Vendor Risk Management Program and How to Automate it

Vendor-relationship is one of the most critical factors that define success of a business. Most organizations depend on their rich vendors’ networks to complete their business’ requirements and enhance their overall operations. This partnership significantly impacts the success and sustainability of an organization, but it comes along with high potential for risk which requires close attention.  

Index 

• What is Vendor Risk Management?
• What are the kinds of risks vendors could bring to an organization?
• What are the components of a vendor risk management program?
• Why automate the vendor risk management program with Partner Portal? 
• What are the benefits of automating the vendor risk management program? 

What is Vendor Risk Management?

Vendor risk management (VRM) is a security initiative that ensures that the engaged vendors do not cause unacceptable business disruption or a negative impact on business performance. As organizations collaborate with vendors to obtain products and services to enhance process optimizations, they also bring in certain risk to the system.  Hence, the VRM enables organizations to assess, monitor and manage their risk exposure from these vendors.   

What are the kinds of risks vendors could bring to an organization? 

The primary stage of effective vendor risk management is to understand what kind of risks a vendor can pose to your business. Here are some of the risks that an organization can face when dealing with vendors: 

• Strategic risk:  

The risk can happen when current vendors make business decisions that contradict the strategic objectives of the organization. For instance, if a vendor is hesitant to allocate required investment and other resources to match the organization's projected growth, it could pose a strategic risk due to misalignment between vendor and organizational strategies.  

To prevent strategic risk, the organization should establish vendor's capabilities to scale and meet growing needs.  The organization builds key performance metrics around that which require to be monitored to avert the risk effectively. The metrics would provide insights into their operation and processes, which can be used to measure if vendors’ actions and results are in favor of the organization’s strategic goals and values. 

• Operational risk: 

Operational risk occurs when disruption at the vendor results in a discontinuation of fulfillment processes. For instance, when a vendor fails to complete an order as they promised, which has a cascading impact on the organization’s manufacturing capacity or failure to provide the product to the end customer as scheduled. 

Right due diligence, real-time inventory update and contingency planning would help the organization in preventing the risk. This would help in ensuring there is limited or no impact of any operational failure at the vendor's level.  

• Reputation risk 

Reputation risk is wherein a vendor can directly or indirectly impact the organization’s status, brand, or the public impression of an organization. This could be due to various reasons including violation of laws and regulations, poor service, data breaches, fraud, etc at the vendor’s end.  

It can have serious consequences, as the organization’s reputation is a critical asset. To limit the risk, the organization needs to continuously monitor the vendors and conduct due diligence. Along with this, they should have robust incident plans to address these kinds of issues very quickly.  

• Compliance risk 

Vendor compliance risk arises when vendors violate the general law and regulation or those agreed-upon vendor and company. For example, vendors violate legal requirements such as taxation or other regulations as prescribed by relevant authorities. In case the same is brought up and cases are booked against the vendor, it could impact the organization as well. Similarly, In case the vendor acts rebellious against market practices companies follow or disobeying rules that would be in favor of companies' rights have a similar impact. Monitoring vendors’ actions or performance at regular intervals of time can help an organization in preventing the risk. 

• Information security risk: 

Information security risk represents ransom, malware, data breaches, and cyber events that occur from vendors’ unsecured access to servers and devices. A lack of or ineffective cybersecurity control at vendors end can pose the threat of external hacking of companies' sensitive data. A critical aspect of protecting sensitive information and preventing risk is adequate security measures and conducting frequent vulnerability tests at the vendor's premises.  

What are the components of a vendor risk management program?

Many organizations outsource products and services and engage with vendors to run a business effectively. The process provides mutual benefits to vendors and organizations. However, it can also expose the organizations to new risks associated with vendors. Hence, organizations need a vendor risk management program that is a comprehensive approach to managing vendors and minimizing the risks associated with them.  

An effective vendor risk management program covers the entire lifecycle of vendor relationships, starting from vendor selection to monitoring and risk assessment of the vendor. 

Within the program, an organization creates a management framework to identify, measure, monitor, and mitigate vendor management risks. Here are some of the basic components of a vendor risk management program: 

• Identify and measure challenges associated with vendors:  

Identifying potential vendors is not only complete with finding the vendors who have enough products to fulfill the order. It also consists of finding potential vulnerabilities, security risks, compliance issues, or operational challenges that may arise from vendor relationships. It enables organizations to develop strategies that can address and mitigate the risks and challenges effectively. 

• Monitoring vendors’ activities and performance: 

Establishing a clear process to monitor vendors’ activities, performance, and compliance ensures they meet the organization’s requirements and adhere to its terms.  Organizations need to define vendor performance metrics to track their performance. Hence, vendors' activities can be ensured while adhering to relevant regulations.  

• Mitigating vendor management risks: 

Implementing a system that can identify and escalate risks related to vendors, such as cybersecurity, data security, poor performance, etc, at regular intervals helps the organization to take immediate action, minimize risks, and reduce their negative impact on the organization.  

Why automate the vendor risk management program with Partner Portal?

Partner Portal, a cloud-based and effective vendor management system, streamlines vendor compliance assessment by storing all the vendors’ data in a centralized platform and assesses their risk by analyzing their performance. 

Partner Portal automates the onboarding process of potential vendors by verifying their documents and reduces the chances of compliance risks. When an organization raises a purchase order for some product, the portal allows vendors to commit the quantity they can deliver. So, organizations can also approach other vendors in the case one vendor is unable to deliver the complete quantity of products and prevent operational risk.  

Partner Portal provides a dynamic dashboard where organizations can monitor their vendors' performance based on some metrics, such as on-time delivery, responsiveness, commitment, and margin. It prevents the possibility of reputational risk. The platform provides real-time inventory updates that assist the organization in preventing operational risk. 

What are the benefits of automating the vendor risk management program?

An automated vendor risk management program collects, assesses, and monitors vendors’ information, automatically.  With this program, organizations can manage their vendors with minimal effort, increase efficiency and enable them to identify and mitigate risk more quickly.  

Its structural framework assesses and manages vendor risks and vulnerabilities, assures that all new vendors are evaluated and monitored consistently.  

The decision-making process becomes easier with real-time data and analytics. Organizations can identify high-risk vendors and prioritize their risk mitigation efforts. It reduces the chance of negative impacts on the business.  

The program also increases visibility into the vendor management system, includes vendor selection, vendor assessment process, and monitoring. It increases transparency between organizations and stakeholders, enables effective collaboration and better decision-making.  

FAQs: 

What is a vendor risk management program? 

Vendor risk management program is a practice of evaluating and mitigating risks associated with vendors or suppliers.  

What should a vendor management program have? 

Vendor management programs should include policies and procedures explained in shared documents, to drive cost control, risk management, service, and quality excellence. 

Why should a vendor risk management program be automated? 

By leveraging automated vendor risk management programs, companies can get more accurate risk assessments, faster response, and active approach to handling potential risks without human error.