The Definitive Guide to Vendor Risk Management

Definitive-Guide-to-Vendor

As technology grows and businesses expand globally, many organizations are discovering an increasing need for a vendor risk management program. Supply chains are becoming larger and more complex, outsourcing is becoming a regular business practice and underscoring all those relationships and contracts is an element of risk.

No vendor relationship is without risk, however, to have a successful business, it is important to correctly mitigate and manage the various risks associated with having an extended enterprise and numerous vendors.

Understanding vendor risk management and how it works within the connectivity of modern business, is an essential component for any business dealing with a multitude of contracts, even for smaller businesses, understanding and implementing a vendor risk management system can have benefits. So, we are here to provide you with everything you need to know in our definitive guide to vendor risk management.

What is vendor risk management (VRM)?

Vendor risk management is the process in place to correctly identify, assess and then mitigate the risks posed by vendors. This process allows for risk-aware and fact-based decisions thanks to the visibility into vendors and the associated management of the relationships.

Although often referred to as vendors, this term is often used interchangeably with third parties and suppliers. Vendors is the term used for providers of a digital service, suppliers are often referred to as such because they supply physical goods, and third party is used to describe all.

Vendor risk management is not a single set of definitive processes, but rather a series of best practices as business aims and requirements will vary dramatically depending on business size, location, and industry.

What is a vendor risk maturity model? (VRRM)

A vendor risk maturity model should not be confused with a vendor risk management system. A VRRM is simply the scale and the score given to your current risk management, taking into account factors such as efficiency of processes, what metrics are in place and the responsiveness to high priority risks and whether risk-aware decisions are made.

This is a useful tool to evaluate where a business is in terms of their current risk management, where improvements could be made and what can be done to ensure better outcomes for the business or organizations.

Why it is important to manage vendor risk

Due to the ever-changing nature of compliance and the increased reliance on a global market, 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 vendors also increases financial, regulatory, and strategic risk. As well as any cyber security breaches or thefts of data and any risks the vendors themselves may pose, the penalties for poor risk management can harm not just finances, but business reputation.

Although risk has always been a part of contracts and arrangements between third parties, with digitalization at the forefront of driving business strategy forward, compliance with data regulations and ensuring both you and your vendor have comprehensive security in place is now high on the agenda for businesses looking to succeed in their market.

The introduction of GDPR in Europe has had wide-ranging consequences for risk management. Even if your business or organization is not based in Europe, if you deal with global vendors as part of your supply chain or outsourcing, the chances are high that at some point you may have to trade or be contracted with vendors in the EU.

Therefore, it is important to manage your vendor risk and reduce the risk of a negative impact or outcome on either your business or the services you provide.

Managing your risk is not just about the penalties involved however, and by having robust risk management processes in place, your business is more likely to be able to assess and manage risk and correctly gauge the level of risk appetite your business is open to. This not only helps your overall business strategy moving forward and can allow for scalability and business growth without adverse effect but creates business opportunities you otherwise would not be able to manage.

What is a vendor risk management program?

A vendor risk management (VRM) program is a framework of processes and controls to help identify, mitigate, and manage the risks posed by any relationship with a third party. These can include reputational, financial, security and organizational risk, as well as compliance with all legal and regulatory requirements.

A VRM program is often software-based, as software can help automate risk management processes, as well as helping to measure inherent risk and provide tools to assess and monitor your vendors. Different providers will offer different features and functionality and the size and nature of your business will also play a part in whether you implement a full VRM program using available software, a specific VRM software provider such as Symfact, or whether you manually create a program of processes.

Regardless of your VRM program, you should always follow vendor risk management best practices if you want your vendor relationships to be successful.

Best practices for vendor risk management

Many businesses or organizations will manually manage their risk using a basic framework and set of processes, but for businesses to successfully strengthen and evolve their VRM, there needs to be a series of risk management best practices to get the most value out of your VRM program and to accurately assess, monitor and manage any risk that may have a negative outcome for your business. When creating your VRM program, bear in mind the following best practices:

Identification

Identifying risk is the first step in vendor risk management. Firstly, you must identify the risk types that are most important to your business and identify and define your risk appetite, this helps reduce the amount of time spent on vendors that do not fit with your current risk strategy.

Secondly, you must conduct due diligence on potential new vendors. This helps identify and determine risks, the drivers behind them and where a vendor may leave your business exposed. To get the most accurate assessment of a third party, due diligence can often be supported by using external data sources. These sources need to be relevant to specific elements of the industry a business is in. Different countries and contracting for specific products and services for example, will create different risks and therefore different risk profiles. By using the correct data sources, a business can reduce the overall cost of the risk assessment stage.  

Assessment & Evaluation

The next step is to evaluate 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 your vendor risks and risk drivers, creating risk profiles for each current vendor and potential vendors 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. It is also important to note that due to current increasing regulations and standards, especially regarding data protection, an evaluation of the increased risk of the expansion of your business is important and should be included in any risk profile.

