Vendor Consolidation: What It Means for Vendor Management and Due Diligence
In a world where systems need to be able to communicate, many financial institutions are choosing to consolidate vendors, using a single third-party service provider with a variety of product and service offerings to limit redundancy, save money, and streamline integration.
It’s a move that makes sense from a business and management perspective, but how does it impact vendor management? It all comes down to due diligence.
You need to vet your vendors so that you have:
- A relationship that meets expectations.
- Good customer service.
- Evolving products and services.
A Relationship That Meets Expectations
Every vendor should do what it says it will, but when a single vendor is responsible for a large chunk of critical products and services, it is extremely important that it will live up to its promises. That’s where due diligence and a strong service level agreement (SLA) fit in.
Initial and ongoing due diligence
Management should conduct third-party vendor due diligence before a contract is signed and throughout the duration of the relationship. The more products and services a vendor provides, the greater the risk and the deeper the diligence should go. The goal is to understand the vendor’s financials, experience, legal and regulatory knowledge, reputation, business continuity, operations, and controls. Just because an institution has dealt with a vendor in the past doesn’t mean it can skimp on due diligence when taking on a new activity.
Service-level agreements for vendor contracts
An SLA clearly outlines expectations and provides tools for ensuring they are met. These include term definitions, controls and performance standards. Decide what’s important to your financial institution and set measurable, specific benchmarks. Don’t just say you expect reliable systems. Instead, specify up-time. For instance, you may expect bill payment to be available 99.9 percent of the time each month. If you aren’t specific, the vendor may disagree with you when you complain that bill payment isn’t reliable and then refuse to fix the problem. Require vendors to give you monitoring tools and reports such as SSAE 18s to help you gauge performance. Include financial penalties for breaches of contract to hold the vendor accountable.
Good Customer Service
It’s natural that things will go wrong sometimes, and you’ll need help getting back on track. It’s not enough for a customer service team to be responsive. It must also be well integrated with staff that has a deep understanding of all the products and services it provides.
One of the benefits of a using a single vendor is not having to play the “blame the other vendor game,” going back and forth between vendors as each denies responsibility. Investigate how your vendor handles service issues and whether you’ll get bounced around between departments dedicated to mobile banking and online account opening or whether one contact will be able to address all issues. Get a feel for how and how quickly problems will be addressed. It’s no fun being bounced between vendors, but it’s even more frustrating when it’s a single vendor doing the bouncing.
You also want a vendor that listens to your feedback. If you encounter bugs, need new products or services, or have ideas to make things work smoother, you want a vendor eager to hear what you have to say and find solutions.
Evolving Products and Services
The banking world is constantly advancing, and you want to keep pace. Make sure your vendor is a partner who will do that by asking about enhancements.
Being thorough doesn’t mean asking 100 questions. It means asking about the things that are most important to your institution and seeking answers that demonstrate that those elements meet your needs.
For instance, if a product isn’t fully fleshed out yet and the vendor is promising enhancements will be ready soon, it can be useful to ask:
- What’s the expected timeline?
- What budget/resources are dedicated to the project?
- Can you give examples of past enhancements?
- Do you have references?
The vendor might be able to tell you that two years ago it had two products and now has five products that do many more things. It might tell you that is has grown its development staff from four to six over the past year. It could tell you how frequently it enhances existing products. It could also tell you it’s not dedicating resources to a project right now, indicating it’s being sunsetted.
When it comes to vetting, it’s all about quality over quantity. While having many vendors creates challenges in terms of balancing a variety of contracts, risk assessments, due diligence documents and other administrative tasks, vendor consolidation also requires strong vendor management.
Don’t let having fewer vendors throw you off your vendor management game.
Learn about the 5 steps to vendor onboarding in our free
Ultimate Guide to Fintech & Third-Party Vendor Onboarding.
Related: Vendor Risk Countdown: Top 10 Risks Third-Party Vendors Pose to Your Financial Institution
Topics: Risk & Compliance, Integrated Risk Blog,