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The Components of a Vendor Management Process

March 25, 2025

There are likely several vendors you work with that help you manage various aspects of your business, such as IT service providers, accounting software companies, and even outsourced payroll processors. Implementing a vendor management process can help you evaluate your vendors upfront to ensure they’ll be able to meet your business’s operational and security needs during normal business times or when they unexpectedly experience an interruption in the service they provide.

Components of a vendor management process include:

  • Classifying your vendors and assigning a risk rating
  • Creating a standard list of vendor questions
  • Vetting each vendor prior to signing a contract with them
  • Continuing to regularly evaluate each vendor on an ongoing basis

Classify Your Vendors

The first step is to identify and classify vendors using a risk-based approach. This classification system determines the level of oversight required for each vendor based on their service provision.

Key classification indicators include:

  • Business criticality: Is the vendor essential to your customer service model?
  • Data sensitivity: Will the vendor host you or your customers’ sensitive or confidential data?
  • Regulatory impact: Could the vendor impact your ability to stay in compliance with regulations?

Using the indicators above, assign a suitable risk rating:

  • Critical risk: Vendors crucial to your business operations.
  • High risk: Vendors with access to your sensitive data and high operational dependency.
  • Moderate risk: Vendors with limited access to your data and moderate operational impact.
  • Minor risk: Vendors with no access to your sensitive data and minimal operational impact.

Do Your Due Diligence

Conduct thorough due diligence before onboarding vendors. This step ensures they meet your security, operational, and compliance standards.

Create a standard list of vendor questions

Develop a standard list of due diligence questions for onboarding new vendors and reviewing existing vendors. These questions should cover various aspects of vendor operations and security measures:

  1. Request and review system and organization control (SOC) reports.
  2. Inquire about the vendor’s regulatory requirements and request recent audit reports.
  3. Evaluate privacy protection efforts including privacy statements.
  4. Verify insurance coverage, including cyber insurance.
  5. Review incident response, business continuity, and disaster recovery plans.
  6. Assess the vendor’s financial stability through their recent financial reports.
  7. Examine access controls (multi-factor authentication, single sign-on, password requirements).
  8. Review security assessment reports, including vulnerability and penetration testing.

Ongoing Vendor Management

Prioritize and adjust your evaluation process based on vendor classification.

Review critical vendors at least annually or more frequently if necessary and monitor for red flags such as lawsuits, negative publicity, security breaches, lowered agency ratings, or unstable financial standing.

Benefits of Effective Vendor Management

  1. Improved risk mitigation and security.
  2. Enhanced operational efficiency.
  3. Stronger vendor relationships.
  4. Standardized selection and onboarding processes.
  5. Better alignment with business objectives and regulatory requirements.

By implementing a comprehensive vendor management process, you can make informed decisions, build robust vendor partnerships, and effectively manage risks. This proactive approach ensures that vendors continue to meet the evolving needs of your business while maintaining high standards of security and operational excellence.

This content was provided by an OSCPA partner, INTRUST Bank. Learn more about INTRUST Bank and access their experts at intrustbank.com.