Engaging third-party vendors to acquire goods or services is not a new concept in business. However, with the advancement of online technology and ever-evolving regulatory standards, utilising a vendor risk management program is more important than ever.
Whether you own a new business just starting out or are an established brand hoping to boost your business risk management solutions, implementing structured and supported Risk Management software will ensure you are well-equipped to safeguard your growing company.
What is Vendor Risk Management?
Vendor risk management (VRM) is the critical process of identifying, assessing and mitigating any risks associated with conducting business with suppliers and third-party vendors who provide products or services to a company.
VRM is an essential aspect of business risk management because vendors can introduce a unique set of risks that can significantly impact a company’s reputation, operations and compliance position. VRM solutions must be applied throughout all stages of the vendor lifecycle, including sourcing and selection, onboarding, risk assessment, continuous risk monitoring, performance management and termination.
Types of Third-Party Vendor Risks
An efficient risk management solution allows organisations to effectively identify and address risks associated with vendor partnerships. This helps them protect their business integrity while managing costs and ensuring business continuity. There are five main types of third-party vendor risks: compliance risk, ESG risk, cyber risk, reputational risk, and financial risk.
Compliance risk refers to any governmental or legal regulations that companies within a specific industry must adhere to. These regulatory requirements are constantly evolving to protect sensitive data and operational systems. Violating these strict regulations can result in hefty fines and irreparable reputational damage.
ESG risk involves concerns surrounding environmental, social, and governance practices. For example, after Russia’s invasion of Ukraine began, companies affiliated with the Russian government were largely ostracised from the global business market. Brands must also protect their operations from accusations of unethical business practices, negative environmental impact, and human rights violations.
Cyber risk and cybersecurity are crucial factors in vendor assessments. Ransomware and cyber attacks of any kind can shut down a company, making it impossible for it to fulfil business obligations. According to a recent study conducted by IBM, 25% of all data breaches resulted from ransomware or cyber-attacks, making operating systems inoperable.
Reputational risk relates to any unwanted or harmful media coverage about a vendor that could negatively impact the reputation and operation of any business connected to it. This can often happen when a vendor is caught operating with unethical business practices, repeatedly has quality issues with their products, engages in criminal activities or is responsible for an ecological disaster.
Financial risk solutions ensure that all procurement teams have complete visibility into their vendors’ financial health and stability, including their current debt and any credit extended to customers. A bankruptcy declaration can result in a significant loss of business and detrimental supply chain disruptions.
Management Solutions
In order to mitigate any potential risk that could arise from third-party vendors, it is crucial to have a secure and efficient vendor risk management system.
Assess Onboarding Processes
The first step in your VRM program is assessing how you will onboard new vendors and identify their inherent risks. You will need to decide on the proper mechanism for evaluating and onboarding new vendors and establish the factors you will use to critically and fairly tier them.
You will also need to decide how to collect the necessary information to assess inherent risk and what inputs, such as operating, legal, financial, or reputational data, will be used to calculate it.
Automate Key Aspects
The next step is to be proactive in collecting the evidence and data needed to conduct your standard reviews and compliance assessments. By automating these key processes, you can eliminate the threat of human error.
The collection and review process can take many forms, such as managing the assessments yourself or outsourcing them to a partner company. Many businesses find success using a hybrid model that applies the appropriate approaches to different vendors based on specific needs and requirements. This ‘outside-looking-in’ approach helps to make better-informed and accurate risk assessments.
Utilise Continuous Risk Intelligence
Periodic assessments are vital for understanding how vendors use their information security and data privacy systems at any given point. However, breaches can occur between these assessments, making continuous monitoring necessary in VRM.
Many companies take the wrong approach in this situation, underestimating the importance of qualitative information. Combining business monitoring with effective cybersecurity measures can achieve a more comprehensive view of vendor risk.
Establish Effect Solutions
Once risk has been identified and established, it is crucial to apply the correct strategies to mitigate and eradicate it. Key considerations include determining whether your team possesses the expertise to rectify the failed controls or whether it would be better to use automated and pre-defined remediations specific to the risk.
You also need to create a system to predict and plan for future risks once a successful solution has been applied, draw up the necessary documentation to help you demonstrate vendor compliance with specific regulatory and industry standards and find proactive strategies to mitigate any unknown or hidden risks that are not revealed via assessments.