Want to build a strong vendor management program that aligns all three lines of defense? As financial institutions outsource more and more to third-party vendors, fintechs, consultants and other partners, it's more important than ever to make sure your institution is treating vendor management like a team sport that it is.
In this post, we'll dig into the three lines of defense and how to implement them across every stage of the vendor management lifecycle.
Read also: 4 Reasons to Add Cyber Monitoring to Your Vendor Management Program
Vendor management is all about managing risk and ensuring there are controls in place to mitigate the risk of doing business with a third-party vendor.
A vendor management program is how a financial institution proactively oversees its relationships with third parties. This can include activities such as selecting and onboarding vendors, monitoring vendor performance, managing vendor contracts and agreements, ensuring vendor compliance with regulations and standards, and evaluating and mitigating risks associated with working with vendors.
The goal of a vendor management program is to maximize the value received from vendor relationships while minimizing risk by ensuring that vendors are compliant, able to protect your data, operationally and financially sound, and represent your institution well.
The Three Lines of Defense (now known as the Three Lines model) is a risk management tool designed to help financial institutions achieve strategic objectives and create and protect value.
Focusing on governance and collaboration, the model details the role of each of the three lines in an organization and the relationship they need to have with the board and each other.
Those roles include:
The First Line: The managers and process owners responsible for the institution’s day-to-day activities. They create and apply internal controls and respond to the risks in their area.
In a vendor management program, the first line is made up of the vendor owners and those that work with vendors on a day-to-day business. They are in a position to identify and report on problems like vendor service outages or customer complaints.
The Second Line: The second line provides expertise, support, monitoring, and challenge on risk-related matters. Essential to decision-making, they proactively test and monitor high-risk areas and create and execute the policies, procedures & systems that oversee and guide the first line. (This typically includes the compliance and risk management functions.)
In a vendor management program, this often includes the compliance department, risk management or vendor management function, and IT.
The Third Line: Internal audit provides independent and objective assurance and advice on the adequacy and effectiveness of governance and risk management.
The third line in a vendor management program includes those who perform audits and compliance and quality assurance reviews.
Related: Tips for Implementing 3 Lines of Defense in your CMS from a Compliance Pro
Applying the three lines model to vendor management
The Three Lines Model requires each of the three lines to work together towards a common risk management goal. Success with the three lines relies on clear communication and a common risk management language so that each line knows its role and communicates its findings.
The good news is that this work needed to align the three lines should already be built into any good vendor management program.
The vendor lifecycle
In its simplest form, the vendor lifecycle includes four phases: