Your company may be exposed to financial, operational, and reputational risks when conducting business with third parties. While third-party providers may be required to run your organization smoothly, you must manage risks proactively. This is where vendor management and evaluation programs come into play.

What is a Third-Party Vendor Management Program?

Third-party vendor management consists of all the processes necessary for a company to monitor and manage the interactions with its third-party vendors. Some companies rely heavily on third-party vendors to help get products to market faster, as well as to run business operations or provide other critical services.

Third-party relationships, however, also introduce several risks to an organization, including regulatory, reputational, information security, cybersecurity, and financial risks. In particular, if a vendor has access to your corporate network, that vendor can access sensitive corporate, employee, and customer data. That poses a cybersecurity risk to your business. 

Companies must develop strong vendor management practices and implement Vendor Risk Management (VRM) systems to manage such risks.

A vendor risk management plan should capture all the behaviors, access, and rules that an organization and its third-party vendors agree upon. The plan should include details about testing and assurance required to prove that the third-party service provider can do its job. The vendor risk management plan should also include a checklist of all the steps a third-party vendor must follow to keep its risks at some satisfactorily low level.

The Risks of Not Having a Vendor Risk Management Solution

Let’s look at a few of the threats you’ll face if you don’t spend enough on vendor management.

Reputation: You must know of supplier acts that may affect your reputation. People frequently comment that “no press is bad press”. However, if you receive unfavorable coverage, it might lead your company to keep and attract clients much slower while losing customers progressively, a phenomenon known as silent attrition.

Operational: If you don’t have adequate vendor management, you’ll probably have no idea what contracts have been signed. And you’ll almost certainly pay for identical services from numerous sources without knowing it. If you don’t know who your vendors are, it might lead to operational inefficiencies or service agreement issues.

Compliance: Nobody wants an unfavorable audit. In today’s regulatory environment, it’s a fair bet that failing to invest in vendor management will result in a low audit grade soon.

Spending more money: By failing to engage in vendor management, you are putting your business in a situation where surplus funds will be recklessly spent. If you don’t have a strong hold on your vendor list or are operating a decentralized vendor management program, your business may have engaged with superfluous suppliers who provide comparable products or services as another vendor you interact with regularly.

Inadequate scope of third-party management: You may be unsure who should be on your actively controlled vendor list. This may cause havoc throughout the corporation!

Cutting costs: Cutting corners to save time may also result from a lack of sufficient investment in vendor management. Cutting costs may have a negative knock-on impact, such as poor work product, a lack of communication within the business, a drop in service standards, and more.

Why Should I Invest in Third-Party Vendor Management?

Third-party vendor management is a comprehensive approach to managing your business’s relationships and activities with external partners. While VRM requires an upfront investment of time and resources, the long-term benefits in risk mitigation, cost savings, efficiency, and strategic growth make it worthwhile for businesses of all sizes.

Below are some of the most significant advantages of effective third-party vendor management:

  • Risk mitigation. Third-party vendors may introduce a business to various risks, such as data breaches, supply chain disruptions, and regulatory compliance issues. Effective vendor management helps identify, assess, and mitigate these risks, assuring your business is adequately prepared to address potential challenges.
  • Cost efficiency. Proper vendor management enables businesses to negotiate better pricing and terms with vendors, leading to more significant cost savings. VRM also fine-tunes procurement processes, lowering the risks of overpayments, double billing, and other financial issues.
  • Enhanced focus on core competencies. Outsourcing certain functions to third-party vendors allows a business to focus its internal resources and expertise on its core competencies and strategic objectives instead of getting bogged down in peripheral activities.
  • Regulatory compliance. Many industries have strict regulations and compliance requirements. Effective vendor management assures that vendors meet these standards and follow applicable rules, reducing the risk of legal and regulatory issues.
  • Improved performance monitoring. Vendor management provides mechanisms for tracking and evaluating vendor performance. This helps you hold vendors accountable for their promises and agreed-upon service levels.
  • Reputation management. The actions of third-party vendors can affect a business’s reputation. By carefully selecting and managing vendors, a company can maintain a positive image and avoid negative associations.
  • Disaster recovery and business continuity. Vendor management includes assessing the vendors’ disaster recovery and business continuity capabilities. This assures that the vendor can still support your operations during a crisis.

Best Practices for Third-Party Vendor Management

The following are best practices to guide your third-party vendor management process:

1. Prioritize Vendors

Risk levels vary from vendor to vendor, so you must prioritize vendors by putting those with the most risk first. You can do this by establishing a risk rating formula. For example, Risk = Likelihood of Data Breach x Impact of Data Breach/Cost. Based on the results, perform those calculations on your vendors, then group them into high, medium, or low categories.

2. Implement Access Control

A 2021 survey found that 54 percent of respondents didn’t have a proper third-party access list, and 64 percent didn’t identify parties with sensitive data access. This is a severe misstep since giving your vendors too much access to your systems is a common cause of breaches. 

While controlling all access is challenging, consider using Identity and Access Management (IAM) and a zero-trust approach for authorized access.

3. Continuously Monitor and Assess Vendors

Traditional risk management is costly and point-in-time. Security ratings provide ongoing quantitative security measurements akin to credit ratings. They offer real-time, non-intrusive insights into vendor security posture, allowing continuous risk assessment across the portfolio.

4. Automate third-party vendor management

Wherever possible, automate third-party risk management processes. Automate vendor risk management tasks like data collection, risk assessment, continuous monitoring, compliance, and vendor onboarding. This streamlines risk management, assures consistency and reduces errors.

5. Review Insurance Coverage

Do you trust your third parties to have enough insurance for potential disasters or data breaches? Typically, third-party agreements mandate specific insurance levels. If a third party lacks the necessary coverage and an incident happens, your organization could face avoidable risks.

Periodically re-evaluate your insurance needs after signing the contract with the third party. Changes in technology, delivery, or manufacturing locations may render your existing coverage insufficient. 

6. Plan for Worst-Case Scenarios

Not all vendors will meet your standards, making business continuity, disaster recovery, and incident response planning vital—plan for contingencies, including removing non-compliant vendors.

Business continuity planning also reduces customer disruptions due to third-party failures, whether from misconfigurations or natural disasters affecting third-party data centers.

The Third-Party Vendor Management Lifecycle

The third-party risk management lifecycle, also called third-party relationship management, outlines the steps in a typical relationship with a third-party vendor. Here’s a brief overview of the main stages:

Stage 1: Third-Party Identification

  • Identify current and potential third-party vendors.
  • Use existing data sources, integrate with technologies such as Configuration Management Databases (CMDBs), or conduct assessments/interviews.
  • Collect initial information about the third party to assess inherent risks.

Stage 2: Evaluation and Selection

  • Evaluate vendors using factors unique to your business needs.
  • Choose the vendor based on Requests For Proposals (RFPs) and suitability.

Stage 3: Risk Assessment

  • Assess vendor risks using standards such as ISO 27001, SIG Lite, NIST 800-53, HITRUST, and other standards.
  • Understand the risks associated with the vendor’s services.

Stage 4: Risk Mitigation

  • Identify and flag risks, then assess whether those risks align with your risk tolerance.
  • Implement controls to reduce risks to an acceptable level.
  • Continuously monitor risks for changes.

Stage 5: Contracting and Procurement

  • Review vendor contracts for critical provisions and clauses related to risk management.
  • Assure that contract terms such as scope, payment, confidentiality, and liability are addressed.

Stage 6: Reporting and Record Keeping

  • Maintain compliance by keeping detailed records.
  • Use third-party risk management software for auditable record keeping.
  • Create reports on program aspects for improvement.

Stage 7: Ongoing Monitoring

  • Continuously monitor vendor relationships.
  • Adapt to changes in regulations, news, breaches, or vendor usage.
  • Monitor factors such as mergers, process changes, and financial viability.

Stage 8: Vendor offboarding

  • Develop an offboarding checklist for vendors.
  • Assure that all necessary measures are taken for security and compliance.
  • Maintain a detailed evidence trail for regulatory purposes.

What to Look for in Third-Party Risk Management Software

When choosing third-party risk management software, look for the following features:

  • Risk Assessment Automation. Look for tools that automate the time-consuming tasks of scoping assessments, distributing questionnaires, and collecting responses. Automated assessment scoping helps focus on critical risks and reduces vendor management fatigue.
  • Configurable Reporting. Robust reporting capabilities are essential for proving compliance with regulations and industry standards. Configurable reporting allows you to generate role-specific reports and dashboards quickly, demonstrating the effectiveness of your risk management plan.
  • Continuous Monitoring. Your third-party risk management software should monitor vendor performance and risk changes in real-time. This will allow you to stay alert to any shifts in their risk status, assuring quick responses to emerging issues. It should also send notifications of any new risks.
  • Integrated Compliance Tools. Embedded compliance tools assure alignment with internal policies and external regulations to reduce supplier risk. This makes them especially valuable for heavily regulated sectors such as finance and government.

Benefits of Automating Vendor Management Lifecycle

Both suppliers and buyers gain from a successful vendor management lifecycle. However, there is no one-size-fits-all solution to the intricacies of vendor-buyer relationships. When companies handle hundreds of suppliers, challenges are unavoidable. As a result, businesses want all the assistance they can obtain to manage each vendor effectively.

This is where an automated vendor management process comes into play. They start the value development process by creating a healthy and beneficial corporate environment. Here are some of the benefits of using an automated system:

Better Efficiency

Organizations may benefit best from each activity by automating vendor management operations. The vendor management team can more easily discover irregularities or delays.

A simplified management process results in a shorter lifespan. As a result of an automated vendor management procedure, productivity, efficiency, and performance are increased.

Reduced Costs    

Using automation in the vendor management lifecycle decreases operating costs in various ways. With improved visibility by automated systems, organizations may quickly identify and remove needless expenses. They also help to reduce the amount of workforce necessary for vendor management.

Expanding Vendor Base   

The automated vendor management system relieves the support staff of time-consuming administrative procedures and paperwork. As a result, they are free to concentrate on vendor selection. It allows expanding firms to broaden their supply base. Using an automated system, businesses may easily manage a vast vendor base.

Improve Supplier Relationships    

A robust cooperation with suppliers is essential for the collaboration’s future success. There is no room for human error or delays when the vendor management process is automated. Vendors will not be required to wait for onboarding, contract negotiations, or payments.

When the entire system runs well, the supplier-buyer relationship improves dramatically.

Effective Vendor Selection   

Efficient vendors are essential to every organization but are challenging to find. All low-level and administrative chores are handled by a reliable and automated vendor management system.

As a result, the procurement staff may devote more time and effort to vendor selection and onboarding. They can also impose criteria and choose qualified and experienced providers.

RiskOptics Third-Party Risk Management Solutions

Keeping track of third-party vendors and their threats to your business can be too much for spreadsheets or traditional methods. A robust vendor risk management program is necessary to help you streamline your onboarding and vendor risk assessment process, and it requires active and consistent management to limit a company’s third-party risk exposure.

RiskOptics ZenGRC is intuitive and straightforward to use. It streamlines evidence management, workflows, and reporting for risk management and regulatory compliance.

The platform offers a simple user experience combined with automation and analytics to facilitate vendor risk management. ZenGRC distributes and collects due diligence questionnaires. It will even aggregate the results and assign a risk score to each vendor.

It automates compliance and shows how it affects your primary goals. This real-time view lets you explain the impact to key stakeholders and make intelligent choices to protect the organization and data and earn trust.

Get a demo to learn more about the uses of ZenGRC for your company.

3 Challenges Healthcare Compliance Teams Are Set
to Overcome with Reciprocity ZenGRC in 2022