Your Business is Only as Safe as its Vendors. Steps to Making Sure All Your Vendors are Keeping your Business in Compliance
With increased globalization, third-party vendors are a virtual necessity for almost every business. Even small organizations have to work with some vendors for some services, whether it’s product procurement, logistics, software subscription, or transcription services.
For large businesses, the number of vendors can be astronomical. For example, Walmart works with over 100,000 vendors – and a mistake from any of them can lead to ramifications for the company.
Third-party vendors are necessary to keep up with the demands of the modern business landscape. With the efficiency and convenience of utilizing third party vendors comes greater risks to your business because of the actions of another. Vendor compliance is an important part of maintaining these relationships and ensuring that your business is protected from the actions of your third-party vendors.
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What Is Vendor Compliance?
Vendor compliance is ensuring that all the vendors you use for your business fulfill predetermined policy and legal expectations.
Depending on the size of your business, you may have third-party manufacturers, suppliers, distributors, or other agents that provide products or services to your business. Typically, the work is contracted and has terms and conditions, which ensure the vendor delivers the goods and services as required.
There are two types of compliance: basic vendor compliance and regulated vendor compliance. Basic vendor compliance is for non-regulated industries and features a third-party policy with requirements and assessments, while regulated vendor compliance involves a government-regulated industry, such as healthcare or finance.
In regulated industries, both the business and the vendor must comply with laws and regulations.
For example, employees, businesses, and vendors working in the healthcare industry must comply with the Health Insurance Portability and Accountability Act (HIPAA), which requires that all healthcare facilities with access to Protected Health Information take action to ensure the protection of patient data.
If a healthcare facility outsources a service, for example, that service must also be HIPAA compliant. A mistake on the part of the vendor providing the service could have financial and legal ramifications for the healthcare facility.
Another example is law enforcement, which may outsource transcription services to a third-party vendor. With our law enforcement transcription services, we ensure that all transcriptionists are CJIS-compliant and without a criminal background, which could have an impact on the evidence or casework.
Likewise, legal transcription services involve high-stakes situations that could have detrimental effects if done carelessly, which is why the accuracy and confidentiality of all documents, recordings, and transcripts are guaranteed.
What’s at Risk with Non-Compliance?
One of the challenges with vendor relationships is that you could end up suffering the consequences for your vendor’s actions. Whether your vendor fails to meet regulatory requirements or lacks insurance coverage, the effects will ripple out from the vendor to you.
Some of the risks of non-compliance include:
There are a number of problems that can arise from vendor non-compliance that can cost you your hard-earned reputation. Security breaches, violated laws, or poor customer service can all damage your reputation as a business partner, harming the brand, standard of service, and reputation you’ve cultivated over years – or even decades.
Strong businesses have strategies to achieve its goals. If your vendor offers products or services that don’t align with the way you conduct business, it can harm your return on investment (ROI). You not only won’t get what you paid for, but you could lose time and money to correct the error. Depending on the issue, it could cost you current or future clients.
In regulated industries, non-compliance can lead to legal actions for violating regulatory laws, requirements, or rules. This not only affects the vendor but your business as well, as you could be facing exorbitant legal fees and fines, ongoing legal issues, or other challenges.
What Is a Vendor Compliance Program?
A vendor compliance program helps you effectively manage your relationships with vendors with clear goals and parameters that hold the vendors accountable for their services, standards, and errors. Having a program in place helps you avoid unexpected costs and issues from non-compliance, such as:
- Incorrect orders
- Late deliveries
- Damaged goods
- Data leaks
- Associated labor costs
Steps to Secure Vendor Compliance
Fortunately, you can protect your business from damage caused by third-party vendors with these steps:
Conduct a Risk Assessment
Before you work with vendors, perform assessments of the risks, benefits, costs, liabilities, and more in a risk-vs.-reward analysis. For example, what would it cost your law firm if there were errors in your documents or your firm software had a breach? Could you be looking at a loss of time and money? Current and future clients? Legal troubles?
Engage all internal stakeholders and get their input. If necessary, create a third-party management position to handle your vendor relationships and policies.
Create an Assessment of Non-Compliance Costs
Once you have your risks and consequences outlined, create a detailed assessment of the issues that could arise from non-compliance. This not only makes it clear to your employees and leaders why vendor compliance is important, but it also illustrates the possible consequences to help your vendors understand the stakes and their responsibility.
Assess the Vendor
You must do your due diligence before working with a third-party vendor. Evaluate the vendor’s annual reports, financial statements, qualifications, and reputation in the industry. You should also test their knowledge of any relevant government regulations and insurance coverage, which are two areas that are vulnerable to issues with compliance.
Create a Vendor Compliance Policy
It’s important to set up expectations from the start before you work with a vendor. Create a vendor compliance policy that outlines your business’s expectations, which the vendor must agree to. As needed, include operational guidelines, legal requirements, and the consequences for the vendor if it fails to meet your expectations.
Outline Expectations in a Contract
Your compliance program is a general guideline for all third-party vendors, but each vendor should also have its own contract to ensure your guidelines are met. Contracts should include detailed information about the responsibilities for your business and the vendor, the performance standards, and the price of products or services.
In addition, include any reporting requirements, confidentiality and security clauses, audit standards, contingency plans, termination clauses, ownership and licensing clauses, dispute resolution clauses, and any other relevant legal information for your industry. The goal is to make the contract clear and transparent to ensure the vendor understands what’s expected of it.
Commit to Ongoing Vendor Compliance Management
There’s a lot of upfront work when you’re vetting and onboarding a vendor, but the work doesn’t end there. You must continue to perform analyses and evaluations after the contract to avoid issues before they can begin.
You must continue to oversee contract and policy alignment, licensing and registrations, operations, financial health, audit reports, customer feedback, insurance coverage, and other liabilities for third-party vendors. If necessary, hire a vendor compliance manager to stay on top of all third-party vendor relationships.
If you work with a large number of vendors, create a priority list. Begin with the largest vendors or the vendors that have the greatest potential risk for your organization, then work toward the smallest vendors. Every vendor needs to be assessed, but this will make it more manageable and help you to determine how often – and how in-depth – those assessments must be.
Establish Compliance as a Condition for Business
When a vendor signs off on a compliance contract, it’s a binding agreement and a condition of working with your business. There are numerous ways the mistakes on the part of a vendor can affect your business, including high costs in money, time, reputational damage, and lost clients, and it’s your responsibility to set the standard from the start and hold the vendors accountable.
Author Bio: Ben Walker
Ben Walker is a CEO, entrepreneur, and visionary leader that enjoys helping others become successful in business and in life. Ben’s company, Ditto Transcripts, provides user-friendly and cost-effective transcription services for the medical, legal, law enforcement, and financial industries for organizations all over the world. Ben is a sought after thought leader and has made contributions to publications like Entrepreneur Magazine, Inc, Forbes, and the Associated Press. Follow Ben’s Tweets: @benjaminkwalker