For most businesses, third-party vendors are essential to the business ecosystem. A study by Gartner found that in 2019, 60 percent of organizations worked with more than 1,000 third parties.
As those networks continue to grow, so will the cybersecurity threats that third-party vendor relationships pose to your business. These partnerships have unprecedented access to sensitive data and systems across the supply chain network.
Suppose your organization owns sensitive data and has third-party vendor relationships. In that case, you must develop and use a robust third-party vendor risk management framework to combat the increasingly sophisticated threats of today’s risk landscape.
A vendor management framework is a system for developing a vendor management program. A framework includes recommendations for creating the program, acquiring and managing vendors, and determining each vendor’s value. It also defines the business processes and procedures to assess, monitor, and mitigate third-party vendor cyber risk.
Vendor Risk Management (VRM) identifies, analyzes, monitors, and mitigates risks that third-party vendors might pose to your business. These risks could affect your business’s cybersecurity, regulatory compliance, business continuity, or organizational reputation.
Ideally, a VRM framework is something you develop before you put any vendor risk management technologies or tools into place. In this way, a vendor framework helps to define and organize your overall vendor risk management program rather than duplicating your efforts.
This article will examine third-party vendor risk management frameworks, learn why they’re essential, and introduce the components you should consider when creating your vendor framework.
Benefits of Creating a Vendor Framework
Vendor risk management begins with due diligence before signing a contract. It also involves conducting a vendor risk assessment for each contractor, vendor, supplier, and service provider your company works with.
Understanding the whole vendor management lifecycle allows an organization to recognize the importance of its vendors and incorporate them into its business strategies. Companies with stronger vendor relationships can better manage their supply chain activities.
For this reason, many businesses either already have a vendor risk management program or are starting one.
While growing concerns over information security are the primary drivers behind this change, so are laws such as the European Union’s General Data Protection Regulation (GDPR). These laws require organizations to demonstrate how their third parties manage their risks and mandate third-party compliance as a condition of compliance.
Regardless of laws that require a compliance framework, however, using a vendor framework streamlines the vendor management process for your organization. Defining the policies and procedures for each stage in the vendor management lifecycle allows your organization to address issues and protect against disruptions when such threats inevitably arise.
Wherever your organization stands, a successful vendor risk management program must begin with a solid vendor framework at its foundation. Check out our supply chain risk management guide for more info.
Key Formats of a Vendor Management Framework
Choosing the Vendor Management Framework (VMF) is paramount to efficient operations. The type of framework adopted can significantly impact an organization’s approach to vendor relationships. Here, we explore the three predominant frameworks used globally by organizations:
1. Centralized Vendor Management Framework
The centralized framework operates as the nerve center, consolidating all vendor-related activities within an organization. This format offers a panoramic view of vendor relationships by housing vendor information, contracts, and performance metrics in a centralized database.
This framework proves particularly beneficial in larger organizations where multiple entities manage vendors. It streamlines operations, curbing duplication of efforts and reducing overhead costs.
2. Decentralized Vendor Management Framework
Conversely, a decentralized framework delegates vendor relationship management to individual departments or units. This model empowers localized decision-making, allowing tailored approaches to specific needs. For instance, departments heavily engaged with vendors can autonomously manage their relationships, optimizing efficiency.
However, decentralization may lead to procedure consistency and hinder a comprehensive overview of vendor relationships. Maintaining separate vendor information across units incurs higher administrative costs and challenges the holistic assessment.
3. Hybrid Vendor Management Framework
A hybrid framework merges centralized and decentralized elements, balancing consistency and flexibility. Certain aspects, like contracts and metrics, are centralized, while relationship management remains decentralized. This approach offers local autonomy while ensuring overarching coherence in vendor dealings.
Components of a Vendor Framework
The precise components that make up your vendor framework will depend on your organization’s specific needs. Here, we’ve provided some essential elements that can apply to a vendor framework in any industry and should be included if you want it to succeed.
A Solid Foundation
Before starting from scratch, consider some existing vendor cyber risk management frameworks.
The National Institute of Standards and Technology (NIST) Cybersecurity Framework is a helpful starting point. This framework is the foundation for most emerging cybersecurity regulations. It outlines standards, guidelines, and best practices for defining internal controls and managing cybersecurity risk in your organization and across third-party vendor relationships.
