Vendor risk management (VRM) is assessing and managing risks that may impact a company’s ability to do business with its end customers. By implementing quality VRM practices, companies can protect themselves from potential losses caused by vendor bankruptcy, fraud, regulatory fines, reputational issues, or other disruptions.
This article will discuss the basics of vendor risk management, why VRM software is essential, and the steps to establish VRM in your organization.
What is Vendor Risk Management?
Vendor Risk Management (VRM) empowers organizations to proactively identify, assess, and mitigate risks from working with vendors. The goal is to protect the organization from potential threats these relationships pose.
Organizations should have a VRM plan to protect themselves from potential threats. The annual BCI Supply Chain Resilience surveys have often shown in excess of 70% of organizations suffering significant supply chain disruptions.
A VRM plan outlines how risks will be identified, assessed, and mitigated and should include due diligence to ensure that vendors are reputable and can be trusted. Due diligence is the process of investigating a vendor to assess its suitability as a business partner in terms of financial stability, ownership, reputation, and track record.
However, due diligence is daunting in today’s environment. Searching for and curating information can be overwhelming. Those performing due diligence have to sift through massive amounts of data and attempt to find insights.
Exiger’s DDIQ risk analytics platform helps businesses to accelerate due diligence. It zooms in on the risks that matter most and to help you make critical business decisions faster.
Vendor risk management software is essential for businesses because it enables at scale the identification, assessment, and management of risks associated with vendor relationships. By using this type of software, companies can protect themselves from potential financial losses and other reputational damage.
Why is Vendor Risk Management Software Essential?
As global supply chains become more complex and businesses rely on an ever-growing vendor network, VRM software has become essential to ensure business continuity and maintain a high level of quality control.
In fact, third-party risk is considered the top threat by many compliance leaders. By using software to automate the risk assessment process and track vendor performance over time, businesses can ensure that they are identifying and mitigating any cyber threats lurking in their supply chains.
Vendor risk management software is a critical tool for businesses to ensure that the products and services will be received and do not open up the business to reputational or financial harm. By assessing vendor risks and understanding the potential impact, businesses can make more informed decisions about which vendors to work with and how to mitigate any potential problems.
Vendor risk management software can help businesses in several ways:
- Automating the risk assessment process. By automating the vendor risk assessment process, businesses can save time and resources that they would otherwise spend on manually reviewing vendor and their associated supply chain risks.
- Tracking vendor performance. Vendor risk management software can help businesses track vendor performance over time, identify potential problems early on, and take corrective action before those problems cause severe damage.
- Mitigating risks. By understanding the potential risks associated with a particular vendor, businesses can develop strategies to minimize those vulnerabilities. For example, if a company is concerned about a vendor’s financial stability, it may require the vendor to provide proof of access to adequate cash resources.
- Improving decision making. By using software to manage vendor risk, businesses can make more informed decisions about which vendors to work with and how to prioritize which vendors to focus on from a risk management perspective. This improved decision-making will lead to better overall financial performance.
Exiger’s Supply Chain Explorer can help your organization rapidly surface, understand, and mitigate critical threats to your entire supplier ecosystem—from fourth-party level down to the Nth tier—with just one click. It enables reviews of your trade supply chain and cyber supply chain. Supply Chain Explorer pulls in more than a billion contact records and more than 31 million structured and unstructured data sources. Register now for a free, comprehensive trial to discover how you can instantly identify and assess the criticality of threats in your environment.
How to Establish Vendor Risk Management
There are several elements to include when establishing vendor risk management, such as how to identify risks associated with each new vendor, developing risk mitigation strategies, ongoing monitoring of vendors, and updating your risk management program as needed.
Here are specific steps to help maximize your organization’s vendor risk management capability:
- Choose a vendor risk management software
- Standardize procedures
- Determine a management lifecycle
- Categorize vendors
- Automate risk management workflow
- Monitor the reporting dashboard
- Continuously improve vendor risk management
1. Choose Vendor Risk Management Software
Here are a few tips on how to choose a vendor risk management software that’s right for your business:
- Determine your needs. What type of risk data do you need to consider? What level of information security do you require? What are your potential financial and operational risks that need to be integrated into your software solution? What is the scale of your implementation in terms of vendors and users?
- Compare features. Some third-party vendor risk management software platforms offer more comprehensive solutions than others. One may be more user-friendly or come with a lower price tag. Another may send crucial notifications and reminders. It’s important to compare features and find software that offers your business the right balance of functionality, security and affordability.
- Consider implementation. Some platforms may be more challenging to implement than others. You’ll want to choose software compatible and capable of being integrated with your company’s existing systems and easy for your management team and personnel to use.
- Get a demo. Once you’ve narrowed down your requirements, get a demo of the software you’re considering to see how the platform works and how it will fit into your business workflow. It can also be useful to obtain existing customer references.
- Make your decision. Choose the vendor risk management software that offers the best risk data, security, and affordability for your business.
2. Standardize Vendor Risk Management Procedures
One way to reduce risk is to establish and follow standard procedures for vendor risk management. Having a clear and consistent process for evaluating and managing vendors can help ensure that risks are identified and third-party risk management is streamlined. As part of this it is important to have an appropriate governance process supported by the executive team to ensure relevant functions and objectives are properly aligned.
There are several factors to consider when developing your vendor risk management process:
- The types of risks associated with your business and industry and how these are evolving
- Your company’s tolerance for risk
- The resources available to manage vendors
- The regulatory environment in which you operate
- Ensuring you have a good understanding of the financial impact of vendor failure.
