vendor management best practices: is your program up to par?
TRANSCRIPT
1Copyright 2015©, All rights reserved, 3W Partners LLC
August 12, 2015
Sponsored by…Scott Roller
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Principal & Founder – 3W Partners LLC 25 Years – Fortune 500 Companies
• Telecom • Financial Services
Leadership Roles in• Global Vendor Management• Ops / Strategy / Re-engineering• Outsourcing / Training
TL9001 (“ISO for telecom”)• Certified Lead Auditor
Regulators
Gov’t Entities
Ratings Agencies
Others
OCC, OTS, CFPB
Fannie, Freddie, GAO
Moody’s, Fitch, S&P
ISO, Accounting firms
Audited by…
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Brief History Why the intense focus on vendors? What led us here?
Changing Landscape Financial Crisis ~2008 Vendor management Prior to… and Now Heightened regulator focus areas
What Regulators Expect 12 Key Dimensions Good resources to self-educate
Technology & Tools Increase you chances of success
Third-Party Oversight & Governance (TPOG)
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Financial Crisis 2008
Vendor focus very limited:• Business continuity• Financial strength• Credit risk
Prior to the Crisis
Activities were outsourced• Unfortunately, so was
vendor responsibility and accountability
Vendors seen as a major contributing factor to the crisis
Post-mortem
Inadequate oversight from financial institutions
Hidden risks when relationships are not managed closely
Resulted in massive fraud and consumer distress
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Regulators have a renewed focus on third-party oversight
Regulatory Response to the Financial Crisis
OCC
CFPB
Federal Reserve Board
FDIC
NCUA
Considerable Attention Institutions must bear responsibility for supplier misdeeds
• Numerous “casualties” already Major focus on consumer interaction with vendors Enterprise-wide engagement, especially executives Push for independent reviews
Will focus on 12 Key Dimensions today
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What I often see within the industry
Programs are not overly mature Financials Continuity of business Data and site security
Hard to budget for vendor risk managementLed by single group
Versus cross-section of the enterpriseNot part of larger enterprise-wide Risk Program
Minimal investment
In Smaller Organizations Lack of manpower Inadequate skills Problems often tied to 2nd tier vendors
Have we learned anything from the financial crisis?
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Recent examples… and consequences
Collectively, they paid a total of more than $530 million to settle complaints of deceptive selling and predatory behavior by their third-party suppliers.
Source: http://www.mckinsey.com/insights/risk_management/managing_when_vendor_and_supplier_risk_becomes_your_own
July 2013
Net Message: No one ever remembers the vendor name
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OCC
CFPB
Federal Reserve Board
NCUA
FDIC
On Third-Party Oversight & Governance
OCC Bulletin 2013-29
Supervisory Letter No.: 07-01
Letter: Guidance For Managing Third-Party Risk
Bulletin 2012-03 Service Providers
SR 13-19 Guidance on Managing Outsourcing Risk
Fortunately, expectations resemble one another
• OCC Bulletin 2001-47• OCC Bulletin 2002-16: Foreign-Based Third-Party Service Providers
• FDIC Compliance Manual, December 2012• FIL-44-2008: Guidance for Managing Third-Party Risk• FIL-50-2001: Bank Technology Bulletin: Technology OutsourcingInformation Documents
• SR 00-4 (SUP): Outsourcing of Information Technology and Transaction• Processing
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Risk Classification
Due Diligence
On-Boarding
Contracts
Compliance
Audits
MIS / Reporting
Scorecards
Annual Certifications
Complaint Handling
Escalations
Governance
These cover most regulatory expectations
Execute these well… satisfy your regulator(s)
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Risk Classification
For effective third-party oversight
Risk-based segmentation Scope and intensity of oversight is defined here Must consider risks to…
• Legal & Regulatory• Reputation• Sensitivity of data• Process complexity• Customer interface/impact• Public or private vendor
• Domestic• Offshore
• Core Bank Function• Non-Core
• Number of similar suppliers• Percent of volume handled
Other Considerations
• Strategic (High)• Major (Med)• Basic (Low)
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On-Boarding
Due Diligence
Assess the process of how suppliers are… • Sought• Vetted• Selected (and retained)
Consider vendor questionnaire and evaluation matrix
Have a plan to implement the vendor relationship• Technology, telecom, recruit, train (including compliance), etc.
