Vendor management — often called third-party risk management (TPRM) — is the structured process of identifying, assessing, monitoring, and mitigating the risks that third-party vendors and their subcontractors pose to your institution. TRPM relies on clear policies, defined procedures, and dedicated tools and personnel to monitor and mitigate those risks throughout the entire vendor relationship lifecycle.
Vendors touch nearly every part of an institution’s operations, from the landscaping company that maintains your property to the critical technology providers powering your core systems. Because these relationships vary widely in scope and risk, effective vendor management is essential for deciding which vendors pose the greatest risk exposure — and how to manage that risk.
So, what is vendor management, why does it matter, and how can your organization adopt best practices that make a difference? Let’s take a closer look.
Related: Is Your FI Behind on TPRM? Benchmark Your Program Against Peers
Vendor management's role
Vendor management isn’t just about keeping contracts organized and tracking renewal dates. Active management of your TPRM program ensures third-party risk exposure aligns with your risk appetite while maximizing the value you receive from those relationships.
By transforming vendor relationships from routine business transactions into carefully managed partnerships. TPRM protects your organization against known and potential risks while strengthening your security and compliance posture. Whether you’re working with a critical technology provider or a lower-risk service vendor, effective vendor management ensures you understand the risks, set clear expectations, and manage relationships strategically.
Related: 5 Business Continuity Red Flags in Vendor Relationships and How to Address Them
What is the vendor management process?
Effective vendor risk management follows a structured five-phase lifecycle based on the the gold standard for third-party management, the Interagency Guidance on Third-Party Relationships. While the guidance focuses on financial institutions, the vendor management process it outlines provides a best practices framework that can be adopted by any organization.
The five phases include:
1. Planning
Planning lays the foundation for any third-party relationship. Before outsourcing services, define the business case, weigh the risks, and decide whether the vendor has the resources to manage the partnership effectively.
2. Due Diligence and Vendor Selection
With objectives in place, it’s time to move to due diligence. This step ensures a potential vendor can deliver on expectations, comply with regulatory standards, and operate safely. The depth of due diligence should match the level of risk and complexity — critical vendors require deeper scrutiny.
3. Contract Negotiation
Contracts are essential to third-party relationships, documenting responsibilities, obligations, and performance standards. Higher-risk relationships call for more detailed provisions that clarify responsibilities of the third-party and your internal team, mitigate risk, and strengthen oversight.
4. Ongoing Monitoring
Ongoing oversight of third-party relationships helps ensure vendors maintain strong risk controls, honor contractual commitments, and deliver on service expectations. Continuous monitoring also positions organizations to respond quickly to incidents, addressing issues before they escalate.
5. Termination
Having a clear exit strategy is key when a third-party relationship ends. Contracts should address causes for termination, related costs, and the handling of data and intellectual property. A transition plan also helps ensure continuity if services are moved to another provider.
| Phase | Purpose | Key Activities |
| Planning | Define business case, weigh risks, and evaluate vendor resources before outsourcing. |
|
| Due Diligence & Vendor Selection | Assess whether the vendor can meet expectations, comply with regulations, and operate securely. |
|
| Contract Negotiation | Document responsibilities, obligations, and performance standards to mitigate risk. |
|
| Ongoing Monitoring | Continuously evaluate vendor performance, risk controls, and contractual compliance. |
|
| Termination | Manage exit strategy, data handling, and transition to ensure continuity and minimize disruption. |
|
This comprehensive approach ensures that every aspect of the vendor relationship is effectively managed from initial consideration through final termination.
Related: Vendor Management: What Banks Need to Know About New Guidance
Why is vendor management important?
Vendor management is important because your vendors’ actions directly impact your institution’s reputation, financial health, and ability to operate safely and efficiently. In today’s environment, where organizations rely on hundreds of third parties, even a single weak link can create significant risk.
According to the Ncontracts 2025 Third-Party Risk Management Survey, 49% of surveyed financial institutions (FIs) experienced a low or moderate-impact third-party cyber incident in the past year. A 2024 report found that 98% of organizations have a relationship with at least one third-party vendor that has experienced a breach in the last two years. These are insights that underscore how critical effective vendor management has become for organizations across all industries, including financial services.
Over the past 12 months, 46% of FIs experienced a low-impact incident; 5% are unsure; and 3% experienced a moderate-impact incident.
The stakes are particularly high because:
- Your reputation is tied to your vendors' performance. You can easily damage your organization's reputation by being associated with a vendor data breach, compliance violation, or service failure. Remember, customers don't distinguish between your mistakes and your vendors' mistakes — they just know something went wrong.
- The financial exposure is real. Vendor failures can result in significant losses through business disruptions, direct costs, regulatory fines, and legal expenses. According to IBM’s Cost of a Data Breach Report 2024, the U.S. led the world in average breach cost at $9.36 million.
- Operational risks can be devastating. When critical vendors fail to perform, your ability to serve customers and meet business objectives suffers. The ripple effects can be felt throughout your organization and impact your bottom line.
- You're on the hook for everything your vendors do. Regulators hold your organization accountable for vendor actions, making no distinction between activities you perform directly and those your vendors perform on your behalf. When your vendor fails, it becomes your failure in the eyes of regulators and customers alike.
What are the benefits of vendor management?
A strong vendor management program does more than keep your institution out of trouble — it creates measurable value. While risk mitigation is critical to avoid losses and regulatory violations, effective vendor management delivers benefits that extend far beyond compliance.
Clear expectations and structured oversight can push vendors to deliver better performance. Contract reviews and smarter vendor selection can uncover meaningful cost savings, often revealing duplicate services or outdated agreements that drain resources.
