Vendor Risk Management – Areas You Need to Address Now  

Vendor Risk Management

Due to organizations’ expanding use of vendors and their growing role, vendor risk management is becoming increasingly relevant. Vendor Risk Management is growing as a business discipline and is driven by the desire to improve vendor contracts and performance as well as mitigate vendor risks.  

A number of factors are contributing to the increased attention towards vendor risk management, including the growth of digital commerce, the development of cloud services, and increased regulatory governance. Vendor relationships are not all the same. In order to truly use a risk-based approach, businesses must first categorise their vendors according to pre-established standards, and then decide on the level of continuous due diligence and oversight that is necessary given the allocated level of risk. 

Top five risk relating to vendor management

  • Data Security and Cyber Risk: Data breaches involving vendors continue to grow in prominence. This is a complex area that requires coordination between stakeholders responsible for IT, security, compliance, legal and finance. The most significant thing to do here is ensure there is a comprehensive and clear vendor oversight plan for all vendors that collect, process, manage or store data. You need to be sure you’ve addressed relevant contractual issues up front such as data ownership, service levels and indemnification.
  • Contractual risk: The risk associated with contracts continues to be a major concern for most organizations. Since they are usually left to the business owners to negotiate, they don’t always incorporate the necessary risk mitigation clauses that they should. Simple steps to reduce your contractual risk with vendors include establishing criteria for contractual provisions and developing a mechanism to ensure that all contracts are verified against those standards before being signed.

    Additionally, you need to implement a contract management system to gain visibility into contracts. I’m amazed at how many organizations have no central system to facilitate the management of their vendor contracts. A contract management system will centralize information, provide visibility into key dates, terms and conditions, and allow you to proactively manage compliance. These systems are relatively inexpensive and, in my opinion, a no-brainer for an organization of any size. 
  • Regulatory Compliance Risk: Risks related to regulatory compliance include the risk that a third-party may violate a law or regulation you have required them to follow. Industries are showing increasing interest in this subject. Government authorities place a heavy emphasis on the regulation of organisations like health plans, healthcare systems, and credit unions as well as those that get federal grants. Additionally, third-party providers are subject to and governed by laws. 

    If you’re in this boat, you will want to ensure your vendor risk management activities enable you to evaluate how well your vendors are complying with the appropriate laws and regulations. This could involve routinely checking to see if vendors have policies and procedures in place to implement upcoming and existing regulations. In addition, vendors should be aware of them. Regulators are particularly interested in data privacy. Therefore, it’s vital that the rules, regulations, and practices recommended by the regulatory authorities are followed. 
  • Operational risk: Operational risk is the possibility that the failure of a vendor’s systems, personnel, or procedures will result in a significant shutdown of some aspect of your firm. Your dependence on a vendor comes hand in hand with operational risk, which is often higher with suppliers who offer services like outsourcing, IT systems, and data. 

    Two efficient methods to lower operational risk include performing regular on-site and/or due diligence inspections and creating a backup plan in the event that a high-risk provider fails. Particularly for mission-critical vendors, these two risk-mitigation actions complement one another. 
  • Financial risk: Financial risk is the possibility that a vendor connection will have a negative financial impact on your firm. Excessive expenses and lost revenue are two ways this can occur. The possibility of exorbitant costs typically receives the most attention. The majority of businesses are now skilled at handling competitive bids and securing fair prices. However, managing costs, which results from enforcing contract compliance, successfully managing the procure-to-pay cycle, and carrying out regular cost and contractual audits, has little to do with price negotiations. The work completed after the vendor contract is finalised reduces the possibility of exorbitant charges. 

The dependence on vendors to fund your own revenue-generating activities represents the other financial risk. Examples include, among others, fulfilment facilities, outsourced service providers, and fundraising organisations. It might also include vendors whose products you use to manage financial transactions. Problems with these vendors could delay payments or, in the most extreme cases, result in significant losses for your company. It’s crucial to recognise and categorise these types of suppliers in order to create the most effective due diligence and monitoring procedures. You should also incorporate this information into your operational risk planning to address contingencies.

The goal of effective vendor management is to thoroughly evaluate risk so that you can segregate and manage your most crucial supplier base.

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