Understanding vendor compliance and its importance in SaaS businesses

SaaS vendors should have the appropriate certifications and stay up-to-date with compliance requirements. Depending on the industry and the data type involved, vendors need to comply with standards like HIPAA, ISO 27001, SOC 2, and PCI DSS. Failure to follow these regulations can result in substantial fines, damage to reputation, or even the shutdown of a business in certain areas.

In this blog post, we will explore:

• The importance of vendor compliance 
• Steps on how to secure vendor compliance
• What to include in a vendor compliance program
• How to enforce vendor compliance

What is SaaS vendor compliance?

Simply put, vendor compliance is ensuring that the vendors you work with follow the standards and requirements for doing business with you. It also involves setting up SOPs to resolve issues effectively and quickly when they arise.

Managing vendor compliance involves monitoring the following aspects:

• Regulatory compliance
• Pricing and service tier offerings
• Purchase order and invoice matching
• Availability and backorder management
• Product labeling and quality
• On-time delivery and logistics
• Subcontractors
• Uptime and service level agreements (SLAs).

Efficient vendor management is supported by a formalized vendor compliance program, which ensures that costs generated by non-compliance are minimized. Examples of these costs are late delivery, incorrectly routed shipments, wrong products in shipments (which create backorders and increase transportation costs), resources spent on tracking missing information or items, and additional packaging, handling, and shipping costs.

There are two types of vendor compliance: 

• Basic vendor compliance is for non-regulated industries. Your company establishes a third-party policy, defines requirements, and conducts regular assessments.
• Regulated vendor compliance is for government-regulated industries like banking, finance, and healthcare, where your company and the third party has to adhere to mandatory laws and regulations and policy requirements.

Why is SaaS vendor compliance essential?

Vendor compliance management can make a real difference in your organization's finances. However, it’s crucial to monitor vendor performance and give timely and regular updates on the state of compliance. 

Let's break down why it's so important:

1. Reduces risk

When vendors don't follow the rules, they create significant problems for the companies they work with. To avoid this, carefully evaluate potential suppliers before signing an agreement and monitor vendor performance through periodic reviews.

2. Ensures stability

By maintaining a high level of vendor compliance, you ensure that requirements around product quality, delivery timelines, and software uptimes are met. You can stabilize your costs and supply chain management process by doing the following:

• Making sure deliveries happen on time to streamline production timelines and optimize inventory
• Avoiding surcharges in transportation costs for consistent inbound freight costs 
• Reducing bottom-line spending on software, supplies, and services.

3. Saves money and time

Robust vendor compliance helps projects get done faster and reduce maverick spending. 

Good vendor relationships will get you better prices, more favorable terms, and increased cooperation. 

Steps to secure SaaS vendor compliance

Making sure your vendors play by the rules is important for your business. Here's how you can do it:

1. Conduct risk assessments

Several types of third-party risks occur, such as the following:

• SaaS security risk: loss of sensitive information through data breaches
• Financial risk: loss of business continuity due to the vendor going out of business
• PR risk: loss of reputation due to PR scandal in the vendor entity

Perform risk assessments to evaluate the vendor for each of these risks and compare the benefits and liabilities of working with them and weigh the relationship in terms of risk and reward.

Also consider internal costs, such as those stemming from creation of a third-party management position.

2. Evaluate the SaaS vendor

For each vendor, review the qualifications, annual reports, audited financial statements, reputation stature, and whether they are locked in any litigations. You should also check if they use subcontractors, whether they have knowledge of relevant government regulations, and insurance coverage.

Some vendor management platforms enable companies to send automated request for proposals (RFPs) to efficiently compare vetted vendor candidates.

3. Create a SaaS vendor compliance policy

A vendor compliance policy sets down the internal expectations for working with vendors. It is different from the vendor contract and describes the terms for a vendor to work with you, which includes operational guidelines, legal mandates, and detailed consequences if standards are not met. 

You can put up this policy on your website for third-party reference.

4. Consolidate a SaaS contract

While the vendor compliance program must be agreed upon by you and the vendor, you should also create a contract with the vendor. This SaaS contract includes the following items:

• Scope of responsibilities for both parties
• Confidentiality and security clauses
• Costs and expected delivery timelines
• Limits on liability
• Support response expectations
• Termination clause and reasons
• Performance and audit standards
• Resumption and contingency plans

5. Begin a SaaS vendor compliance management program

A vendor compliance management program involves monitoring performance and compliance, auditing vendors, and addressing problems. After the SaaS vendor contract is signed, you should continue with the assessments and due diligence. Things to monitor include the following:

• Contract and policy alignment
• Financial condition
• Audit reports
• Insurance coverage
• Licenses and registrations
• Customer interactions

You can appoint an internal management resource to maintain visibility and use a SaaS vendor management tool to automate the process.  

What to include in a SaaS vendor compliance program

A good vendor compliance program for your SaaS business should include the following:

1. Clear goals and outcomes

Start by establishing clear and specific objectives for vendor compliance management within your organization. These goals should align with your business strategy and risk tolerance. 

For example, your goal might be to reduce data security risks by 20% over the next year through vendor compliance measures.

2. Documented vendor compliance policy

Mention the consequences of noncompliance in the vendor compliance policy. E.g., noncompliance penalties and vendor chargebacks. By codifying the policies within the contract, vendors are made aware of their responsibilities. 

3. Vendor Questionnaire

Use a questionnaire to check if a vendor is good to work with. It typically talks in detail about data security practices, financial stability, and past compliance history. Using this vendor compliance tool, you can ensure that they align with your compliance objectives and that they have a robust track record of adhering to guidelines.

4. Contract standards and prerequisites

Make sure your vendor contracts say exactly what they need to do to follow the rules. These contractual terms should explicitly state the compliance requirements expected from the vendor.

For example, if data security is a concern, the contract should outline specific data protection measures the vendor must implement and maintain.

5. Evaluation metrics

Clearly outline the metrics that reflect the important aspects of compliance, such as data security incidents, service uptime, or adherence to delivery schedules. These KPIs will help you provide quantitative insights into the effectiveness of your vendor compliance program.

6. Onboarding and offboarding processes

Have clear steps for bringing in new vendors and stopping work with vendors who don't follow the rules. This is especially important in the initial stages of following through with a contract on the vendor’s side of the table. It also makes sure that the post-contractual clauses are followed, too, such as those about data retention or data deletion.

How to enforce SaaS vendor compliance

It is as important to enforce SaaS vendor compliance as it is to document the program. Consider these strategies:

1, Strategic sourcing

Your first line of defense is to pick your vendors carefully. Choose ones with a good history of adhering to rules and guidelines. This helps you avoid problems later. When you work with vendors who are already good at compliance, it makes your job easier.

2. Open communication

Talk to your vendors honestly and often. If there's a problem with following the rules, discussing it right away helps solve it faster. When everyone understands what's expected, staying on track is easier.

3. Exception management

When you have a clear process for handling exceptions, it keeps the frustrations of vendor interactions out of the way. Good exception management keeps vendor communications positive and streamlined.

4. Tech-enabled monitoring

A typical company has hundreds of vendors and managing relationships with each one of them manually is tedious. By using a SaaS vendor management platform, procurement teams can automate and streamline the process. Contract management, vendor negotiation, and compliance monitoring can be managed from a single dashboard.

SaaS vendor management with Spendflo

Spendflo’s vendor management platform helps you with the following:

• Centralizes vendor information and tracks vendor performance
• Automates documentation and tasks related to vendor management 
• Helps make informed decisions regarding vendor relationships.

To know more, get a free saving analysis today!

‍