Once you have a good understanding of these factors, you can develop standard procedures for vendor risk management. Here are a few tips to get you started:
- Develop criteria for assessing vendor risk following a set of metrics
- Create a process for the selection, onboarding, and monitoring of vendors based on templates and questionnaires combined with insights provided by external risk data sets
- Develop a vendor risk metrics dashboard to help report and guide prioritized actions
- Establish procedures for responding to changes in vendor risk
- Document your strategy and make it available to all relevant parties
3. Determine a Vendor Risk Management Lifecycle
By understanding how often and long your organization working with a particular vendor, you can manage the risks associated with that relationship more effectively.
You may need to cycle through vendors more or less frequently. Establishing a standard risk management lifecycle will help ensure that all stakeholders are aware of the risks associated with each vendor and that those risks are being effectively mitigated.
Here are a few key considerations to keep in mind when determining a vendor risk management lifecycle for your organization:
- The frequency with which you will be working with the vendor and the impact their failure could have on your organization. If you are only working with a vendor on a one-time basis, then the risk management process will be different from working with them on a more regular basis and where their failure will significantly impact on your financial performance.
- The nature of your business. If you are in a heavily regulated industry, you will need a more rigorous vendor management process. The risks associated with working with a vendor are higher in a regulated industry.
- The size of your organization. If you are a large organization, the risks associated with working with a vendor can have more significant consequences from a reputational and regulatory perspective.
4. Categorize or Segment Vendors
Categorizing vendors is a way to clearly understand which vendors pose the most significant risk to your organization. This will help you prioritize your resources and take appropriate action to mitigate risks.
There are a few different ways you can categorize vendors and use should be made of external risk data sets to provide further insights:
- By industry. Depending on the sectors your organization works with, certain types of vendors may pose more risk than others. For example, if you work with healthcare organizations, vendors dealing with patient data may be more of a risk than those that don’t.
- By the level of financial impact risk. You can classify vendors according to low, medium, and high risk.
Exiger’s RiskIQ is an automated risk rating product. RiskIQ sources over 300 data points on every third party from the DDIQ report to create a consistent and reliable risk score, empowering you to perform solid third-party risk management.
- By size. Smaller vendors may be more likely to experience financial difficulties or have less robust security measures, making them higher risk than larger, more established vendors.
- By location. Vendors based in countries with geopolitical exposures and less stringent data privacy and security laws may pose a greater risk than vendors in other countries
5. Automate Risk Management Workflow
Automating your workflow can be a huge help when managing risk. Automation will save you time, but it can also help you track vendor performance over time and ensure that risks are adequately mitigated.
Here are four ways that automating your risk management workflow can help with establishing vendor risk management:
- Improvements in new vendor selection. By quickly carrying out some initial due diligence on vendors being considered.
- Continuous monitoring. When you automate your risk management workflow, you can set up continuous monitoring of your vendors. You will receive alerts for any changes in their performance or compliance status, allowing you to take action quickly if necessary.
- Improved communication. Having all communications and documentation in one place can avoid miscommunications between different functions in your organization or with relevant vendors
- Greater efficiency. Automating tasks such as vendor performance reviews and risk assessments can free up time to focus on other aspects of your business to drive improved financial performance.
- Enhanced oversight. Having all of the sensitive information you need in one place helps to quickly identify and mitigate risks, and monitor for any changes.
Powered by DDIQ, Exiger’s Insight 3PM workflow tool seamlessly facilitates the vetting of your most important vendor relationships. It allows for third parties to be assessed by criticality, determining the depth of due diligence and documentation of risk mitigation. This also helps your company meet regulatory and compliance needs such as complying with the Uyghur Forced Labor Prevention Act and managing ESG, financial, reputational, and jurisdictional risks.
6. Monitor Reporting Dashboard
By establishing a vendor risk management program, you can ensure that your organization minimizes vendor risk. A monitoring dashboard should provide instant visibility into vendor performance and risk.
A monitoring dashboard also enables you to track and analyze vendor performance data, such as identifying trends and issues that may indicate future problems.
7. Continuously Improve Vendor Risk Management
Establishing a vendor risk management (VRM) program is vital to nearly any organization given that they nearly all rely on third-party vendors to provide goods or services. A robust VRM program can help an organization avoid or mitigate the risks of using external vendors, including financial, legal, disruption,and reputational risks.
Continuous improvement is a proactive approach to managing vendor risk. It involves:
- Regularly assessing and updating rules and procedures around risk
- Improving VRM processes and controls to keep up with changes in the business environment
- Reducing the likelihood of disruptions or reputational and regulatory issues caused by third-party vendors
There are many ways to improve VRM continuously, but some key steps include:
- Conducting regular updated vendor risk assessments – Thorough formal risk assessments should be performed regularly based on the vendor risk segmentation. Risk assessments should identify and revaluate the risks associated with each third-party vendor and inform decisions about how to mitigate those risks.
- Implementing risk mitigation strategies to accommodate for example changes to contracts, insurance requirements, or how the vendor is used.
- Monitoring vendors on an ongoing basis to ensure compliance with contract terms and that organizational expectations are met. Monitoring can be done through audits, reviews of vendor performance, and relevant automation.
- Communicating and where appropriate collaborating with vendors, such as keeping vendors up-to-date on changes to the VRM program and communicating expectations and requirements.
- Evaluating the VRM program periodically to identify areas for improvement, which can involve program review, stakeholder surveys, or vendor risk assessment data review.
Implement Quality Vendor Risk Management with Exiger
Exiger offers comprehensive VRM services that help organizations identify, assess, and mitigate risks associated with their vendors. Our team of experts has the experience and knowledge to help you create a customized program that meets your specific needs. Exiger’s experienced compliance professionals provide complete coverage, from design and implementation to ongoing training and development.
We’ll leave your program in better shape than when we found it.
Please get in touch with us today to learn more about how Exiger can help your business establish effective VRM processes.