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What is vendor risk management

The changing business operation landscape has reinforced the organizational reliance on a third-party vendor to support various aspects of their businesses. This strategic partnership has benefits, such as business efficiency, regulatory compliance, streamlined business operation, reduced cost, etc. 

It also comes with myriads of risks and challenges, most importantly operational and data security risks. Introducing new sets of problems has called for a more holistic way to mitigate the impacts this risk poses to businesses, leading to effective risk management that identifies, evaluates, and mitigates any potential risks associated with dealing with third-party vendors. 

What is Vendor Risk Management 

Vendor risk management is an all-encompassing strategic evaluation and addressing of the multidimensional risks or disruptions that every business partner might pose to your organizational financial or operational goals throughout your partnership. 

Vendor risk management is an age-long principle that every vendor-dependent business model and company implements while outsourcing some business functions. The world got wind of vendor risk management in 2000 after businesses and organizations were shaken by the gale of cyber-attacks and data breaches. 

This led to business disruption due to laxness in their third-party management system. These negative experiences gave rise to the idea of implementing vendor risk management programs or plans that were being championed with best practices and laws and regulations binding them. 

With every step your business takes at outsourcing to a third-party vendor, you risk data breaches, operational risks, financial risks, reputational risks, cyber-attacks, and other threats that can harm the smooth running of your enterprise and organization. 

This is where vendor risk management serves as the shield against such occurrences through a series of actionable frameworks and best practices that help identify the risks and mitigate them before you sign the contracts. 

Although we might feel the idea of organizational security takes precedence when we look at what spurs the mass number of business compliance with vendor risk management, the truth is government regulations like the European Union General Data Protection Regulations (GDPR) have also reinforced the need to have a vendor risk management system in place before making any third party commitment. 

The sheer number of benefits businesses and organizations derive from properly implementing a working vendor risk management system looks enticing. It has yielded many frameworks that comprise the more comprehensive vendor risk management lifecycle, encapsulating all the working mechanisms that suit every organizational model regardless of your industry. 

Vendor risk management lifecycle is a multi-stage process that caters to the ever-evolving business environment. The vendor risk management lifecycle comprises of:

  • Identify the right vendor that aligns with your business.

  • We are evaluating and selecting the best fit. 

  • Classify the selected vendors into segments. 

  • Selection of Onboarding 

  • Define the terms of the contract 

  • Occasional performance reviews

  • Risk management and continuous review 

  • Offboarding: End of contractual agreement or renewal. 

This carefully outlined vendor risk management lifecycle or plan showcases how your organization should start by identifying the right vendor for your business need to the offboarding stage. The most critical factor among these is that any vendor you intend to select must help your company comply with the regulatory framework and should never compromise your customer data. 

Why Is Vendor Risk Management Important

Companies are prone to one form of risk or another when engaging third-party vendors for some aspect of their business operations, including customer service, supply chain, logistics, recruitment, account operations, etc. This is borne out of the fact that they have to share confidential information with these vendors for the smooth success of their subcontract tasks. 

This assertion is a microcosm of the central focus of the importance of vendor risk management that saves organizations from all forms of risks that come with this level of engagement. However, other pressing issues revolve around the scope of data sharing. 

One such is business expansion, which requires a robust third-party vendor partnership to help handle the increasing volumes of business functions that come with the development. 

In this vulnerable situation, a clearly stated vendor risk management plan is essential to ensure the company can avoid falling into the pitfall of information security, compliance, and operational risks attributed to its expansion and, ultimately, its dealing with the third-party vendor.

Furthermore, looking away from the inherent threat to business functions, we can all agree that well-crafted vendor risk management is also beneficial to how businesses increase their operational efficiency and, at the same time, offer an improved service delivery. 

Vendor risk management is an effective mechanism that you can use to engender a synchronized system of service delivery where your chosen vendor provides the same quality of service with the same standard and quality as it’s done by an in-house team under your supervision. 

Actualizing solid Operational and financial efficiency is another way in which good vendor risk management has proven to be a valuable asset to organizations.  

While it makes operational and economic sense to outsource some of your non-core business operations, It’s prevalent to come across vendors without a standard security protocol. Vendor risk management systems will guide you against selecting such vendors. 

Lastly, in your bid to save cost while at the same time maintaining the standard and quality of your product and service delivery, it’s expected that you work with a third-party vendor to whom you subcontract some of your business operations. A vendor risk management system is a viable tool to keep them in check and ensure your products or services are not compromising their standards. 

What Is  Vendor Risk Assessment

Vendor risk assessment (VRA) or vendor risk review is an essential segment of the entire vendor risk management system that detects uncertainty or risks, evaluates them, and ranks them based on their level of impact on the overall running of the organization. 

Vendor risk assessment processes are carried out under two categories, namely risk identification and risk evaluation. Risk identification uses the company's historical data and metrics to infer a comprehensive list of possible risks associated with a partnership with any chosen vendor. 

However, risk evaluation picks and classifies the documented potential risks quantitative and qualitatively. Quantitative risk evaluation ranks the identified risks based on the severity of their effect on the organization. On the other hand, qualitative risk evaluation ranks the identified risks on the scale of impact from the highest level to the lowest level. 

Click to learn: Vendor management system vs ERP

When a Vendor Risk Assessment is needed 

As a fundamental measure you must take before engaging any vendor, you must understand the right time to kickstart this process. 

