discuss how often your organization will review the policy and procedure documents for relevance, accuracy, and completeness.

  1. Consider the organization’s risk management strategy.

Implicitly or explicitly, each organizational unit has its risk tolerance level and will likely have some unique requirements involving vendors. In this light, a vendor risk management policy should outline the goals and policies of the organization-wide strategy. It should also provide an organizing structure or framework for handling vendor-related risks in each organizational unit and explain how to conduct due diligence when selecting new vendors and ongoing vendor monitoring.

  1. Define your vendors.

The policy should help define what constitutes a vendor, how vendors are categorized and managed, and what types of risks might arise in the relationship with vendors. Management will then be better able to select tools and processes to handle those different risks appropriately. The goal is to convey the organizational message that the risk of working with vendors has always been an integral part of management’s oversight activities. Not only should due diligence be applied to vendor selection, but ongoing monitoring is also essential. The policy and procedures should consider that each type of vendor will have its risks associated with it. It will be necessary to tailor the policy and procedures according to vendor type. If vendors are categorized by risk, there should be separate sections or subsections addressing management processes for each category.

  1. Incorporate a description of risk management processes.

The policy should help management understand how it can manage risk by identifying different areas where risks exist. Incorporating a description of risk management processes helps set realistic expectations for the outcomes of those processes.

  1. Establish metrics for measuring effectiveness. 

The policy should detail the information and measurements used to assess performance, identify gaps in management processes and procedures, and take necessary corrective action.

  1. Review your policy regularly.

You should periodically review the policy for relevance, accuracy, and completeness and, where appropriate, update it to reflect changes in the organization’s risk profile. A review policy is especially helpful when the business risks associated with vendors are increased or decreased. If the organization’s overall risk profile changes significantly (e.g., if a portion of its business is sold), a policy review may be required to help determine what new vendor-related risks have arisen and how your organization should manage them.

It is important to remember that management of vendor-related risk involves more than just the development of policy and procedures. Mitigating vendor-related risks is an ongoing effort requiring management planning, continuous monitoring, and periodic reassessment. The time and effort required for day-to-day monitoring will be extensive, especially in high-risk environments.

Vendors should not be seen as mere vendors; they should be viewed from a risk perspective, incorporating the organizational approach to managing the risk of working with vendors. Management should be aware that new risks may arise due to this unique perspective, and existing risks will evolve. If you need any help developing your policy or any other cybersecurity or compliance-related questions, feel free to contact us today!

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