The payoff isn’t only financial. Centralized information and standardized processes reduce administrative burden and strengthen compliance. When vendors are well-managed, they’re not just service providers — they become true partners. They resolve issues quickly, deliver higher-quality services, and often bring strategic insights that sharpen your competitive edge.
Related: Third-Party Breaches: Lessons from Allianz Life, Salesforce, and the Rise of Social Engineering
What are the challenges of vendor management?
Vendor management isn’t easy in today’s environment. Most institutions juggle oversight for hundreds of vendors with limited staff — 73% manage TPRM with two or fewer employees, even while overseeing 300+ vendors. That’s a lot of risk concentrated in very few hands!
The challenge deepens with fourth, fifth, and nth-party vendors. Most vendors rely on their own internal subcontractors, creating hidden risk layers that are harder to track. According to the Ncontracts TPRM report, 58% of institutions review their vendors’ TPRM programs, 25% assess only critical fourth parties, and 26% don’t monitor them at all. When contracts, due diligence documents, and performance reports are scattered across departments, oversight gaps multiply. Without standardized processes, vendor management becomes reactive — leaving institutions vulnerable.
What are vendor management best practices?
Vendor management best practices provide the structure and consistency institutions need to reduce risk, meet regulatory expectations, and get more value from vendor relationships. By focusing on governance, relationship management, and operational resiliency, organizations can turn vendor oversight into a driver of both compliance and performance.
Organization and governance
- Centralize documentation: Keep all vendor policies, procedures, and records in one place for easy access at any time.
- Clarify roles: Vendor management is a team effort. Define responsibilities clearly so everyone knows how their work fits into the bigger picture.
- Secure leadership support: Board oversight of major vendor agreements ensures alignment with organizational goals and regulatory expectations.
Strategic relationship management
- Set clear expectations: Define what success looks like from the start and ensure expectations are aligned on both sides.
- Think long-term: Strong, stable relationships often deliver better value than chasing marginal cost savings.
- Focus on total value: Consider quality, reliability, and support — not just price.
Operational resiliency
- Prioritize by risk: Focus oversight on high-risk and critical vendors while ensuring all vendor relationships receive an appropriate level of monitoring.
- Standardize processes: Use consistent procedures for selection, onboarding, and management to reduce gaps.
- Resolve issues quickly: Address problems promptly and work collaboratively to implement lasting solutions.
Related: Critical Components of an Effective Incident Response Plan
Vendor management in financial services
In financial services, vendor management isn’t optional—it’s a regulatory expectation. Regulators view weak oversight as an “unsafe and unsound” practice, and institutions are held fully accountable for the actions of their vendors.
The Interagency Guidance from the OCC, FDIC and Federal Reserve stresses the importance of managing “critical” vendors, since failures can trigger significant operational, financial, and reputational harm. Unlike other industries, financial institutions face additional complexity due to strict data privacy standards, business continuity obligations, and exposure to multiple, overlapping risk types.
The same holds true in wealth management, where the SEC and FINRA expect firms to exercise strong oversight of third parties that support investment advisers and broker-dealers. Whether it’s a technology provider handling sensitive client data or a research service shaping investment decisions, regulators hold firms responsible for ensuring vendors operate safely, securely, and in the best interest of clients.
As a result, effective vendor management across banking and wealth management requires a structured, top-down approach. Institutions must balance regulatory demands with operational efficiency, applying consistent oversight across hundreds of vendors to protect customers, maintain resilience, and satisfy examiner expectations.
Related: A Guide to Governance for Financial Institutions
FAQs
What is the vendor management lifecycle?
The vendor management lifecycle is the structured process institutions use to manage third-party relationships from start to finish. It spans five key phases — planning, due diligence and selection, contract negotiation, ongoing monitoring, and termination — ensuring risks are identified, performance is measured, and obligations are met at every stage of the relationship.
Which vendors require the most oversight?
Vendors that provide critical services, access sensitive customer data, or could significantly disrupt operations if they fail require the highest level of oversight. These “critical” vendors pose material regulatory, financial, and reputational risks — making rigorous due diligence, monitoring, and board-level attention essential.
How often should vendor risk assessments be updated?
While low-risk vendors may require less frequent updates, critical and high-risk vendor assessments should be performed regularly or when significant changes occur in the vendor's business or regulatory environment. Think of risk assessments as living documents that need regular refreshing.
What's the difference between third-party and fourth-party vendors?
Third-party vendors are companies you contract with directly. Fourth-party vendors are subcontractors your third-party vendors use. Both create risk, but fourth-party risks are often harder to see and manage.
What tools are used for vendor management?
Effective vendor management relies on technology to centralize data, streamline processes, and strengthen oversight. Common tools include vendor management software for contract tracking, due diligence, vendor risk assessments, vendor monitoring tools and reporting. These tools replace scattered spreadsheets and emails with a structured system that supports accountability and efficiency.
How can small organizations implement vendor management with limited resources?
Focus on critical vendors first. Leverage vendor management technology for automation where possible and consider outsourcing specialized tasks like contract reviews or cybersecurity monitoring to free up internal resources for strategic activities. Vendor management is no longer back-office function — it’s a strategic priority tied directly to risk, compliance, and growth. Institutions that invest in strong vendor oversight are better positioned to avoid disruptions, strengthen resilience, and build trust with customers and regulators. Now is the time to evaluate your vendor management practices and determine whether your tools, processes, and governance can keep up.
Getting due diligence documents is a crucial part of vendor management, but sometimes vendors won't provide the documentation you need. Learn what to do when a vendor doesn’t respond — step-by-step — in our guide.
Subscribe to the Nsight Blog
What is a Third Party?
What Is VMS
