A vendor blacklist is a database of banned suppliers, and companies should use them to remain compliant, reducing operational risks. It’s key to understand more about how vendor blacklists work and the common limitations, so that you can avoid them.
Companies like Trustpair help organizations to strengthen their internal controls, such as vendor blacklists, in order to identify high-risk vendors before payment is released. By validating bank account ownership in real-time and monitoring continuously for changes, we flag suspicious activity before it costs your company.
Key Takeaways:
- A vendor blacklist is a database that identifies which suppliers a company should avoid
- Vendors can be blacklisted for a variety of reasons, including poor performance, legal or regulatory violations, security weaknesses or ethical concerns
- Effective blacklisting requires a clear criteria, defined process and fair governance
- Blacklists have limitations, they can be reactive, manual and can create operational risks during transitions
- Automation can help avoid some of the pitfalls associated with vendor blacklists
What is a vendor blacklist and why do companies use it?
A vendor blacklist is a type of database that lists which potential suppliers are not approved, and why. They’re used by companies to provide a quick reference point for internal staff. This helps teams to work compliantly with approved vendors (those not on the blacklist).
Vendor blacklist features are important because they help teams to properly uncover and analyse the risks involved with each vendor before beginning a partnership. Similarly, updating the vendor blacklists can contain names of suppliers that have previously been approved and used. But these vendors may end up on the list if their performance was worse than expected for example, or a significant security incident occurred to put the business at risk.
Procurement teams are generally in charge of managing and updating vendor blacklists, and companies can end up on one for a multitude of reasons:
- Poor performance during RFP process or in previous partnership: such as the failure to meet service level agreements
- Evidence of vendor fraud: although this must be legally justifiable
- Non-compliance with specific regulatory requirements: such as failure to implement a governance and oversight framework
- Severe financial instability: such as history of bankruptcy
- Ethical risks: such as previous regulatory sanctions
- Cybersecurity risks: such as failure to store data in an authorized, secure manner
- Automatic exclusion due to meeting the criteria of national blacklist databases: ie. operating from a country without transparent financing systems and a lack of reporting)
What criteria determine whether a vendor should be blacklisted?
Deciding whether a vendor should be blacklisted requires compliance teams to effectively score vendors against a complex criteria. These vendor scorecards may contain:
| Item | Blacklisting criteria (red flags) | Whitelisting criteria (green flags) |
| Company data | Failure to provide an up-to-date offering of company registration Office address given does not match official documents Unclear legal status | Immediate notification of change in address, legal structure or registration changes, which can be externally verified |
| Bank account data | Unverified bank account data Bank account located in country flagged with a high risk of fraud | Bank details that have been verified and have not changed Bank based in a country with low financial risks |
| Contract data | Breach of terms, such as non-delivery of critical services Refusal to sign contract amendments | Adherence to contractual obligations Communicative about matters like required changes |
| Security controls | Unaddressed critical vulnerabilities like failures to provide SOC2 report or a history of data breaches | Independently verified security measures, such as ISO27001 and SOC2 Type II |
| Financial reports | Audits that do not clearly present the financial situation Financial reports that suggest severe financial issues History of bankruptcy or financial harm | Evidence of financial stability in reporting documents Positive financial growth |
| Performance reports | Failure to meet service level agreements resulting in significant business disruption Consistent negative feedback | Meeting or exceeding service level agreements High quality of service scores Consistent positive feedback – customers feel well treated |
| Compliance status | History of mistakes that lead to failure to comply Violations, fines and sanctions | Proven record of full regulatory supplier compliance Certificates of Good Standing from relevant regulators |
| Reputation data | Negative brand sentiment scores that can affect your reputation Virality of events that reflect poorly on the brand Decreasing share and stock prices in public companies | Robust Code of Conduct Positive brand sentiment scores, leading to minimal exposure Increasing share and stock prices in public companies |
How do you build and maintain an effective vendor blacklist?
Building an effective vendor blacklist requires a clear criteria, a diligent assessment and a consistent watch-and-see process.
We’ve already covered the criteria above, but how do you translate that table into a physical policy? As part of your overall governance framework, this should cover:
- Clear definitions: ie. what is “blacklisting”?
- Clear grounds: ie. what reasons can lead to blacklisting, and what are examples of situations that would and wouldn’t lead to blacklisting?
