Beyond Contracts: Elevating Vendor Oversight Through Management and Governance

In today’s hyper-connected, risk-laden environment, the stakes of third-party relationships have changed dramatically. About 75% of enterprises have faced third-party disruptions in the past three years, often stemming from poor oversight or misaligned priorities.

Yet, many organizations continue to treat vendor oversight as a tactical, back-office, contract-driven compliance function. However, vendor ecosystems are now mission-critical enablers of innovation, agility, and resilience.

To thrive, enterprises must move beyond contracts toward a holistic model where vendor management and governance converge to create accountability, strategic alignment, and long-term value.

This shift is not just strategic—it’s increasingly regulatory. In January 2023, the European Parliament enacted the Digital Operational Resilience Act (DORA) to strengthen IT security and oversight of third-party information, communication, and technology (ICT) providers in the financial sector. DORA mandates financial entities to monitor third-party risks, enforce key contractual clauses, and implement governance frameworks for critical ICT vendors, setting a new benchmark for vendor oversight across the EU and beyond.

Similarly, in the US, regulatory bodies have sharpened their focus on third-party risk:

• • In June 2023, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly released interagency guidance on third-party risk management, requiring US banks to establish robust risk-based oversight of all third-party relationships, including fintechs and cloud providers.
  • The Securities and Exchange Commission’s Cybersecurity Disclosure Rules (effective December 2023) mandate public companies to disclose material cybersecurity risks, including those originating from third-party vendors or service providers.

Across jurisdictions, third-party governance is no longer optional—it’s a regulated mandate with board-level accountability and financial consequences for noncompliance.

This article demystifies the distinction between vendor management and governance and outlines why investing in a unified, best-in-class vendor oversight framework is mission-critical.

Vendor Oversight: Management vs. Governance

Vendor oversight is no longer about monitoring vendors—it’s about maximizing their strategic value.

When unified, vendor management and governance become two sides of a resilient and innovation-ready enterprise ecosystem.

Vendor Management: The Tactical Core

Vendor management provides the foundational discipline needed to ensure vendors deliver what they have promised—on time, within scope, and in compliance with the contract.

Key vendor management practices include:

• • SLA tracking and performance reporting
  • Invoice validation and financial reconciliation
  • Issue resolution and escalation handling
  • Operational compliance and audit response

However, vendor management is typically reactive, focused on problem-solving rather than value creation. While essential to sourcing hygiene, it is limited in its ability to drive strategic transformation.

Vendor Governance: The Strategic Overlay

Vendor governance introduces a forward-looking, cross-functional framework that extends beyond performance monitoring into risk mitigation, innovation, and strategic alignment.

Core governance practices include:

• • Executive-level steering committees and governance boards
  • Joint risk assessment, regulatory alignment, and business continuity planning
  • Transformation tracking across digital, ESG, and cost levers
  • Escalation frameworks, structured quarterly business reviews (QBRs), and root cause analysis (RCA)

Digital tools such as Avasant’s AvaSense™ or AvaMark™ can support governance initiatives by enabling predictive insights and flagging potential risk breaches and performance anomalies before they impact business operations.

This industry-wide shift is evaluated in our Governance, Risk, and Compliance Services 2024 RadarView™, which finds that over 50% of the IP and assets developed by leading providers, including Wipro, Cognizant, Capgemini, and HCLTech, are focused on automating vendor risk management, implementing third-party risk frameworks, and enabling real-time risk intelligence.

Additionally, these service providers are now leveraging generative AI to automate key third-party risk management (TPRM) tasks, such as vendor discovery, risk assessments, contract analysis, and continuous monitoring.

The result? A new standard for intelligent vendor management and governance, boasting greater efficiency, enhanced accuracy, and reduced oversight latency.

This signals a clear shift: vendor oversight is no longer an internal control function—it’s a technology-enabled discipline, backed by both enterprises and service providers to address modern risk and value expectations.

Case in Point: Financial Services Leader Strengthens TPRM Globally

A global financial institution operating in 50 countries with over 500 third parties implemented a centralized TPRM platform to improve oversight and regulatory compliance.
Key moves included:

• • Standardizing risk assessments through the Archer Third Party Risk Management platform
  • Automating third-party evaluations using AI and predefined risk criteria
  • Establishing continuous monitoring based on global risk frameworks (NIST, ISO 31000, and COSO ERM)

Outcomes:

• • Reduced overall third-party risk exposure by 40%
  • Ensured compliance, thus avoiding regulatory fines worth up to $50 million
  • Improved operational efficiency by 30% through streamlined processes

Why Integration Is Non-Negotiable

Enterprises that focus on management without governance are vulnerable to operational stagnation. Those who pursue governance without management may struggle with execution.

When integrated, these disciplines deliver exponential outcomes:

Benefits of a unified approach:

• • Resilience: Governance structures proactively identify and mitigate vendor-related risks across geography, compliance, and delivery.
  • Agility: Management tracks metrics in real time while governance ensures alignment with evolving business objectives.
  • Innovation: Vendor governance creates mechanisms for co-innovation, where vendors evolve beyond “contractors” to become transformation partners.
  • Value realization: By layering governance over operational management, organizations can link performance inputs (SLAs and CSAT) to business outcomes (cost avoidance, scalability, and ESG impact).
  • Relationship strengthening: Perhaps most critically, a unified oversight model enhances the client-supplier relationship. It fosters transparency, trust, and shared accountability, turning transactional vendors into strategic collaborators aligned to business objectives and long-term value creation.

Building a Best-in-Class Framework

To establish a world-class vendor oversight program, organizations should consider the following pillars:

1. 1. Structured performance reporting: Design scorecards that integrate SLA, CSAT, and benchmarking data for Tier I and Tier II vendors.
   2. Life cycle governance: Implement escalation paths, proactive governance bodies, and formalized review cycles (for instance, operational, QBRs, and RCA protocols).
   3. Data-driven insights: Leverage platforms that centralize vendor metrics, identify breach patterns, and suggest corrective actions.
   4. Risk-centric design: Align oversight processes with enterprise risk appetite, covering geopolitical risk, compliance, and supply chain disruption.
   5. Executive sponsorship: Elevate vendor governance to a strategic enterprise concern—not just a procurement one—anchored by board-level KPIs.

The Bottom Line

In a world where vendors are deeply embedded in digital, operational, and regulatory ecosystems, oversight must evolve from checklists to strategic orchestration. Organizations that adopt a unified vendor management and governance model not only optimize performance but they also unlock competitive advantage.

Best-in-class isn’t about more bureaucracy. It’s about smarter orchestration—where performance is measured, risks are managed, and vendor value is realized in every transaction.

By James Lee, Principal, and Gaurav Dewan, Research Director, Avasant