A vendor risk assessment provides visibility into the risks your business faces when using third-party vendors’ products or services. Risk assessments are critical when a vendor handles a vital business function on your behalf, accesses sensitive customer data, or interacts with customers.
A company should always conduct vendor and third-party risk assessments when onboarding a new vendor. An organization should also continue to perform periodic risk assessments to assure its third-party vendors keep up with quality expectations and do not introduce unexpected risks to the organization.
What Are Third-Party Vendors?
Almost everyone who delivers a good or service to your business, but is not directly on your payroll, is a third-party vendor. For example:
- Suppliers of raw materials or components for goods you manufacture;
- Advisers, consultants, and contract labor (either short- or long-term contractors);
- Providers of business services, such as providers of payroll services, IT management, or customer service centers;
- Providers of business technology delivered via the cloud, such as customer relationship management software, data storage, or other applications.
What is Vendor Lifecycle Management?
Vendor lifecycle management is the approach you use to manage a vendor relationship from start to finish. Vendor lifecycle management puts an organization’s suppliers at the center of its procurement process, and allows you to reap maximum benefit from the relationship while keeping vendor risks as low as possible.
Vendor relationships typically follow this cycle:
- Establish and identify the need for a vendor.
- Find suppliers and request proposals from them.
- Make vendor evaluations for each vendor.
- Choose a vendor(s).
- Define the deadlines and terms of the contract.
- Monitor the relationship and results.
- Renew the contract at the end of its term, or end the relationship.
Vendor Risk Management Checklist
Every business must develop its own vendor risk management strategy, fitted to the company’s unique operations and risk. That said, every company can follow a few standard practices to develop a strong vendor risk management (VRM) program.
- Establish your risk appetite by creating a risk appetite statement.
- Determine the risks that are most significant to your organization.
- Select a framework to help you assess and manage vendor risks.
- Create a vendor inventory.
- Classify vendors according to criticality.
- Conduct risk assessments on all vendors, and implement controls as necessary to keep risks at acceptable levels.
- Monitoring vendor performance over time.
Why Do You Need Vendor Risk Management?
Vendor risk management (VRM) is necessary because vendors introduce risks to your organization, and your organization is responsible for handling those risks. If you don’t, your business can suffer all sorts of consequences – everything from lawsuits, to monetary penalties from regulators, to a tarnished corporate reputation, to lost business opportunities, and more.
Vendors that handle sensitive, proprietary, or classified information on your behalf are particularly dangerous. Regardless of how robust your internal security measures are, if your third-party providers have weak security practices, they constitute a substantial danger.
To mitigate those risks, organizations must have an enterprise-wide strategy to measure and evaluate their suppliers. If those enterprise-wide policies are not in place, individual departments may choose their metrics and ad hoc requirements, leading to a poor risk management process.
What Are the Benefits of Vendor Risk Management?
VRM helps organizations create and automate their supplier risk management program. It helps standardize onboarding, evaluations, identification, mitigation of risks, and risk monitoring activities. A good supplier risk management program will provide benefits too, such as:
- Better risk management in the future. You’ll have a good picture of where third-party and fourth-party risk stands after all suppliers are in your VRM program and categorized. Vendors should be classified as low, medium, or high risk so the VRM program can focus on medium and high-risk vendors.
- Reduce costs. By standardizing processes, your VRM program will make your vendor management processes more efficient. Managing and mitigating risk will reduce the occurrence of costly unexpected situations.
- Focus on business processes and compliance. Regulators are cracking down on companies that fail to manage third parties appropriately. Regulators classify vendors as an extension of a firm’s operations, and a violation could result in fines for both the company and the vendor.
- Better reporting. Gathering information without a proper VRM program can be challenging. Assure that your VRM program has robust reporting features so you can produce summaries for your board of directors and comprehensive supplier risk reports for management.
