October 07, 2022 | Supplier Management Technology Blogs
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.
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.
A company must consider established best practices when planning its vendor risk management strategy. Vendor risk management best practices include:
Draw up a complete vendor list, and cross-check this list against a list from accounts payable to ensure no vendor has been missed.
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.
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.
Businesses can automate vendor risk management to manage risk exposure with the help of software tools effectively. The software tools help with:
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:
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 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.
GDPR stipulates policies for managing personal data. Lack of compliance can lead to revocation of license.
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.
Vendor risk management is essential for a variety of reasons. Vendor risk management benefits include:
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.
A process to manage third-party risks helps the business deliver better performance and manage vendor relationships efficiently.
Using third-party vendors facilitates budget and cost control. However, efficient management and selection of vendors are critical to realizing cost savings.
A robust mechanism for analyzing and reporting problems is essential. VRM helps maintain the business’s reputation and relationship with clients.
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.
Vendor risk management is necessary to protects the business from risks and maintain a productive partnership with vendors.
Make the checklist in way that the business can confirm that a vendor can provide the promised service without exposing the business to financial, regulatory, or productivity risks.
VRM reduces the frequency and severity of data breaches, data leaks, and cyberattacks involving third parties. It also ensures business continuity.
The objective of VRM is to position the organization in a defensible position by listing all the vendors as well as measuring the risk they pose.