In business relationships, it is important to get partners who will help you with procurement and deliverables. This isn’t a new concept – companies have been engaging with third-party vendors to help with providing goods and services for as long as the business world has taken shape.
However, one new concept that is beginning to gain traction is risk management in the vendor management paradigm. To make things easier, experts have named this concept “vendor risk management.”
The importance of vendor risk management is pretty easy to understand. You want to manage vendors and their risk levels as much as possible and ensure that their flaws – if any – don’t necessarily affect your business or standing. With a robust vendor risk management program, you can understand the different levels of risk that third-party vendors and fourth-party vendors pose to your business and work on mitigating these risks.
Instead of relying on incident response, vendor risk management ensures that you can catch and prevent risks before they even happen.
While it is required in every field of business, vendor risk management is especially important when dealing with companies in related fields – such as financial services. Many of these companies will rely significantly on third-party partners to enable some of their mission-critical services and provide the best level of care to their customers. Regulatory expectations concerning third-party risk management processes have grown significantly over the past few years, and it is now important for companies to monitor and manage vendor risk.
Understanding Vendor Risk Management
Simply put, vendor risk management deals with monitoring and managing risks resulting from establishing relationships with third-party service providers and vendors.
To understand the importance of vendor risk management, it is critical to know the different types of risk that you can face when it comes to vendor relationships. These include:
Operational Risk
This is the risk that a third-party service provider will disrupt your business operations when you enter into a relationship with them. Generally, a vendor management consulting firm will recommend that you enter into a contractually bound service levels agreement with a third-party service to manage this risk.
Also, depending on how critical the vendor is to your operations, you might want to have a backup vendor in place to ensure that your business continues to operate smoothly. For technology firms and financial institutions, this is especially common.
Cybersecurity Risk
With business operations now going online, it is impossible for anyone to risk being left behind. This is why you need to have a solid online presence and be as active as possible to get clients.
At the same time, being online opens you to several types of cybersecurity risks. Cyber attacks and data breaches are especially common in today’s business world, and several other security incidents could easily hamper your operations and cause significant business losses.
So, before you enter into a partnership with any third-party service provider, you will need to ensure to conduct proper due diligence. You have to check through each vendor before onboarding them into your system. You will also need to monitor vendors through your business lifecycle to ensure that their existence doesn’t pose any threats or risks to you.
Compliance and Regulatory Risks
In its simplest sense, this is the risk that a third-party service provider will affect your company’s compliance with regulatory requirements – whether at the municipality, state, or federal levels. Some compliance requirements state that companies in certain industries aren’t to partner with a specific type of vendor. By understanding your limits and the nature of your third-party vendor, it becomes much better to stay within the limits of the law and focus on compliance.
Reputational Risk
Sima third-party service providers already have bad reputations with the public. Partnering with them will only do damage to your public profile as you move forward. So, it is important to conduct risk management on companies to find out their standing with the public.
Poor recommendations, inappropriate interactions with customers, and generally high levels of dissatisfaction should all be red flags when you’re considering your working relationship with third-party vendors. You can also tie the reputational risk to the cybersecurity risk. When a prospective third-party is known for suffering data breaches and hacks, partnering with them won’t do much to promote your brand.
Financial Risk
This is a pretty simple one. It is the risk that partnering with a vendor will have a detrimental effect on your company’s finances and ability to make money.
Amongst the many risks, this could just be the most serious. Every company is in business to make money. In fact, the only reason why you will be considering a partnership with a vendor is to bolster your capacity to make money.
At the same time, there are different ways that partnering with a vendor could cause you to lose money. For instance, a vendor could have subpar supply chain management practices and affect your company’s ability to make sales. Also, when a vendor poses other risks (such as cybersecurity risk or reputational risk), there is the risk of you losing money just as well.
Assessing the financial risk of working with a vendor is important to the overall success of your company. It is an important step that shouldn’t be trifled with at all.
Strategic Risk
This is the risk that your company won’t be able to meet its business objectives as a result of partnering with a vendor.
