How to ensure vendor compliance when buying and renewing SaaS
Compliance and Security
Empower your supplier relationships with effective vendor compliance. Uncover the secrets to crafting a robust vendor compliance program in this essential guide.
Building a relationship with a new supplier requires investing time to ensure a quality experience for both parties.
To do this, it’s vital to move beyond a transactional approach to suppliers. But how do you measure the health and resilience of supplier relationships? How do you know your vendors will do what they promise?
Vendor management backed by a robust vendor compliance program is the best way to ensure your suppliers hold up their end of agreements. A good management program helps build relationships that work for both parties while reducing risk and costs.
Let’s look at the components of a successful vendor compliance program and how implementing one transforms your supply chain and outcomes.
What is vendor compliance?
Vendor compliance refers to a supplier's ability to adhere to the details of an agreement. Depending on supply type and contract specifics, managing vendor compliance parameters may include monitoring:
- Product labeling and quality
- Regulatory compliance (such as adhering to GDPR guidelines)
- Availability and backorder management
- Product substitutions
- Pricing and service tier offerings
- On-time delivery and logistics
- Uptime and service level specifications
- Purchase order and invoice matching
- Social and sustainability requirements
Tracking and reporting on vendor compliance increases the success of an agreement and ensures all parties uphold the contract and its objectives.
Why vendor compliance is essential
Vendor compliance isn’t just idealistic or wishful: It can have a significant real-world financial impact on your organization.
Vendors who fall out of compliance present significant risks for organizations that work with them. Closely evaluating potential suppliers before signing an agreement — and monitoring their activities after — reduces the potential of introducing third-party vendor risk. A periodic performance review is one of the best ways to avoid noncompliance-based risk before it spirals out of control.
Maintaining a high level of vendor compliance stabilizes your relationships and the organization. Keeping a close eye on product quality, software uptime, and delivery timelines creates an environment where milestones are completed on time and business continuity is ensured.
Vendor compliance can stabilize your costs and supply chain management process by:
- Ensuring timely deliveries to optimize inventory control and production timelines
- Avoiding surcharges in transportation costs to guarantee consistent inbound freight costs
- Reducing bottom-line spending on supplies, services, and software
Saves money and time
High levels of vendor compliance create efficient systems that reduce project timelines and minimize wasteful or maverick spending.
The secondary benefit of fostering strong supplier relationships with good communication is to get better pricing, more advantageous terms, and increased cooperation in bringing projects to fruition. All of these factors make your supply chain more resilient and cost-effective.
What are the costs of non-compliance?
At the minimum, non-compliant vendors make your organization less efficient, costing you time (and, by proxy, money).
For example, a vendor who fails to meet support ticket resolution time standards prevents your team from quickly solving issues and jumping back into work.
On the other end, a non-compliant vendor can leave you with a serious data security problem. If they don’t meet current data security legislation and are subject to a data breach, you could be the victim of hefty fines and a potential PR nightmare.
Because vendor compliance is so substantial, it’s integral to consider it far before you notice any issues.
When to establish a vendor compliance program
The best time to establish a vendor compliance program is long before you have non-compliance issues. If there are no problems, investing time into building a vendor compliance program may seem unnecessary. But the downside of waiting is the potential of incurring high costs and enduring problematic delays.
When surveyed, 90 percent of organizations said they had experienced negative effects due to third-party risk incidents in the last year, and over half plan to expand their third-party risk management during 2022.
Steps to secure vendor compliance
Now is the time to establish a vendor compliance program, so here are the first four steps for securing compliance.
1. Design your vendor compliance policy
Start by clearly stipulating your internal expectations for working with vendors.
This is not the contract you hold with each vendor, nor is it a template for one. Instead, it describes your boundaries when working with a third party, what risks you are willing or not willing to accept, what degree of leniency you allow for contract non-compliance and the actions your vendor managers should take in the event of a non-compliant supplier.
2. Start with a risk assessment
Next, you’ll want to perform a variety of assessments of third-party risks. Analyze types of risk such as:
- SaaS security risk (the possibility of a data breach)
- Financial risk (the possibility of the vendor going out of business
- PR risk (the possibility of a damaging PR scandal on their part impacting your reputation)
For each risk, itemize the benefits and liabilities of working with each vendor, analyzing each relationship in terms of both risk and reward.
