Vendor Risk Management & Assessments: Procedures, Benefits & Best Practices

The pressure to perform in today's cutthroat business environment is at an all-time high. Businesses must perform consistently well every financial year to survive and grow in their respective industries. They must stay ahead of the competition, increase efficiencies, boost sales and revenue, all while maintaining control of their operational details and meeting reporting and regulatory requirements.

Fortunately, the cloud, SaaS, outsourcing, mobility, and third-party service providers have increased conveniences, efficiencies, and business profits globally. However, these advancements have also introduced new cybersecurity risks and challenges to businesses working beyond their four walls.

This article discusses vendor risk management and assessments and their essence in protecting businesses from third-party risks.

What is Vendor Risk Management?

It refers to the process of ensuring that your use of IT suppliers and service providers does not create the potential for business disruption or any negative impact on your business performance.

VRM technology supports businesses that must assess, manage, and monitor their risk exposure from vendors and third-party suppliers who provide IT services and products or have access to enterprise information.

Vendors and third-party suppliers can provide a minimal, one-time need for a project, or can turn out to be an ongoing business partner. VRM is an enterprise's oversight of all relationships with vendors at all stages, from acquisition to supply of products or services, onto the final evaluation.

VRM is a critical component of management because vendors can pose numerous risks, including compliance, reputational, financial, legal, and more. Thus, it is always in your company's best interest to assess and protect yourself from vendor risks at every stage of the relationship.

What are Vendor Risk Assessments?

Vendor risk assessments refer to the processes of screening and evaluating third-party suppliers or vendors as potential business partners. They aim to identify hazards and risks associated with a vendor's products and processes to determine if they are qualified and fit in with the organization's set requirements.

Performing a risk assessment is especially critical where a potential vendor will be handling one or more core business functions, will interact with customers, or have access to their data. What's more, the assessments are not only necessary when starting a new vendor relationship but also required to ensure that they maintain the expected quality standards and requirements without causing any risks to your company, customers, or investors.

Why Do They Matter?

Below are some reasons why vendor risk assessments are essential to your VRM program.

  • It's a Regulatory Requirement. Regulators require companies to acknowledge that there is an inherent, additional risk posed by outsourcing to a third party. An assessment is necessary to address the risk adequately. Assessments are completed on each vendor as well as on the service or product they provide.
  • Helps You Determine Specific Risk Areas to Monitor Closely. As you conduct a vendor risk assessment, you may realize that certain areas have a heightened risk factor. For instance, it could be the vendor's cybersecurity or disaster recovery planning. In such cases, it's good to talk with the vendor to see if they can improve on their end. If not, you may decide to terminate the relationship, to monitor the situation closely, to contractually commit the vendor to do something to mitigate the risk, or to implement additional controls on your end.

How to Conduct a Proper Vendor Risk Assessment

Vendor risk assessments help your business understand the risks it assumes in each third-party relationship and allows you to make informed decisions moving forward.

  1. Create a Vendor Risk Criteria

    The first thing is to define the criteria to use when evaluating risk. What to include will be relative to your business, industry, compliance requirements, and any other relevant factor. However, several risks cut across industries and include operational, privacy, transactional, replacement, downstream, compliance, and geographic.

  2. Develop a Preliminary Vendor Risk Profile

    Use your identified risk criteria as the basis for your formalized risk assessment. In your review, evaluate the risks of new vendor relationships based on your defined criteria and establish preliminary risk profiles for each. Assign a suitable level of due diligence and create profile tiers such as high, medium, and low.

  3. Perform Due Diligenc

    The next step is performing the appropriate due diligence to assess the identified risks. Here, you can collect information using questionnaires and other supporting documents such as compliance reports, audited financials, or disaster recovery plans. You may need experts (IT, security, compliance, finance, etc.) to help analyze the information.

  4. Address the Risks You Uncover

    Remember that the goal of a third-party risk assessment is not to eliminate risks, but to use data to understand the risks and find out how to mitigate and manage them.

Benefits of Vendor Risk Assessments

  • Improves your vendor acquisition strategy
  • Protects your business from risks associated with your vendors and their products or services
  • Enables you to meet governance and regulatory requirements
  • Allows you to cultivate efficient, productive working relationships
  • May lead to the creation of strategic partnerships
  • Increases operational or financial efficiencies
  • Expands the availability of your services
  • Allows you to focus on core business functions

VRM Best Practices

For your vendor risk assessment and management to be successful, it critical to follow the best practices below:

  • Compare your vendor list to the one from your accounts payable department to ensure you don't overlook a vendor.
  • Understand the business impact (is the vendor critical to your company) and regulatory risk (high, medium, or low).
  • Keep a disciplined approach.
  • Ensure that you complete an assessment on the vendor as well as their service or product.
  • Correctly determine your due diligence requirements, depending on the level of risk.
  • Remember that risk assessment is an ongoing concern and not a one-time occurrence.
  • Appropriately rate each vendor's risk for appropriate action.
  • Keep the senior management informed.
  • Stay abreast of industry regulatory requirements.

The Bottom Line

Vendor (third-party) risk assessments evaluate all the considerations in the outsourcing of products or services to a vendor. It is pertinent to understand all the risks associated with your outsourcing decisions entirely. Every outsourced vendor relationship comes with a certain amount of additional risk. It's inevitable.

Vendor risk assessments are sound business practices that can help your business avoid unanticipated and costly surprises down the line by knowing the risk upfront. Not only do these assessments allow you to evaluate your vendors' risks, but they also satisfy senior management and the board's expectations as well as regulatory requirements.

Whether you have stacks of third-party risk questionnaires or you need to assess their compliance, vendor management is the solution. It is now a critical function of any business that contracts third-parties for some of its functions.

If your cybersecurity program does not include vendor risk management, it's high time to start. Contact us at GreyCastle Security to protect your business.

Don’t forget to download our Risk Assessment infographic to share with your team, too!