Commercial businesses are hugely reliant on their vendor contracts and any high growth business cannot hope to be successful in either local or global markets without third party vendors. Forming essential relationships and connections in your supply chain or extended enterprise can improve profit and give you a competitive advantage. However, this increased reliance on third party vendors also increases financial, regulatory, and strategic risk. As well as any cyber security breaches or thefts of data and any risks the third party themselves may pose, the penalties for non-compliance can harm not just finances, but a business reputation. Vendor risk management aims to help your business or organization to understand, assess, evaluate and monitor any risks vendors may pose that will lead to a negative impact or outcome on either the value or service of the contract or to the business itself.
Vendor risk management is especially critical if your third-party vendor handles any sensitive customer data or provides a key service or function within your business.
It is important practice for your business to conduct due diligence and risk assessment on any new vendor, or continued monitoring on current vendors, to help prevent any issues and reduce any risk that may occur from poor performing contracts, data breaches, low quality or compliance.
There are many risks associated with vendor contracts and a key element of vendor risk management is to identify what type of risks the relationship may have on your business.
The most commonly associated vendor risks are:
Security & Cybersecurity
Successful risk management strategy for third parties and vendors also relies on a set of key elements and processes that can help manage each stage of a vendor contract, so your business can minimize the risks involved and get the maximum performance from each vendor.
There are widely considered five key elements to approaching vendor risk management and what best practices should be included at each stage of a vendor contract to mitigate the risks involved in extended enterprise. We have outlined the five steps below, to help you understand what you should include to have successful vendor risk management.
Identifying risk is the first step in vendor risk management. Due diligence is key during the procurement stage. Identifying the risks, the drivers behind them and where a vendor may leave your business exposed, ensures a correct assessment of whether the risk can be mitigated or managed against the possible value the vendor will bring to the relationship.
According to a global study, a third of all companies did not do any due diligence on third-party vendors they entered into a contract with. Not only does that create a huge amount of risk, but it also means they will be unlikely to get the best value out of their third-party vendor relationships.
If you want to know more about identifying risk, you can read more on our blog. Third-Party Risk Management: Best practices for protecting your business.
The next step is to evaluate or analyze the risk. Having a framework in place to successfully evaluate the risks and the scope of what each identified risk may pose on the different areas of your business is a vital best practice.
Once you have analyzed the risks and risk drivers, creating risk profiles for each vendor can help with the analysis of where and how your business may be exposed. When creating risk profiles, specificity is your friend; your risk profiles need to be relevant to elements of your business and the situation. Different countries and contracting for specific products and services for example, have different adherence to regulations, will create different risks and therefore different risk profiles.
Businesses should always assess the level of risk vendors pose and categorize the third-party risk profiles based on the level of risk and the type of relationship required. This allows for better management of the costs and time involved for research and analysis into higher-risk companies, which will be far higher up the risk priority list than vendors with a lower risk profile.
Once each vendor has been rated for risk, you should determine which vendors may need further due diligence, whether or not they provide a critical role to your business function and if and how the relationship moves forward. By assessing each risk, you can help determine if or where in the chain you are exposed by having a relationship with the vendor and ensuring you have fact-based decision making as the driving force.
Once a business has chosen the correct vendor to form a relationship with, it is imperative that any contracts are carefully written with consideration of any risks that have been identified during the risk profiling and assessment. By adding in clauses and obligations to contracts, you can help mitigate any areas of concern.
Communication is also key, any indication that a vendor may be posing a substantial risk (across all risk types) needs to be contained quickly. Depending on the risk type, this needs to be sent to the relevant management teams, including updating upper management/senior executives. Excellent communication and transparency can make this process efficient and easy, poor communication can mean delays and a possible negative impact on your business. By having this level of communication in place, discussions and solutions can be put in place to mitigate the risk and then communicated company-wide if necessary.
Proper monitoring of risk can prevent any gaps or delays in the extended enterprise of a business. Regular monitoring of the overall lifecycle of vendor contracts and the vendors themselves, along with the risks identified during the assessment process, can highlight any non-compliance with regulations, operational issues and security breaches that may have negative and costly consequences on your business. It is also important that any new risks, or risk areas are continually identified so that steps can be taken quickly to avoid any damage to your business or your business reputation.
Monitor and stay up to date with all new industry regulations and government legislation to avoid being blindsided by risks that could have easily been identified and dealt with. This also allows your business to regularly update your risk management and prevent unnecessary non-compliance.
Business will never be risk-free, however having a good strategy and the framework in place to support it, businesses can make the most of high-growth strategies and business expansion, without having to deal with a negative outcome.
To support your business, implementing a digital, automated vendor risk management solution is highly recommended.
Although the risk management processes and steps stay the same, with a digital solution your business can reduce the time and resources spent on dealing with the processes and substantial amounts of data associated with risk management and vendors. With automated software, businesses can streamline their corporate governance into one easy to use system and improve productivity and efficiency overnight.
Different software providers offer different capabilities, but the risk management solution offered by Symfact has helped ensure businesses stay compliant with both internal policies and outside regulatory bodies across their third-party network by assessing, monitoring and mitigating risks that can have a detrimental effect on their relationships and business. To give you an example of what an automated solution can offer you, here are the benefits the software from Symfact could offer your vendor risk management.
Gain real insights into clients, suppliers, vendors, and agents
When launching new business relationships, their software can design, build, and publish intelligent questionnaires to help identify any risks
Symfact has links to all leading external databases such as those from Dow Jones, LexisNexis, Dun & Bradstreet and Refinitiv, giving you access to advanced security profiling of both businesses and individuals and a comprehensive background check of all vendors
Their Identity management features can identify, authenticate, and investigate individuals and companies, helping to detect and prevent fraud and reducing the risk any vendor may pose to your business.
Symfact’s third party risk management software also offers features such as incident capture and reporting capabilities. This ensures all incidents are stored and automatically assigned for investigation, whilst analysis tools can assist with legal protection for you during the lifetime of a third-party vendor relationship. Their configuration ability is also useful as it can help your business to increase accuracy in risk models and processes, as your current vendor risk management framework can be configured to match both perfectly.
With a level oversight of contract performance and data only a digital solution can offer you, your business can ensure that higher-risk vendors can be prioritized, and fact-based decision making is the driving factor behind any steps taken to mitigate and minimize further risk.
If vendor risk management software sounds like it could be beneficial for your business, then please do not hesitate to contact us here at Symfact. Our software aims to help you work smarter, not harder, so see what we can do for you today.