What is Vendor Risk Management and Why is it Important?

Vendor Risk Blog

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Big and small companies rely on third-party vendors to perform legal, HR and payroll, marketing, and logistics services. Any vendor connected to your network and company and client data is a potential risk. From data breaches to reputational risks, third-party vendors can inflict significant damages.  

Vendors can be grouped into the following categories.

  • Services Providers offer various goods and services to their partners, including financial, cleaning, components, and logistics.
  • Industry Specialized vendors provide highly specific services. For example, drone manufacturers need a very different list of vendors than food or retail companies may need.
  • Geography-Based vendors typically assist companies in gaining a foothold or outsourcing functions overseas where language, cultural, and political factors need to be considered.
  • Cost Savings vendors fulfill the essential business tasks and processes cheaper than in-house.

Large corporations can have tens of thousands of vendors. That number could range from the dozens or hundreds for small and medium-sized businesses.

What Exactly is Vendor Risk Management?

Vendor Risk Management (VRM) is the practice of evaluating vendors for potential risks that an organization faces before establishing a contract. No matter how much vendors can help a company gain success, they can also be a risk.

For this reason, companies need to have a modern, straightforward, and rock-solid method for VRM — also referred to as Third-Party Risk Management (TPRM) — to manage and remediate the risks associated with third-party products and services before they create problems. 

Managing multiple vendors can quickly become a tangled web. As third parties themselves rely on other third parties to function (aka fourth-party risk, fifth-party risk, and so on), things get tricky. Fourth-party risk can affect you in ways that you didn’t anticipate. It’s important to have a clear understanding across your organization of what third parties you’re working with and who they’re outsourcing operations to as well.

Common Vendor Risks to Know

Third-party vendors can present significant drawbacks. Here are six common risks third-party vendors can present:

  1. Strategic Risks are born out of bad business practices and decisions inconsistent with your company's strategic goals. An example will be if a third party does not innovate to keep up with the market or customer needs. Their current lack of improvement could expose a company to future risk. 
  2. Financial Risks damage any financial performance. Should a supplier provide faulty components to your final product, your company could fall short of revenue goals due to poor sales.
  3. Reputational Risks happen when you are affected by any negative public opinion created by a third party. A vendor may use unacceptable business practices (child labor) and have data/security breaches. Even though it is by no fault of yours, all examples harm a company's reputation and standing. 
  4. Regulatory/Compliance Risks happen when a third party violates any compliance with laws, rules, or regulations. When a vendor violates environmental laws, the principal organization can be liable and face fines.
  5. Operational Risks are any disruption to your business operations. If you use a third-party Cloud hosting vendor for your IT and a natural disaster causes them to go down, so do you.
  6. Information/Data Security Risks happen when third-party vendors are victims of cyberattacks and data breaches. Attacking a well-known vendor can often give criminals access to multiple companies' organizational and customers' data.

Four Steps to Manage Vendor Risk

One single vendor can be challenging to manage; many can be overwhelming. Companies need to put an efficient framework, processes, procedures, and tools to reduce the risks of using vendors. Here are four steps to get started with VRM:

  • Centralize all your vendor data management into a single repository for managing all of the documents and data associated (service level agreements (SLAs), statements of work (SOWs), and contracts).
  • Screen all vendors. Use one of the commonly adopted frameworks (like NIST CSF, ISO 27001, and NIST 800-37) or develop your own due diligence process before onboarding. Then regularly review and update as needed. 
  • Develop a Risk Scoring metric to prioritize the most critical aspects that your vendors need to meet. Scoring may vary depending on the vendor's work, but the score should always reflect your compliance, information security, and quality standards and controls.
  • Maintain ongoing assessments post onboarding. Continue reviews throughout the contract's life. Having automated alerts and reports to compare your vendors against national and international lists will assist in this function.

How to Best Manage Your Vendor Risk

Successful VRM can be a time and resource-intensive practice if done manually. Even if you deploy all four steps above, you may not be in the clear. To help you risk smarter and manage your vendor risks better, we created LogicGate’s Risk Cloud platform with our TPRM solution to help you identify, assess, score, monitor, and report vendor risks. But don't just take our word for it.

LogicGate was recently named a "Strong Performer" on The Forrester Wave™ for Third-Party Management Platforms, Q2 2022. If you want to make sure your Vendor Risk Management can turn risks into strategic wins, ensure compliance, and strengthen your business' resilience, then look no further than Risk Cloud. Visit logicgate.com to learn more and request a demo.

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