You may also consider the ISO 27001 information security management certification. ISO 27001 is an international standard for validating a cybersecurity program. It also helps to assess the security components of your vendor’s information systems. If your vendor has ISO 27001 certification, it indicates a solid cybersecurity program.
These are just two examples, but many best practices and established frameworks exist; creating your own from scratch is unnecessary. At the same time, leaning on standard approaches and terminology that your vendors already use or recognize (as opposed to a custom framework) will make the vendor cyber risk assessment and management process much more manageable.
Your third-party vendor risk management framework must anticipate the shifting nature of third-party relationships. Traditional third-party risk management programs focus on fixed points in the relationship lifecycle, such as the pre-contract due diligence phase.
This approach fails to capture risks that may arise from a change in scope, personnel, or strategy. One Gartner study also found that 83 percent of legal and compliance leaders identified third-party risks after due diligence and recertification.
To account for this flux in risk, build policies and processes that allow you to assess and monitor risk continuously over the entire vendor relationship. Gartner recommends using data-driven methodologies to determine the most critical risks and streamline vendor due diligence.
Considerations for Compliance
You also must factor compliance into your vendor risk management framework. Specific sectors are subject to strict third-party cybersecurity risk management regulations.
For example, in the healthcare industry, the framework must ensure that supply chain partners maintain continuous compliance with the Health Insurance Portability and Accountability Act (HIPAA) and the Health Information Trust Alliance (HITRUST).
In industries that classify (or “tier”) vendors by risk, such as the financial services sector, separate policies and procedures must be incorporated into the framework to address high-risk third parties.
Depending on your industry and the risks you address, the frameworks we’ve mentioned above can provide you with a foundation that can be augmented to meet your organization’s specific needs while ensuring effective supply chain management.
When creating your vendor framework, don’t go overboard. An overly complicated framework can be hard to govern and enforce. This is especially true if your organization is decentralized and you depend on different teams and business units to keep these processes and frameworks in place.
As your third-party network expands, your vendor framework provides a critical foundation for integrating security and risk management into your vendor relationship lifecycle. With your framework as your guide, you will be better informed about where your highest security risks lie to make more informed decisions about managing risks for the long term.
Specific Policies and Processes
Ultimately, your vendor framework should guide your organization during every stage of the vendor management lifecycle.
Your vendor framework needs to be specific about each stage in the vendor management lifecycle – including product development, quality management, sourcing, and procurement – without overwhelming the document with information.
It should lay out the policies and processes for each of the following stages of the vendor management lifecycle:
- Vendor identification. Your vendor framework should detail how you evaluate, choose, and enter contractual agreements with vendors. It should also define the metrics for vendor evaluation.
- Vendor selection. Before you select a specific new vendor and enter into a contract, your organization must conduct due diligence on that party. Assure that supply chain partners comply with any required regulations and industry standards that you face and that the vendor has robust business processes and secure information systems.
Your vendor management framework should clearly outline the pre-contract due diligence activities your organization needs to perform before onboarding a vendor. It includes how you will distribute surveys and questionnaires to prospective vendors and the requirements they must meet to move forward with the relationship.
Due diligence also requires that your organization monitor the vendor’s risks to you throughout the contracted period. Your vendor framework should clearly define your vendor risk assessment policies and processes so they can be repeated.
- Vendor segmentation. This step involves classifying each candidate vendor according to specific metrics such as lifecycle cost, availability and inventory control, quality management of goods and services, and support. Define which metrics you will use and how they will determine whether a vendor meets the requirements.
- Vendor onboarding. You must gather all necessary documents and data to add a vendor to the approved list. This process is called vendor onboarding, and your vendor framework should clearly outline how it should be done. Determine which documents you need, where they should be stored, and how often they must be reviewed.
- Vendor performance management. Now, it’s time to monitor how your vendor performs throughout the contract. Monitor inventory levels, shortages, and impacts on customer satisfaction.
Your vendor framework should provide you with the benchmarks you’ll use to determine whether your vendors are performing up to standards. When vendors aren’t meeting targets, supply chain activities and initiatives should be implemented to reduce the risk of disruptions.
- Vendor information management. This involves collecting data from each vendor lifecycle step, from onboarding to offboarding. Your vendor framework should determine which information is collected, how it’s collected, where it’s stored, and how often the data should be updated.
- Vendor relationship management. Identifying key vendors and cultivating long-term partnerships is essential for your business to succeed and meet changing customer demands. Your vendor framework should describe the methods to develop those relationships, including determining which vendor relationships are worth cultivating.
