If a vendor's performance is deteriorating, look for signs of stress on its balance sheet. It may be time to look for alternates to reduce your risk. This can be accomplished only if your relationship managers work hand-in-hand with your vendor program manager to capture such trends.

If the vendor's performance is deteriorating while its balance sheet is getting stronger, it may be time to discuss how to improve performance or reduce contract cost. Feedback on a vendor's performance from your staff and relationship manager is the key here.

Selecting a good vendor management system and getting all your managers involved is a necessity. Much like you invest in various employee management training programs, vendor management training for your managers should be considered. Think about setting up an internal ranking system for your vendors and allow for feedback from your staff. After all, we all use Rotten Tomatoes for movie reviews and it works. Applying the same principles to gauging vendor performance can help you rate your vendors.

Examiners are looking for a consistent process end-to-end. Whether it is your criteria for classification of vendors, vendor selection process, due diligence check lists or overall assessment, having a documented and repeatable process keeps you compliant. The basic process as laid out by NCUA Letter No. 07-CU-13 is a good way to start a vendor management setup. The NCUA suggests a three-step approach: risk assessment, due diligence, and risk measurement and monitoring. Risk assessment is important because not all vendors have the same risk profile. Vendors must be categorized based on the criticality of the service they offer, among other criteria. The due diligence required for each vendor depends on their risk categorization. This ensures that controls are proportional to risk. Finally, it is important to establish policies and procedures to measure vendor risk and performance and then monitor these parameters on an ongoing basis.

Most vendor management products on the market already come with a compliance-ready setup, well worth the expense. All credit unions should additionally have a process to share reports with your board, documenting the risks associated with your vendors and the risk mitigation steps undertaken. All this can be done by your compliance team and chief financial officer and will be enough for ensuring compliance.

In these tough times, keeping a firm grip on your expenses is critical, and vendor management is a great place to start. A good vendor management program has the potential to help your credit union refocus and make sound business decisions on one of the biggest buckets of expenses you incur. For most credit unions the noninterest operating expense for vendor payments amounts to 40% to 45% each year. A 5% decrease in these vendor costs will reduce your total operating expense by 2%.

It is worth pointing out that the most expense you can incur from a vendor relationship is when the vendor goes out of business without adequate time for an organized replacement. An obvious benefit of periodically evaluating whether the most important of your vendor relationships are with sustainable businesses and stress-free is the potential elimination of such surprises.

By focusing on vendor performance management, there are savings of a few percentage points every year. This alternate setup requires you to centralize your vendor information (for your compliance manager to oversee it) and decentralize the responsibility to gather information from all your vendors. The return on this project is guaranteed and the payback should be within the first year.

If every credit union has a way to rank vendor performance, then sharing such rankings with other credit unions is not a stretch. After all, we already see several credit union employees regularly hit the "like" button of the vendor's Facebook page, a definite step in that direction.

All new Web 2.0 solutions, including vendor management solutions, should allow you to gather feedback from across your credit union staff today. The next wave of innovation should allow credit unions to look at the industry's view of any vendor for any particular product or service. Online communities of credit unions, such as your state league community, will soon start sharing their experience and assessment on any vendor in real-time!

Vendor management should be all about performance management, resulting in reduced risks and costs. Compliance is a needed and desirable end-product of this change, but it should not be the only objective. This journey should start with a meeting of the CEO, controller, and compliance manager and continue with meetings with other managers and employees.

Paroon Chadha is co-founder and vice president of Passageways.

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