Critical: System Entitlements• Limit vendor access to only what is “required”• Have a revocation process
o Consider revoking within 24-hours of leaving
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Contracts
Regulators have specific expectations regarding vendor contracts Examples of often-overlooked clauses:
• Use of subcontractors• Termination for default• Compliance with laws• Privacy policy (sensitive info)• Electronic Transportable Media• Right to audit• Licensing
• Indemnification• Notification of complaints• Handling of media inquiries• Service level monitoring• Limitation of liability• GSA “Excluded Party List”• HUD’s “Limited Denial of Participation”
What is required of you …Is also required of ALL members of your “supply chain.”
Make it contractual.
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Compliance
Audits
Identify all relevant compliance requirements and document how requirements are being met
Regulatory updates and change management process effectiveness• Flow down to vendors (operations, contracts, scorecards, etc.)
Do your vendors...• “Say what they do?” (via Policy & Procedure Manual)• “Do what they say?” (can vendors demonstrate it?)
Have an audit schedule and comprehensive plan Ensure risks are documented and controls are in place.
• Strategic (High)• Major (Med)• Basic (Low)
Risk Classification• Twice per year• Once per year• Every other year
“Potential” Audit Frequency
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MIS / Reporting
Scorecards
You need timely and effective reporting in all supplier relationships. Demonstrate you have sufficient visibility and control.
Hard to achieve safety and soundness without robust reporting
Identify key performance indicators (KPI)s, track and report on them. Document vendor improvement plans.
• Drive accountability. Regular reviews.
• Evidence of follow-up and actionso Warning noticeso Training, certificationo Volume adjustmentso Expanded or decreased scope of work
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Annual Certifications
Re-certify vendors annually.
No more
• Financials• Licensing• Insurance• Data security• Capacity / Staffing• SLA performance• Process reviews• Compliance• Customer impact• Fees & incentives
• Use of subcontractors• Training (especially compliance)• Business continuity• Audit results • Complaints• Media attention• Pending litigation• Mergers & Acquisitions• Ownership changes• Compensation practices
Very labor intensive dimension
Keeping up with all changes: Yours, vendors, regulators, etc.• Assessing the impacts annually, at minimum.
Due Diligence
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Complaint Handling
Requires an effective method of capturing, responding to and resolving complaints.
• Especially where suppliers are involved. Complaint source and severity: Major, Moderate, Minor. Linkage of root cause back to the operation. Report to senior leadership.
Escalations
When supplier problems arise, must have effective identification, escalation and management of issues.
Escalate to appropriate levels. Special review committee? Examples:
• Bad press• Multiple system outages• Multiple complaints
• SLAs repeatedly not met• Downgraded financials• Fraud event• Audit findings
Define your future reactions
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Governance
Senior executive and/or Board Member engagement• “Fingerprints everywhere”
o Drive and approve policyo Monitor vendor platform (via regular readouts)
At-will access to vendor resultso Sign-off on vendor selection and recertification (and action/exit)o Audit trail of their engagement
Proposed: Two Tier Governance Model
Executive Committee
Operations Committee
Drive Vendor…• Performance / Quality• Control & Compliance• Risk & Change Mgmt.• Audits• Volume Allocations• Contingency plans
Sets “TONE at the TOP”• Strategic Alignment• Risk appetite• Policy• Verify adequate oversight• Ask questions• Approve, Suspend & Terminate
Extremely useful when managing vendors and risks Centralized repository; Security Portal for easy access Clear, actionable management reports and well-designed workflow
systems • Essential for accountability across the institution
Measure your level of dependence on critical suppliers
Build vs. Buy Building a new third-party risk application from scratch is a big
undertaking; • So too is enhancing a current risk tool to perform new functions
Consider “off-the-shelf” workflow and risk-management tools
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Healthy, transparent and compliant Consistency across vendors
• OK to manage according to risk segmentation Documentation
• Policy & procedure; Roles & responsibilities• Audit trail
Performance based criteria Adequate staffing for oversight
• Number of resources• Skill and competency
Executive engagement• “Fingerprints everywhere”
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Third-party relationships must be good for financial institution, its vendors and consumers
Leverage technology where possible
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Questions?
Scott RollerPrincipal / Founder3W Partners [email protected] cellwww.3Wpartners.net
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