Determine, keep an eye on, and reduce vendor risks
From sourcing to terminating vendor relationships, organizations should be vigilant to manage the relationship and their underlying risks effectively.
What is Vendor Risk Management?
Risk is an essential part of a business with a direct correlation with returns. Keeping this in mind many organizations outsource their operational functions to specialized vendors. These vendors increase business exposure leading to vendor risk.
Such vendor risks are mitigated by robust Vendor Risk Management. Vendor Risk Management is a framework for monitoring and assessing the risks posed by vendors and provides a better understanding of the contract by tracking the metrics related to vendor controls, performance, and activities. Effectively managing vendors on an ongoing basis allows Organizations to evaluate the risk-to-cost ratio of doing business with vendors. There are many names for Vendor Risk Management such as Third-Party risk management, Supplier risk management, Agent risk management, and more.
Why is Vendor Risk Management Important?
Organizations around the globe continue to count on Vendors to be able to focus on core operations which in turn increases business exposure. Vendor Risk Management is essential to evaluate whether the companies you are associated with are upholding relevant laws, regulations, and industry standards. A Vendor Risk Management model should be scalable, adaptable, and built on industry-specific benchmarks to fast-track an organization’s management function.
In the post-pandemic era, where vendor relationships are expanding, more regulations and compliances are being reinforced, moving organizations’ focus toward vendor risks. Factors driving organizations to place more emphasis on vendor risk include:
- The great resignation and current recession driving outsourcing of non-core as well as core activities
- Ability to identify potential supplier/vendor performance/contractual failures proactively
- Digital transformation enables storing and sharing of data via the cloud
- Increased regulatory risk from offshore outsourcing and supplier networks
- Organizations’ tendencies to rely on products/services from specialist suppliers
A Vendor Lifecycle includes:
Key Risks Associated with Outsourcing Services to Vendors
When considering vendor risk management, many organizations immediately think about cybersecurity risks. But Vendor Risk Management entails so much more. While it is good to start small and focus only on cybersecurity risks as a first step, other types of risks should also be prioritized. These risks include:
A Successful Vendor Risk Management Program Adds Value to The Organization and Includes Benefits Such as:
How Can SPC NXT’s Detailed Approach Help in Vendor Risk Management?
SPC provides customers-specific engagement guidance during various stages of the vendor/ Dealer/ Franchisee lifecycle — from onboarding to ongoing monitoring to reassessment — based on the nature of a third-party vendor’s relationship with the customer, the stage of the relationship, and measured security performance.
Phase 1: Know Your Vendor’s Organization
Collecting this information helps ensure that the company is (1) legitimate and (2) licensed to do business in your area. You’ll also want to collect information on key personnel for use in further risk assessments.
- Articles of incorporation
- Business license
- Company structure overview
- Biographical information of executives and Board members
- Location (are they located in a high-risk Region?)
- Proof of location, such as photographs or an on-site visit
- References from credible sources
Phase 2: Know Your Vendor’s Financial Standing
Assessing financials isn’t as important for vendors as it would be for other due diligence targets, like potential acquisitions. However, you do want to check whether the vendor is financially solvent and paying their taxes. There’s no sense in working with a vendor that won’t be in business next month. Conversely, a strong growth pattern could forecast an increase in prices down the line
- Tax documents
- Balance sheets
- Loans and other liabilities
- Major assets
- Compensation structure
Phase 3: Cyber Risk
Data breaches that originate with Vendors are becoming increasingly common, and they rank among the most expensive types of cyber-attacks. Though assessing third-party cyber risk is traditionally left until after procurement, there is a strong argument for its inclusion in the due diligence process.
- Cyber risk assessment questionnaire
- IT system outline
- Penetration test results
- Site visit to assess physical cybersecurity
- History of data breaches
- Security awareness testing performance
Phase 4: Political & Reputational Risk
Vendors that will have access to important information or systems must be subject to an added level of scrutiny. Corruption or political weaknesses could potentially be dangerous, and their scandals could quickly become your scandals.
- Check the organization against key watch lists, global sanctions lists, and lists published by regulators
- Check key personnel against politically exposed persons (PEP) lists and law enforcement lists
- Risk-related internal policies and procedures
- Reports from agencies like the CFPB
- Litigation history of company and individuals
- Negative news reports
- Complaints and negative reviews
Phase 5: Operational Risk
As part of the vendor due diligence process, you’ll want to assess whether the vendor is exposed to operational risks that could negatively affect your company. One example of this type of risk would be downtime for a SaaS provider which could impact operations at the organizations in their network.
- Disaster preparedness plan
- Business continuity plan
- Employee turnover rates, employee lawsuits, and other indicators of a toxic culture
- Code of conduct
SPC NXT helps organizations avoid the pitfalls of vendor complexity with assets worth $10 billion investigated under Forensic & Integrity practices. With expertise in GRC, it provides comprehensive security and privacy management solutions such as Vendor Risk Management, Privacy, and Due Diligence support.