3. Lock in your contracts
A good vendor compliance framework involves establishing a formal agreement with every supplier you work with. These contracts should outline details such as:
- Delivery timeframes and expectations
- Costs and associated fees
- Expectations about support responses
- Limits on liability
- Termination and dispute resolution clauses
- Performance and audit stands
4. Begin your vendor compliance management program
Now that your risks are assessed and your expectations communicated, the vendor compliance management program begins.
This program focuses on monitoring vendor performance and compliance, auditing suppliers, and addressing issues of concern.
What to include in a vendor compliance program
A thoughtfully constructed vendor compliance program starts by analyzing where your organization would like to go and forms a plan for tracking the progress toward that goal in each vendor relationship. The following components of your program ensure you have the vision and visibility to realize those goals.
Goals and outcomes
Before successfully ensuring compliance and risk management, you must know what those outcomes look like for your organization. Developing a documented policy regarding vendor compliance can clarify and codify these needs and give negotiators and suppliers a place to start when developing partnerships. This policy should also outline the cost of non-compliance and its impact on production, continuity, and customer satisfaction.
Documented vendor compliance policy
A compliance program can only be successful if there are associated consequences for noncompliance. Therefore an essential part of your program is documentation regarding noncompliance penalties and vendor chargebacks.
Codifying and acknowledging these policies within your contract ensures that all parties know the expectations for the supplier relationship and the vendor’s responsibility if they fail to meet them.
When evaluating a vendor that doesn’t have a security compliance certification (for instance, SOC 2 or ISO 27001), be sure to have a well-developed supplier questionnaire available.
Requiring a questionnaire as part of the vendor evaluation and negotiation process can offer a higher assurance that your potential supplier follows reasonable procedures and aligns with your organization's compliance goals.
Contract standards and prerequisites
Beyond contract non-compliance policies within your vendor compliance program, outlining the key departmental prerequisites for every contract is essential. Doing so streamlines the evaluation process by including only those suppliers who can meet departmental compliance requirements. This ensures satisfaction for both internal and external stakeholders.
The best way to ensure high success rates with your vendor compliance program is to select and closely monitor key performance metrics (KPIs) for your program.
By outlining your high-priority metrics in advance and closely monitoring them during routine vendor evaluation, you ensure a firm understanding of the activities and conditions that lead to success. You can also be sure your suppliers meet those conditions over the contract term.
Onboarding and offboarding processes
Good compliance means setting suppliers up for success both at the beginning and end of the relationship. Establishing a supplier onboarding process and a robust offboarding process ensures compliance survives the honeymoon period at the beginning of a new partnership. It also ensures adherence to post-contractual clauses, for instance, those concerning data deletion or retention.
How to enforce vendor compliance
Developing a system for enforcing compliance with your selected vendors is as important as outlining the objectives and signposts of success. The components of an effective compliance policy help build relationships with your suppliers that result in high compliance levels.
Implement strategic sourcing
Selecting high-quality suppliers from the beginning saves much mitigation and hand-wringing when issues arise. By implementing a solid evaluation process, you can weed out potential supplier issues before they impact your organization.
Fostering open and continuous communication with your suppliers during the contract term is the best way to avoid potential compliance issues before they happen. By enabling excellent two-way communication, you clarify and set expectations with your supplier, putting them in the best position for success.
Once you establish your compliance parameters, successfully communicating them to suppliers ensures everyone knows where they stand during the contract. A process for acknowledging and rectifying compliance exceptions can take the frustration and awkwardness out of these interactions. Good exception management is a cornerstone of positive, continuous supplier communication.
Even small organizations may have relationships with hundreds of suppliers. Organizing and tracking each relationship is the best way to ensure strong and healthy partnerships.
Using a vendor management platform’s automation power to monitor and evaluate supplier relationships makes the process easier and more streamlined. The right platform brings together contract management, supplier negotiation, and compliance monitoring in one place.
How Vendr’s SaaS buying and management practices ensure vendor compliance
Implementing vendor management with Vendr gives organizations a high level of visibility into their software spending, contract management, and supplier relationship management. By using an automated vendor management platform, organizations can reduce the most common sources of supplier risk, implement solid vendor evaluation programs, and ensure high levels of compliance with contract terms and conditions.