$150K Cost Savings Through Vendor Due Diligence Automation

$150K Cost Savings Through Vendor Due Diligence Automation

Executive Summary

Montgomery Retirement, a growing RIA with $2 billion AUM, struggled with a manual, inefficient vendor due diligence process that consumed significant resources and exposed them to unnecessary risks. Golden Door Asset helped Montgomery Retirement implement a centralized vendor risk management platform with automated background checks and continuous monitoring. This resulted in a $150,000 annual cost savings, enhanced compliance, and significantly reduced operational risk.

The Challenge

Montgomery Retirement faced several critical challenges related to their vendor due diligence process:

• High Operational Costs: The manual process, relying on spreadsheets, emails, and phone calls, required dedicated staff hours to collect, verify, and analyze vendor information. They estimated spending $250,000 annually on this process, factoring in salaries, opportunity cost, and compliance-related fines for inadequate oversight which occurred once resulting in a $10,000 fine.
• Time-Consuming and Inefficient: Each vendor onboarding took an average of 6 weeks, delaying project implementation and hindering business agility. Contract renewals were often rushed, leading to suboptimal terms and potential financial disadvantages. A recent audit highlighted that 15% of vendor contracts were renewed without proper due diligence, exposing them to potential risks.
• Limited Risk Visibility: The manual process made it difficult to gain a comprehensive view of vendor risk. Identifying potential compliance violations, cybersecurity vulnerabilities, or financial instability was challenging. Their reliance on static, point-in-time assessments meant that they missed crucial changes in vendor risk profiles between assessments.
• Lack of Standardization: Due diligence procedures varied across departments, leading to inconsistencies and gaps in risk assessment. This created difficulties in aggregating risk data and generating accurate reports for regulators and senior management. This decentralized approach led to a regulatory finding that Montgomery Retirement was not adequately documenting its vendor selection processes, carrying a potential financial penalty.
• Scalability Issues: As Montgomery Retirement continued to grow, the manual vendor due diligence process became increasingly unsustainable. The anticipated increase in vendor relationships would have further strained resources and amplified existing inefficiencies. Their projected vendor relationships growth rate was 20% year over year, making the current system untenable.

The Approach

Golden Door Asset collaborated with Montgomery Retirement to implement a comprehensive vendor risk management solution based on the following principles:

• Centralization: Consolidating vendor data and processes into a single, centralized platform to improve visibility and control.
• Automation: Automating key tasks, such as background checks, risk assessments, and monitoring, to reduce manual effort and improve efficiency.
• Standardization: Establishing clear vendor risk assessment criteria and standardized workflows to ensure consistency and compliance.
• Risk-Based Approach: Prioritizing vendor due diligence based on the criticality of the vendor and the potential impact of a disruption.
• Continuous Monitoring: Implementing ongoing monitoring of vendor performance and risk profiles to detect emerging issues promptly.

To achieve these objectives, Golden Door Asset recommended and assisted with the implementation of the following key strategies:

1. Vendor Risk Assessment Framework: Developed a comprehensive vendor risk assessment framework that considered factors such as the vendor's criticality, data access levels, regulatory requirements, and financial stability. This framework was then used to categorize vendors into different risk tiers (high, medium, low) based on their potential impact.
2. Automated Background Checks: Integrated the vendor risk management platform with LexisNexis to automate background checks on potential vendors, including criminal history, credit reports, and regulatory compliance records.
3. Ongoing Monitoring: Implemented continuous monitoring of vendor performance and risk profiles using automated alerts and notifications. This included monitoring news feeds for negative press, tracking regulatory changes, and assessing vendor financial health.
4. Clear Approval Workflows: Established clear approval workflows for vendor onboarding and contract renewals, ensuring that all necessary risk assessments were completed and documented before a vendor was approved.
5. Training and Education: Provided training and education to Montgomery Retirement's staff on vendor risk management best practices and the use of the new platform. This ensured that all employees understood their roles and responsibilities in the vendor due diligence process.

Technical Implementation

The technical implementation involved integrating a best-in-class vendor risk management platform, Aravo, with several key data sources and internal systems.

• Aravo Implementation: Configured the Aravo platform to reflect Montgomery Retirement's specific risk assessment framework, approval workflows, and reporting requirements. Customized risk questionnaires based on vendor risk tier to optimize the due diligence process.
• LexisNexis Integration: Integrated Aravo with LexisNexis to automate background checks on potential vendors. This involved establishing a secure data exchange protocol and mapping data fields between the two systems. The automation reduced the manual effort involved in background checks by 75% and improved the accuracy of the information gathered.
• Data Integration with Accounting System: Integrated Aravo with Montgomery Retirement's accounting system to automatically track vendor spending and payment history. This allowed them to identify vendors who were exceeding their allocated budget or experiencing payment issues.
• Workflow Automation: Automated the vendor onboarding process using Aravo's workflow engine. This involved defining specific tasks, roles, and deadlines for each stage of the process, such as risk assessment, contract review, and approval.
• Calculation of Cost Savings: The $150,000 cost savings was calculated by comparing the pre-implementation costs of vendor due diligence to the post-implementation costs. The calculation considered factors such as salaries, opportunity cost, and compliance-related fines.

The specific calculation was:

(Pre-Implementation Annual Costs - Post-Implementation Annual Costs) = Annual Cost Savings ($250,000 - $100,000) = $150,000

The post-implementation costs were derived from reduced labor hours due to automation, avoiding potential fines due to more thorough due diligence, and efficiency gains realized through the centralized platform.

Results & ROI

The implementation of the automated vendor due diligence process delivered significant results for Montgomery Retirement:

• Reduced Vendor Due Diligence Costs by $150,000 Annually: Automation and improved efficiency reduced the amount of time and resources required to conduct vendor due diligence. This resulted in a $150,000 annual cost savings.
• Reduced Vendor Onboarding Time by 50%: Automation and standardized workflows reduced the average vendor onboarding time from 6 weeks to 3 weeks, enabling faster project implementation and improved business agility.
• Improved Risk Visibility: The centralized vendor risk management platform provided a comprehensive view of vendor risk, enabling Montgomery Retirement to identify and mitigate potential issues more effectively. The percentage of vendors identified as high risk increased by 20% due to the deeper analysis, allowing for proactive mitigation.
• Enhanced Compliance: The automated process ensured that all necessary risk assessments were completed and documented, helping Montgomery Retirement comply with regulatory requirements. No further compliance-related fines have been incurred.
• Improved Scalability: The automated process enabled Montgomery Retirement to scale its vendor risk management program to support its continued growth.
• Return on Investment (ROI): The estimated ROI of the project was 200% based on the annual cost savings and the initial investment in the vendor risk management platform.

Key Takeaways

1. Automation is Key: Automating key tasks in the vendor due diligence process can significantly reduce costs and improve efficiency.
2. Centralization Enhances Visibility: Centralizing vendor data and processes into a single platform provides a comprehensive view of vendor risk.
3. Risk-Based Approach is Essential: Prioritize vendor due diligence based on the criticality of the vendor and the potential impact of a disruption.
4. Continuous Monitoring is Crucial: Implement ongoing monitoring of vendor performance and risk profiles to detect emerging issues promptly.
5. Training Empowers Success: Proper training on the new system is vital to maximize the automation's efficiency.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors automate compliance tasks, improve client engagement, and generate alpha. Visit our tools to see how we can help your practice.