1. At the Request for Proposal Stage 

This is classified among the pre-hire risk review stage, where you look at the key indicators like the level at which the vendor protects the client’s data, clearly stated recovery plan, well-outlined internal risk assessment, and others. 

2. During the Engagement Period 

Vendor risk assessment does not end at the point of selection; you should always be on the lookout for the vendor's process to carry out the agreement's terms and the agreed-upon production standard. If there is any deviation from the contract, you should either pull the plug on the contract or find a means of fixing the situation. 

3. During a Period of Uncertainty

Uncertainties like pandemics, legal issues, bankruptcies, government changes, and policy amendments can also necessitate a vendor risk review. During this period, you should review the existing or new vendor to get the full scope and the effect of the issues on your partnership. 

How to Conduct Vendor Risk Assessment Process

The vendor risk assessment process systematically reviews the vendors to whom your organization intends to subcontract some of their business processes. You can only do something with the full consent of the entire organizational hierarchy since they are a significant part of the selection process. You can follow The following fundamental principles to conduct an effective vendor risk assessment process. 

1. Create a Comprehensive List of All Existing Vendor 

There are multitudes of vendors out there that have the capabilities to execute the project you are looking forward to outsourcing. Choosing the right one among the sheer number of them can be a headache that can only be solved by outlining them based on the operational tasks they oversee. 

Proceed to evaluate the extent to which a break in compliance from any of the vendors would affect your business and also look if a total expulsion of such vendor would affect the smooth running of the company.

3. Have a Full Mastery of the Various Types of Risks

There are multitudes of risks that your business is prone to face from the use of third-party vendors. You must have a complete understanding of the following risks and how they affect the smooth running of your business. 

  • Compliance Risk: if the selected vendor fails to follow the rule of law and industry regulations binding the production of said products or compromises the standard of service delivery, compliance issues may arise, leading to potential legal and financial losses. 

  • Operational Risk: These are related to issues like process management failure, internal and external fraud, failed safety practices, and other everyday uncontrollable events. 

  • Transaction Risk: You tend to encounter this type of risk, resulting in an unbalanced accounting book where your business gets caught up amid fluctuating currency exchange rates in a transaction involving two different currencies. 

  • Data Security Risk: One of the most prominent risks can ground your entire organization if care is not taken. It’s expected you share a lot of data with your third-party vendor to aid them with how they execute the project. However, breaches in data security, ranging from ransomware, spyware, malware, and others, might occur during this process, leading to a loss of millions and a dent in your organization's reputation. 

  • Upstream and Downstream Risk: Upstream risk ensues when your vendor cannot supply sufficient resources or materials needed during production. At the same time, downstream risks involve the inability of the selected vendors to handle your product distribution channel sufficiently. 

  • Replacement Risk: This refers to the possibility of the selected vendor to renege on their contractual agreement. In this situation, you need to have an adequate replacement risk management plan in place to replace adequately. 

4. Evaluate Your Level of Risk Tolerance 

Having a risk management plan is only achievable with understanding how crucial every decision you make at this stage would influence your business running. Before deciding on any vendor, you should assess their level of importance to the section of the company they are handling. 

Then, run a short analysis between the likelihood of the risk factor and the impact of the risk on your business to determine the magnitude and value of your decision. 

5. Classify Each Vendor Based on Their Level of Importance 

At this point, you should have your feedback from the external mechanisms you set in place to look at each selected vendor's level of compliance, past performance indicators, reviews, and others. 

You should collate these results with your in-house decision-making parameters to decide if you must work with such a vendor or start the process entirely to find some new batch. 

You can simplify this process through any of the following methods: categorizing each vendor based on their specific style of operations and service type, on-site audits, reviews from past customers, personal research g through the vendor's website, industry opinion about them, or other related means. 

6. Compare Each Vendor With the Industry Benchmark

To get a well-balanced overview of your assessment, you need to design a designated risk profile that comprises every vendor based on their attributes and style of operation. To conduct a proper comparison, you should identify and set aside the desired industry standards you expect each vendor to exhibit. 

Then, create a specifications table comprising each vendor's risk ratings and a concise research-based description. Merge each metric and select the one that adequately reflects your organization's and industry's standards. 

How You Can Improve Your Business Operations With Helport Vendor Risk Management Solution 

To get all your business processes done synchronously and efficiently by your teams. Helport vendor management solution provides you with AI-driven software that makes it easy to gain access to the streams of business opportunities in your industry, provide refresher training to your teams to keep them up-to-date with the recent updates and standards in your industry, and also enhance your business visibility with improving quality of work and service delivery.  

Try Helport vendor management solutions today for a more synchronized and well-connected team that is getting things done. 

Conclusion

No business can do without the helping hand of a third-party vendor. However, the increasing presence and reliance on vendors to handle some critical aspects of business operations pose operational and compliance risks. 

However, through proactive identification, careful assessment, and strategic mitigation, VRM empowers you to turn potential disasters into manageable bumps. 

Vendor risk management equips you with the most crucial risk assessment template that will guide you toward selecting the compliant vendor for your business operations while ensuring sensitive data are safeguarded from breaches and other issues that might hamper your operational continuity. 

You can go here to learn more about the top 5 vendor management systems and make an informed choice for your business operations.

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