- Clear process: including an investigation, sanctioning authority, communication with the vendor and an appeals process
Building is one thing, but maintaining the vendor blacklist technology is a whole different beast.
Maintenance starts at the moment all of the initial due diligence documents entered and vendors are onboarded. It requires two key processes:
- Monitoring
Visibility across all of the risks within your initial risk assessment is key. How will you know if a vendor gets a regulatory sanction? Or has a data breach, putting their customers and partner relationships at risk? You will also need team members scanning and logging performance assessments with the ability to get to the root cause, verifying company and bank account changes, and monitoring financial reports, for example.
- Action
A large part of vendor blacklist maintenance is about updating the various data points. It’s about reporting whether your suppliers meet their SLAs, or proposed delivery times, for example, and then scoring this against the original expectations. Likewise, vendor risk levels may change if your monitoring reveals an emerging threat.
Action can be automated or manual, but it must happen in order to save your vendor blacklist from poor maintenance or becoming outdated.
What are the risks and limitations of using a vendor blacklist?
While vendor blacklist solutions are standard practice in most industries, they can come with several key challenges:
- Very manual and reactive process
- Legal justification
- Maintaining security and operational efficiency during vendor changeover
The manual and reactive nature of the process
For enterprise level companies where over 1,000 vendors is considered typical, keeping up with database changes can become incredibly difficult to manage. In particular, the traditional way to fill out vendor blacklists is by simply waiting to hear about a change. But difficulties like this leaves procurement teams reliant on stumbling upon the right information.
Companies can overcome this by working with an automated vendor management system that has a blacklist feature. This should work to consistently ‘clean’ the data, validating it with proof and automatically updating the risk scoring features. This type of system should make it obvious when a vendor surpasses the threshold for blacklisting, and enable users to dive deeper into the data.
Legal justification
Firms that blacklist vendors (especially in the US) should engage with legal experts to achieve fair and formal justification for the decision. Otherwise, you are risking litigation. Blacklisting must therefore be fair, transparent and justifiable to avoid disputes and stay compliant.
Organizations should spell out their expectations in terms of performance and service within initial contracts. Undergoing a testing or RFP phase can also be helpful in outlining your vendor expectations and giving comments before signing on the dotted line.
Maintaining security and operational efficiency during vendor changeover
Finally, firms should prioritize maintaining their security and operational efficiency as they perform comprehensive blacklisting. This is because the changeover process exposes several vulnerabilities, especially with the risk of retaliation.
Organizations could back-up any data held by the third party in question before informing them of the blacklisting. But they could also focus on protecting their data transfers with enhanced security measures like high-grade encryption.
The changeover is likely to cause internal disturbances. So, ensuring that colleagues are prepared to continue, and know how to overcome key blockers is also beneficial.
How can automation improve vendor blacklist management?
The biggest gains caused by automation in vendor blacklist management are in the monitoring tasks. Continuous monitoring ensures that you stay up-to-date with the latest vendor changes as they happen. Furthermore, your vendor assessments can happen faster, with key team members able to focus on the tasks most important, rather than admin.
Here are some of the ways that you can apply automation to improve your vendor blacklist management:
- Integration with performance data: integrate your expected and actual delivery schedule to automatically update vendor performance scores
- Streamlined data management: automate repetitive tasks like document collection and data entry
- Automated risk scoring: as ongoing changes occur, firms can rely on machine learning algorithms (or even rules-based logic systems) to score vendor risk levels
- Audit and compliance automation: with transparent and up to date records, it’s easy to follow the audit trail, or conduct compliance checks
- Speed of blacklisting decisions: investigations can be completed in a fraction of the time when the supplier database is ‘cleaned’ and validated automatically
Companies like Trustpair help organizations strengthen vendor blacklist controls by automating supplier verification. Before payment is released, high-risk vendors are identified, so that they can be investigated and potentially blacklisted. This platform ensures vendor records stay accurate and helps finance and procurement teams to prevent fraud across all payments.
Every company needs a vendor blacklist
A vendor blacklist is a database of suppliers a company should not work with, based on risks like performance, compliance or security issues. It’s built and maintained through clear criteria, continuous monitoring, and regular updates. Automation, such as Trustpair’s vendor data cleansing solution, improves accuracy and speed, thus decreasing risk.