The Pacific Tsunami Warning Center in Ewa Beach, Hawaii detects, locates, and determines the magnitude of potentially tsunami genic earthquakes and issues warnings of imminent risk. Similarly the Federal Reserve Board is responsible for detecting, locating and determining the magnitude of potential risks posed by financial institutions on the U.S. and global economies.
In the wake of the Dodd-Frank Act and the Federal Reserve Board’s announcement that it is conducting Vendor Management Discovery Reviews, this paper examines the impact of the growing importance of Vendor Management and governance on the way financial organizations interact with service providers. The observations and recommendations included in this white paper are focused on preparing the reader to fully appreciate the risks involved in forming a multi-sourcing strategy, the Federal Reserve Board’s likely direction in conducting initial Discovery Reviews and how to prepare for and perform well in a Discovery Review.
One of the cornerstones of the Dodd-Frank Act is its requirement that financial institutions identify and mitigate “systemic risk”—the risk that results from the interconnectedness of major financial institutions with multiple sourcing providers. Therefore financial institutions are under the obligation to ensure they have deployed vendor management practices designed to support effective risk management in a multi-sourcing strategy and to optimize service outcomes.
Vendor Management is the set of processes, tools, policies, and organization structures affecting the way a sourcing relationship is directed, administered or controlled. The developments in recent years has highlighted the need for a vendor management operating framework that fully addresses the four pillars of vendor management:
Financial Management, and
These four pillars are broken into sixteen operating dimension that provide a framework for comparing your vendor management practices against those factors the Federal Reserve Board will likely be reviewing as part of a Discovery Review. The Purpose of Vendor Management is to ensure that:
Providers are aligned with the business sourcing strategy and are delivering the anticipated benefits,
Providers can act as an enabler to the business – by exploiting opportunities and maximizing benefits,
Provider resources are used responsibly, and
Provider related risks are managed appropriately.
Having the proper structure, tools, processes and skill and competent resources in place not only reduces operational risk, but can produce significant financial returns on a multi-sourcing strategy. The concepts discussed in this paper, if applied, can bring to your organization, the confidence that it is aligned with recognized industry best practices and is well prepared to face a Federal Reserve Board Discovery Review.