Vendor Risk Management: What You Need to Know

Vendor risk management, also known as VRM, should be included in any organisation’s risk management strategy and processes, particularly in today’s interconnected business environment. If you are a company that outsources various services and goods, you’ll need to both assess and mitigate risks associated with dealing with third party vendors. While outsourcing can offer numerous benefits, such as cost savings and access to specialised skills, it also introduces new risks that must be managed effectively to protect your organisation’s interests.

Why risk management matters when dealing with third party vendors

In order to protect your business from potential financial, operational, reputational and compliance risks associated with vendors, effective risk management is vital. You need to have a plan and take some time identifying and prioritising potential risks. This process of identifying and mitigating risks early on can save your organisation a lot of money and headaches down the track. It can also help avoid damage to your company’s reputation.

Vendor risk management is also increasingly important due to the growing scrutiny of industry regulators in Australia when it comes to third party relationships. These days, you are expected to have stringent processes in place for managing and mitigating vendor risk. Failure to do so can result in fines or other penalties being imposed on your organisation.

The key components of vendor risk management

In order to effectively instigate a VRM plan, there are a number of key components to be considered and these are:

1. A vendor risk assessment: This is the process of evaluating each vendor individually and determining the possible risks of being associated with that vendor. For example, a transport company runs the risk of delays in deliveries. It’s also important to assess just how critical each vendor is to the daily operations of your business. Sensitivity of data is also another consideration.
2. Perform vendor due diligence: When considering entering into a professional relationship with a new vendor, it’s important to do your research first. Does the vendor have a solid reputation for reliability and quality of service? Is the vendor well established, financially stable and in compliance with industry rules and regulations? A new vendor needs to be able to tick all the boxes to reduce risk to your own operation.
3. Contractual risk mitigation strategies: When drawing up contracts with individual vendors, it’s vital to include provisions for key risks, which include things like data security, business continuity, confidentiality agreements and so on. Each provision should clearly define the responsibilities and liabilities of each party.
4. Perform ongoing monitoring and auditing: Once you have established a relationship with a new vendor, to help avoid and mitigate risks, regular monitoring and auditing are required. This also helps to ensure compliance and that contractual agreements are being honoured. Failure to continuously monitor your third party vendors could have catastrophic results in the future. Auditing your vendors regularly also enables you to decide whether to continue doing business with that particular vendor or to find a replacement vendor.
5. Incident response planning: No matter how diligent you are about risk management, problems do crop up from time to time and you have to have a plan in place for when they do. This could include disruptions to service, data or security breaches, loss of product or income and so forth. Careful planning will minimise the impact of any problems or issues.

Vendor risk management best practices

In order to ensure effective VRM at all times, put in place the following best practices:

• Establish a VRM framework: Your VRM framework needs to outline your company’s approach to managing vendor risks, including key responsibilities, processes and VRM tools.
• Risk-based approach: With VRM, adopt a risk-based approach by focusing on the vendors that pose the highest operational risk.
• Perform regular risk assessments: Remain diligent to both recognise and mitigate potential risks with vendors.
• Open communication and collaboration: Ensure the channels of communication and collaboration remain open between your organisation and its vendors.
• Continuous improvement: Learn lessons to continuously improve your company’s risk management processes.

Final words

Vendor risk management is a critical process that you must undertake to protect your business from the various risks associated with outsourcing. You can effectively manage vendor risks by taking a proactive approach to VRM.