VIEWPOINT: The Eight Levels of Vendor Management

By Brown, Royce; Cheek, Timothy | American Banker, July 9, 2010 | Go to article overview

VIEWPOINT: The Eight Levels of Vendor Management


Brown, Royce, Cheek, Timothy, American Banker


Byline: Royce Brown and Timothy Cheek

Vendor management can be a perfunctory exercise to satisfy FDIC and OCC compliance checklists. Or it can be a richly rewarding discipline that furthers a bank's most strategic goals.

Since you must have a function in place, why not climb what we call the "vendor management value curve"? After all, there are good reasons why it is important:

* Regulators have made it a priority. OCC guidelines couldn't be clearer: "Many third-party relationships should be subject to the same risk management, security, privacy and other consumer protection policies that would be expected if a national bank were conducting the activities directly."

* Cost pressures have increased outsourcing, with more vendors playing more critical roles. From the mundane (document shredding) to the customer-facing (contact centers), to the innovative (mobile), it is not unusual for a midsize bank to have a hundred vital vendor relationships and large banks many more.

* Outsourcing brings uncertainty. Studies suggest a third of outsourcing projects fall short or fail. Implementations are prone to delays and overruns. In today's fast-changing, tight-margin environment, that translates to higher risk.

* Vendors' own situations can have serious implications, potentially involving security or customer privacy breaches, fraud or the collapse of the vendor. Bank profits and reputation can be at stake in vendor relations.

How to build an effective vendor management function? There are eight levels for escalating vendor value: availability, reference checks, unit cost comparison, basic spend analytics, advanced spend analytics, balance scorecard/strategic alignment, advanced selection/engagement and strategic vendor alliances.

At the first levels vendor management is narrowly focused. Is the vendor available for the job? Do the vendor's references and capabilities meet the business requirements of the project? At this stage integrated vendor management does not deliver appreciably more value than separate buyers of vendor solutions would on their own. But a consistent approach creates a stepping stone to greater value.

Next strive to ensure that the bank is getting the most for its vendor spend. It helps the buyer compare vendors on cost and provides basic spend analytics: With which vendors are we doing business? What internal groups are driving that business?

Additional value is generated when vendor management categorizes and consolidates spend data, performs decision-support analytics and compares actual spend to forecast. Is our spending focused on revenue opportunities or day-to-day operations? Which vendors regularly meet or exceed budget and why?

Then strong vendor management asks not just how do we manage our vendor spend, but what is the overall return on our vendor spend? What indirect costs should be included - what is the "total cost of ownership"? …

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