- Vendor contract management. This involves handling all aspects of vendor agreements from start to finish. Your vendor framework should describe how you will manage vendor contracts from onboarding to offboarding. For example, your framework should outline the steps that happen should a vendor breach its contract.
- Vendor offboarding. At the end of your vendor relationship, you must follow strict offboarding processes to remove a vendor from your information systems. This step is crucial because you must ensure that vendors off-board don’t have continued access to your data after the relationship ends.
Tools to Help
Technology is vital to vendor management because organizations can accomplish “more with less” by implementing automation. To maintain a competitive advantage and get the most out of your vendor relationships, you must be open to adopting new technology to streamline your vendor framework and, ultimately, your supply chain management process.
What Are the Five Stages of Supply Chain Management?
Even the most seasoned international business person may find supply chain management (SCM) overwhelming because of its extensive range of tasks. However, you can model the process by breaking it down into parts.
The Supply Chain Council created the Supply Chain Operations Reference (SCOR) model, which is widely used and highly effective to help supply chain management professionals address, enhance, optimize, and communicate the benefits of supply chain risk management practices. The SCOR model goes through five phases of the supply chain: plan, assemble, deliver, and then return.
First Stage: Plan
Businesses should ensure that their supply chain risk management strategies align with their business strategies. Lines of communication and SCM performance measurement procedures should be developed for the entire global supply chain.
Resource and demand planning are also crucial to define in this first stage. For example, you need to balance inventory levels with risk management to avoid the risk of shortages while optimizing profitability.
Second Stage: Source
This area of supply chain management organizes the purchase of components and raw materials.
Following the selection and evaluation of suppliers, businesses must negotiate contracts and agree on inventory control methods, warehousing, logistics management, and payment authorization processes. Forecasting models are loaded into the ERP (enterprise resource planning) system to drive demand on the supply chain.
Third Stage: Produce
Effective operations management is critical for production scheduling, manufacturing, and packaging. Businesses must ensure quality management and supply chain compliance requirements are met throughout production processes.
Fourth Stage: Deliver
The delivery stage includes warehousing and logistics management. Products are physically delivered to customers, and invoices are sent. Businesses must also handle all the import and export procedures to comply with local laws.
Fifth Stage: Return
Inevitably, products will be returned for one reason or another. Companies must have business processes to handle return authorization, receipt of returns, replacement of defective products, and issuing invoice credits. Businesses must set guidelines for:
- Returns of goods
- Monitoring expenses and performance
- Keeping track of reasons for product returns
Best Practices for Vendor Framework Management
Effectively managing vendor relationships is pivotal for organizational success, requiring a structured approach and adherence to best practices. Implementing a robust Vendor Management Framework (VMF) is just the beginning; understanding and implementing critical practices is essential for maximizing the value derived from these partnerships.
- Clear Vendor Selection Criteria: Define specific vendor selection parameters based on capabilities, financial stability, and alignment with organizational goals.
- Robust Contract Management: Develop detailed contracts outlining deliverables, timelines, and performance metrics, regularly reviewed and updated as needed.
- Effective Communication Channels: Establish efficient communication methods to ensure clarity, prevent misunderstandings, and facilitate information flow.
- Continuous Performance Evaluation: Regularly assess vendor performance against set metrics for ongoing improvement and alignment.
- Risk Management Strategies: Develop proactive risk mitigation plans, including contingency measures for disruptions and robust data security.
- Cultivate Strategic Partnerships: Foster collaborative relationships with key vendors, aligning goals for mutual growth and innovation.
RiskOptics Offers Supplier Risk Management Solutions
Once you’ve onboarded a vendor, keeping tabs on its security is only beginning. You’ll need to send self-assessment questionnaires, obtain penetration testing results, continually update your vendor data, and more.
A vendor management solution allows your organization to improve vendor relationships throughout the vendor management lifecycle while helping you reduce risks and save money. The ideal vendor management system should help your company fulfill its unique business goals and procurement needs and drive profits.
RiskOptics ROAR takes the hassle and the worry out of vendor risk management. Its continuous monitoring features ensure you’re always on top of your third parties’ compliance hygiene.
With ROAR automating your vendor risk management, you and your team can focus on other, more critical tasks. Sign up for a free demo today to see all the features RiskOptics can offer to improve your vendor risk management.