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What is Vendor Risk & Vendor Risk Management?


Most businesses tend to outsource operations to third-party vendors. The reason for doing this is usually to improve operational efficiency and save money. With third parties gaining access to sensitive customer data and critical systems, businesses need to monitor risks associated with the third-party vendors to mitigate or eliminate any potential threats or damages to the businesses.

Some of the third-party vendor risks that may pose a threat to an organization are:

  • Legal risks

Organizations are custodians of sensitive Personally Identifiable Information (PII). Usually, there are legal repercussions when sensitive customer information is shared with unauthorized persons. The laws are clear on that. In addition, introducing third parties to an organization may put the company in legal jeopardy if the third-party vendors compromise the user data.

  • Reputational Risk

Sometimes, using third parties may put an organization at risk of having its public perception ruined. Third-party vendors may harm a company’s reputation if they engage in practices that violate laws and regulations. If they have interactions that are not in line with the organization’s standards and ethical practices, or if in their negligence, they expose confidential customer information.

  • Financial Risks

An organization may face financial risks when the third-party vendors fail to meet fiscal performance requirements. Financial risks may be in the form of high costs or lost revenue. Excess charges could lead to inhibitions in the company’s growth or unwanted debts. It is, therefore, vital to have regular audits to ensure that the spending is at par with the terms of the contract. In addition, vendors may lose revenue if their operations affect the company’s revenue-producing activities. All these necessitate systems to manage the risks.

  • Cybersecurity Risks

Cybersecurity risks could pose significant threats because they can cause financial, reputational, and legal damages if not addressed in due time. With cyber risks, a moment’s event could lead to untold damage to an organization. That is why organizations need to employ strategies to manage cyber risk. Any organization inviting third parties to its systems needs to constantly monitor the vendors because any slip-ups may cause catastrophic damages.

  • Strategic Risks

These risks occur when the third-party vendors make decisions that are not in line with the company’s objectives.

  • Vendor Relationship Management

The first step in managing vendor risk in an organization is to have robust vendor relationship management. Simply put, vendor relationship management involves managing relationships with third-party vendors. Strategic execution of vendor management relationships ensures that any associations with vendors result in longstanding alliances, where both parties can achieve simultaneous growth.

Effective management of vendor relationships involves several factors. Communication is one of the most paramount factors in achieving consistent correspondence. Collaboration in sharing information is also crucial for ensuring transparency in all operations. Technology also plays a key role by providing software and tools to aid the collaboration and communication between organizations and third-party vendors. Key Performance Indicators (KPI) also help to set the foundation for vendor relationships. They lay down expectations, therefore, creating a blueprint for success.

  • Vendor Risk Management

Businesses should scrutinize any third-party vendors to identify the threats that they could potentially cause the business. Vendor Risk Management (VRM) involves assessing any third-party vendors before, during, and after the duration of a business contract. It is a critical procurement process as it provides a comprehensive plan for avoiding any legal, reputational, financial, or cyber threats that could hinder operations.

  • What are Vendor Risk Management Maturity Models (VRMMM)?

With all the possible risks associated with third-party vendors, many organizations are burdened with the responsibility of creating a third-party vendor risk management program. The program is supposed to bring together all vendors in one place and analyze the risks that those vendors could pose. It is also essential in analyzing the existing measures put in place to avert any risks posing threats to the business.

Vendor Risk Management Maturity Models are excellent tools for organizations to see where they are and compare their existing strategies against a comprehensive list of best practices. With these maturity models, organizations can fully assess the value of their investment in risk management. In addition, with VRMMMs, significant components can be broken down, making it easier for the model to adapt to various industries.

VRMMM makes it possible for risk management strategies to be assessed on a maturity curve. A risk management system is considered more mature if it is more effective in achieving the best outcome for the organization. Therefore, assessing risk management efforts on a curve is a more practical approach compared to merely ruling out risk management strategies as effective or not. This model encourages risk managers to assess maturity on a continuum and focus on the room for improvement.

  • Key Elements of An Effective Risk Management Plan

Here are some of the things that should be included for an effective third-party risk management strategy

  • Contracts stipulating the relationship between the vendors and the organization
  • Regular assessment of vendor performance to ensure that they are adhering to the contract stipulations.
  • Regulations to ensure that the third parties meet the industry compliance standards.
  • Clear rules on what information the specific vendors are allowed to access with regard to the vendor agreements.
  • How to Select the Best Third-Party Vendor Risk Management Plan

Several factors should determine an organization’s choice of a third-party risk management plan. These factors include:

  • The regulatory requirements for the company
  • Industry compliance requirements
  • Acceptable level of risk
  • Joint ventures
  • Business processes of the company
  • Best Practices for Third-Party Vendors Risk Management

Having a third-party risk management framework in place ensures that the reputational and financial damage to the organization is minimal in the event of a vendor breach. In addition, risk management ensures that overall productivity is not affected when doing business with third parties. Data breaches can cause irreparable damage to the customers, employees, and the organization’s reputation in the market.

Here are some of the things that organizations should do in their risk management plan:

  • Ensure that they have an inventory of any third-party vendors that they are engaging with
  • Identify the possible risks that could stem from doing business with third parties.
  • Assess and categorize vendors based on potential risks and eliminate the risks beyond their company’s risk appetite.
  • Put in place a system to analyze future third parties. Organizations should have a minimum acceptable level of risk to ensure that any third parties uphold the highest level of data security.
  • Have a person in charge of vendor risk management and any other risk management practices.
  • Have proper lines of defense to mitigate risks. They could include leadership, vendor management, internal audits. They could also have cybersecurity defenses like installing SSL certificates that ensure that the in-transit communication is encrypted, thereby reducing data breaches. Choosing the right kind of SSL certificate is equally important. For ecommerce business ventures, we suggest going for wildcard SSL certs. With this single cert, you can secure an unlimited number of first-level subdomains under your chosen main domain. A scalable and future-proof option, this makes for a sensible choice. If budget is a concern, we recommend going for the premium yet cheap comodo wildcard ssl.
  • Have contingency plans of action in the event of a data breach or when a third-party vendor is found to be below the accepted quality.
  • The benefit of Vendor Risk Management frameworks

Vendor risk management plans give companies a set of standards to guide them in decision making and reducing the hassle of managing third-party vendors. They also come a long way in saving companies money and reputation.

  • Vendor Risk Assessment

The success of any company is dependent on the way it manages its vendors. Vendors are essential to businesses, but any negligence could cause significant losses to the business. Conducting vendor risk assessment helps companies identify and understand the risks of using third-party products or services. It is essential to perform risk assessments when third-party vendors handle sensitive business functions, access confidential data, or interact with customers.

Ideally, third-party vendor risk management should seek to ensure that any potential risks are prevented before they actualize and cause damages to the company. However, that can only happen if organizations are proactive in exercising due diligence in ensuring that vendor relationships are risk-free and that all vendors maintain quality standards.