What is Vendor Risk & Vendor Risk Management (VRM)?

It’s a crucial initiative that needs to be put into place early, ideally during your evaluation of potential vendors and elsewhere in the procurement process. An effective VRM program ensures that these third-party vendors, products and services do not disrupt your business or cause financial or reputational damage.

Otherwise?  You face serious risks: 53% of organizations have experienced at least one third-party-caused data breach, and the remediation costs average $7.5 million.  That’s far more than the typical cost of instituting a vendor risk management program.

Chances are, your company outsources parts of its business to third-party vendors. Often, this means the vendors have access to intellectual property or sensitive information – internal or customer-related. Privacy and security are sensitive issues; most organizations require their vendors to uphold both internal standards and to abide by industry and government regulations.

Some of the common regulations and regulators that extend their purview to third-party vendors, consultants and contractors, and can thereby expose your organization to regulatory scrutiny and penalties, include:

• FFIEC
• Federal Reserve
• OCC
• FDIC
• CFPB
• CECL
• GLBA
• Sarbanes Oxley

• GDPR
• CCPA
• Dodd-Frank
• SEC
• FINRA
• NYDFS 500
• HIPAA

All of these serve to protect your organization from risk that is brought in by third and fourth-party vendors, especially as these are usually outside your direct control. To effectively control and manage vendor risk, you need a collective view of all potential threats.

As an article by Deloitte clearly articulated,

“Historically third-party risk has been a procurement issue. The process went something like this: Procurement would identify potential savings from outsourcing; legal would draft a contract; and that would be it – few would bother following up on the relationship. That simply doesn’t cut it anymore.”

What are the various types of vendor risk?

Reputational risk

Your organization’s reputation is of utmost importance – negative public perception of your company can affect customers and your overall business. Third-party vendors can damage your reputation in various ways, from having interactions that aren’t up to your company standards, to being negligent with sensitive information or even violating regulations. From dissatisfied customers to data breaches that cause disclosure of customer information, there are a lot of potential risks to take into account.

Compliance and legal risk

Also known as regulatory risk, this arises from the violation of laws, regulations and internal policies or procedures that your organization should follow. The laws will vary depending on your industry and sector. Non-compliance can result in substantial fines, so it’s important to ensure that your third-party vendors abide by the applicable laws, rules, regulations, policies and ethical standards.

Financial risk

Also known as credit risk, this can arise when third-party vendors are unable to meet the financial performance that was agreed upon in your contract. There are two main forms of financial risk:

• • Excessive costs can hamper growth and lead to debt. Regular audits of the vendor can help ensure they are spending according to the terms agreed upon.
  • Lost revenue can be managed by recognizing which of your third-party vendors directly affect your revenue and monitor their risk accordingly.

Cyber risk

Cyber risks are constantly changing and evolving. As they grow in sophistication, managing your cyber risk is more important than ever before. All third-party vendors do not pose the same level of risk; it’s important to understand and evaluate which third parties to focus on and dedicate additional resources to. At the same time, you need to define what your organization defines as an acceptable level of risk.

Once you have this established, you can assess separate vendors and make changes and adjustments accordingly. Assessment should include a look at compromised systems within the vendor environments, and which of these can leave your organization most vulnerable to cyber attacks.

Strategic risk

When vendors make decisions that don’t align with your organization’s strategic objectives, they pave the way for strategic risk. The trick is to establish key performance indicators (KPIs) and use these to monitor strategic risk into various vendor operations.

Operational risk

When vendors fail to provide their services as they were meant to, from inadequate or failed internal processes, this can disrupt your organization’s activities. Creating a business continuity plan can help you navigate your company in the unfortunate event of a vendor shutdown.

Strategies for mitigating vendor risk:

Assess the risk potential

Identify your third-party vendors, and evaluate which pose the level of risk that requires monitoring. Prioritize your high-risk vendors and have a thorough risk assessment process that will be the basis of your reviews.

Monitoring

Again, we can’t stress how important it is to periodically monitor your third-party vendor risks. This should be a continuous process, not performed just once and then forgotten about.

Due diligence

This is paramount to avoiding unnecessary risk in the first place. Make sure you thoroughly research all third parties before signing a contract. Ask the right questions and be careful to identify as many risks as possible before you establish your business relationship.

Choosing the right risk management framework can be the key to your organizational success with third-party vendors. At the end of the day, effective vendor risk management needs to be transparent, auditable and efficient to be effective.

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