A Comprehensive Guide to Vendor Risk Management

Outsourcing is an inescapable compulsion for companies globally — at least for some of the aspects of business operations.

Outsourcing to third parties reduces costs and improves efficiencies by enabling companies to deploy key personnel on core business functions. That said, outsourcing brings its own sets of perils. It exposes companies to risk.

What is Vendor Risk Management?

Vendor risk management (VRM) is critical to companies that routinely outsource to third parties. The VRM process helps companies monitor and control risks associated with using third-party vendors. Third-party vendor risk management ensures that third-party vendors do not cause risks to rise to unacceptable levels, potentially negatively impacting business performance or entirely disrupting the business.

What are Vendor Risk Management Best Practices?

A company must consider established best practices when planning its vendor risk management strategy. Vendor risk management best practices include:

Record All Inventory Relationships

Draw up a complete vendor list, and cross-check this list against a list from accounts payable to ensure no vendor has been missed.

Determine The Organization’s Risk Appetite and Contingency Plans

Identify each vendor's risk type and segregate third parties that pose an operational and regulatory risk. Define the organization’s risk appetite, each vendor's risk profile and rating, and the contingency plan for each risk should it arise.

Develop A Rule-Based Vendor Risk Management System

Ensure risk assessment is carried out during all the phases of the vendor relationship, starting from the vetting stage. Ensure that the risk management system is flexible around the degree of risk. The riskiest vendors or those with the most severe impact should be subjected to additional scrutiny.

How can Businesses Automate Vendor Risk Management?

Businesses can automate vendor risk management to manage risk exposure with the help of software tools effectively. The software tools help with:

• The automation of repetitive tasks and processes
• Easing vendor risk assessment, monitoring the risks, and implementing the risk response
• Managing tracking and compliance with industry-specific regulatory requirements

How can Businesses Create an Effective Vendor Risk Management Framework?

Outline all potential challenges and the areas from where these challenges can arise. To effectively assess vendor risks, the organization should build a vendor risk management framework that outlines its approach to identifying and managing risks from third-party vendors. The VRM framework should help businesses:

• To become aware of the security procedures of the vendor. The contract should include a clause that allows the firm to audit the vendor's practices
• To define how the monitoring will be undertaken – because continual monitoring is essential to ensure protection against risk

Why is Vendor Risk Management Important?

The importance of vendor risk management arises from the fact that when work is outsourced, it requires sharing of confidential data. Irrespective of the robustness of the business’s security measures, sharing data with vendors makes the company vulnerable to any weaknesses in the vendor’s security measures.

The risks that the firm must mitigate when dealing with vendors include

Data Breaches

Data and financial information of customers are heavily regulated. The vendor’s security control must be closely tracked, and measures instituted for managing risk to avoid penalties and loss of credibility.

Global Regulations and Industry Requirements

GDPR stipulates policies for managing personal data. Lack of compliance can lead to revocation of license.

Data Flows

Third-party vendors might require access to company information, including sensitive IP, which can be exposed in a data breach with disastrous consequences for the business.

What are the Benefits of Vendor Risk Management?

Vendor risk management is essential for a variety of reasons. Vendor risk management benefits include:

Streamlined Vendor Evaluation And Onboarding

The regulatory compliance requirements applicable to the business also extend to the vendors. For example, GDPR rules stipulate that compliance is the data controller's responsibility. This means that the company is responsible for the vendor’s compliance and its own.

Improved Vendor Relationships And Performance

A process to manage third-party risks helps the business deliver better performance and manage vendor relationships efficiently.

Greater Cost Savings And Improved ROI

Using third-party vendors facilitates budget and cost control. However, efficient management and selection of vendors are critical to realizing cost savings.

Improved Reporting And Analytics

A robust mechanism for analyzing and reporting problems is essential. VRM helps maintain the business’s reputation and relationship with clients.

Conclusion

Many businesses focus only on managing the risks of their critical IT vendors, which is an incomplete strategy. The risks can arise from any of the vendors – when you least expect it. Ensuring that risks arising from vendors are managed protects the company against damages and loss of reputation.

Frequently Asked Questions