- Defensibility. When your organization suffers a data breach, regulators, consumers, and others will often pursue you in court. Even if a third party perpetrated the violation, your organization could be held accountable if you don’t have a VRM program showing you did your due diligence.
What Are Vendor-Related Risks?
Vendors can pose a wide range of risks to your business. Below are five categories of risk to keep in mind when assessing third-party vendors.
With the increasing sophistication and speed of cyber threats, it is more important than ever to monitor the cybersecurity posture of your suppliers.
When assessing performance, focus on vulnerabilities within vendor network environments. Requirements such as vulnerability scans and penetration testing allow you to see how strong your vendor’s cybersecurity is and how much risk the vendor is potentially bringing to your business.
A third party’s poor operations could saddle your business with unexpected costs. For example, if a critical supplier suddenly goes bankrupt, you might need to buy replacement materials at spot-market prices far higher than you expected. Even if the vendor is only going through a rough patch, you could experience higher prices as it tries to meet profitability targets.
Reputational risk is the public perception of your company. A vendor’s poor performance, unethical actions, or other misconduct could end up reflecting poorly on your business even if you had nothing to do with the issue in question.
Suppliers might not deliver their services as promised, disrupting your day-to-day activities. To limit operational risk, your organization should create a business continuity plan so that you can continue to operate in the event of supplier disruption or closure.
In most cases, a company is legally responsible for the conduct of third parties working on its behalf. So if one of your overseas distributors violates U.S. law by, say, bribing foreign government officials to win a business contract – U.S. prosecutors will look to hold your company accountable for that legal violation. Or if the vendor suffers a data breach, you might face penalties under the PCI DSS standard (protecting consumer credit card data) or the EU General Data Protection Regulation (protecting the personal data of EU citizens).
What Is the Vendor Risk Assessment Process?
Vendor Risk Assessments (VRAs) identify and evaluate the risks connected with a vendor’s operations and products, and their potential influence on your organization.
Vendor risk assessment is important because it compels your business to articulate the risks posed by your third-party vendor relationships; then you can begin to manage those risks in a disciplined, efficient manner. As discussed above, third-party vendors are often associated with financial, cybersecurity, information security, operational, reputational, and compliance risks.
How Do You Get Started With Vendor Risk Management?
VRM programs take a lot of work. To begin, you can take the following steps.
- Ask your accounts payable department for a list of all third parties receiving payments from your business. Compare that list to your own list of vendors, to see whether your VRM program is overlooking third parties that do, in fact, do business with your company.
- Once you have the lists from accounts payable, sort the third-party service providers into different groups based on the vendors they are: cloud storage providers, marketing agencies, suppliers, and so forth.
- Assess third-party vendor relationships at the service or product level. To understand the risks third-party service providers present, it’s critical to complete a risk assessment of every vendor’s service and product.
- Determine the due diligence requirements for high-risk and critical third-party vendors. For example, consider more frequent and in-depth monitoring if a third-party service provider is a high risk.
- Stay current with governmental and industry regulations and implement new guidance for third-party vendor risk assessments as needed.
- Update senior executives and stakeholders on any significant changes to the third-party risk assessments.
Mitigate Vendor Risks with ZenRisk
With ZenRisk risk management software, you can automate supplier risk management so you and your team can focus on other, more critical tasks. Freed from the tyranny of spreadsheets, your business can take a wiser, more holistic approach to risk management.
ZenRisk provides a single source of truth that assures your organization is always compliant and audit-ready. Policies and procedures are revision-controlled and easy to find in the document repository. Workflow management features offer easy tracking, automated reminders, and audit trails. In addition, insightful reporting and dashboards provide visibility to gaps and high-risk areas.
Using ZenRisk to manage your suppliers takes the hassle and worry out of risk management. Its continuous monitoring capabilities ensure that you are always on top of the compliance hygiene of your third parties. In addition, it provides templates and streamlines workflows, so you don’t have to do it all yourself.
Why not reach out to a Reciprocity expert today to schedule a demo?