When each current or potential vendor has been rated for risk, you should determine which vendors may need further due diligence, whether 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 ensures you have fact-based decision making as the driving force.

You should also consider what sort of assessment framework you should have in place. Although most businesses can work with generic risk assessment practices based on the risk types that are important, certain industries will have specific industry standards and assessments that must be adhered to and considered as part of the vendor risk management process.

Classification

Another best practice is to categorize your vendor risk profiles based on the level of risk, your businesses risk appetite and the type of relationship required. This allows for better management of the costs and time involved for research into potential higher-risk companies, which will be far more than third party options with a lower risk profile.

The most common way of doing this is to classify your vendors into three tiers, with tier 1 being highest risk. However, the type of classification is largely irrelevant if there is some form of categorization of your vendors, both current and new.

Mitigation & Monitoring

Monitoring your vendors and their contracts is an essential process within a VRM system and an example of a best practice.

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.

Proper monitoring of vendors and vendor risk can prevent any gaps or delays in the supply chain or running of the 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 and ensures you stay highly responsive to any issues or risks.

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.

You should continually 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 by vendors.

 

Automation

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.

Automation can be particularly useful when onboarding new vendors and allows for a continuous monitoring of vendor metrics without having to allocate the resources to manually monitor and assess risk and performance.

Automating your workflows, or even just the recurrent tasks within your workflows and processes, such as sending notifications can help save your business both time and money.

Automated monitoring of your data sources is one of the big advantages of integrating a VRM program into your business. The combination of data analysis and the granularity of data provided by a VRM, should give businesses an accurate representation of what vendors are successfully meeting their requirements and obligations regarding efficiency and output and reducing the operational risk from delays in the process.

 

VRM Software with Symfact

Here at Symfact, we believe by implementing our VRM software, you ensure your organization is adopting the best platform available that can help optimize your business potential, whilst minimizing all areas of risk, from due diligence through to off boarding a vendor.

The VRM solution offered by Symfact has also 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.

We offer a centralized repository for all your data and contracts, creating a unified data pool from which to track specific data. You can do this using our metadata search function and data tagging. Being able to evaluate and monitor the data can help you prepare for inherent risk, rather than reacting to problems when they occur.

By having our VRM software in place to compile the information you need from data sources that are specific to your business, using our intelligent questionnaires and our external databases, your business can have a successful contract lifecycle. Here at Symfact we offer advanced security profiling and background checking by connecting to Dow Jones, LexisNexis, Dun & Bradstreet and Refinitiv, whilst our software can design, build, and publish intelligent questionnaires to help identify risk.

We also offer Identity management features that can help your business identify, authenticate, and investigate individuals and companies, helping to detect and prevent fraud and reducing the risk any third-party may pose to your business. By utilizing our identity management, you can also better understand your vendors, improving your business relationships and reducing future risk.

Having an overview of workflows and reducing the time spent by your employees on the actual management of contracts due to the efficiency of an automated vendor risk management system, means that productivity will improve, and you can manage all types of risk effectively, which in turn will improve business growth and revenue. At Symfact we offer VRM software that includes:

  • Analytics of specific information and documents relating to risk with our custom reports tool
  • Track data and events to predict possible risks, be proactive instead of reactive
  • Continually track and monitor the data important to your business strategy to ascertain opportunities where strategic risk may be taken to maximize revenue

A better risk management process can also allow your business to access potential business opportunities and development and by optimizing your vendor risk management by using the tools included with our software, you can monitor any KPI’s, allowing you to assess risk and project long-term revenue. Plus, the reporting and auditing features of our automated platform means you are always alert to compliance regarding contract terms and provisions, avoiding the financial and reputational risks associated with poor compliance with standards, regulations and internal policies and procedures. By implementing vendor risk management software, and by utilizing automated technology, you have the benefit of being fully prepared for any business expansion and growth in number of vendors, as well as helping to protect your business by assessing, monitoring, and mitigating risks that can have a detrimental effect on your relationships and business,  Specific features offered by Symfact include:

  • Ensure compliance with data regulations by selecting the location of your server and therefore data, depending on your legislative and jurisdictional requirements
  • Due to features being automated, such as document storage, our software uses less human resource, reducing the risk of an accidental data breach
  • Use our configurable access control interface to allow and restrict access as and when you need to, helping to mitigate security risk

If you are concerned that implementing a VRM program like the one offered by Symfact wouldn’t be compatible with your current system, then we can integrate our software with a range of different systems and software thanks to our cross-platform, open API architecture. Any existing tools or processes, or even legacy systems that are already being successfully utilized within your business can be retained and implemented into their platform. This capability can help your business to increase accuracy in risk models and processes, as your current 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 our vendor risk management software sounds like it could be beneficial for your business or organisation to help manage your current relationships, or if you are experiencing a period of quick growth and would like the framework and a platform on which to manage increasing risk, 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 with our free demonstration.