If you’re not sure what vendor risk management (VRM) is, it is a process that attempts to deal with the risk inherent in dealing with third parties or suppliers to your business. It is largely concerned with reducing or mitigating these risks, especially as they apply to specific areas which might potentially be very harmful to your own business. These areas include cybersecurity, operations risk, compliance risk, reputational risk, financial risk, and strategic risk. Any one of these could cause your company a great deal of embarrassment or harm if it were to somehow impact your company.
Cybersecurity
There will always be a serious risk of loss of data or financial loss if one of your vendors has their system corrupted, and that gets passed on to you. Before onboarding any new vendors, make sure you perform all necessary due diligence to ensure that their hardware and software are free of all malware and viruses. You will also need to continue monitoring their operations, so that they don’t become vulnerable at some point, and pass that vulnerability along to you.
Reputational Risk
You could be significantly harmed by associating with a vendor who has suffered major reputation damage. Unhappy customers, poor interactions, and bad recommendations are a few of the areas where affiliated vendors might have public relations issues, and that could tarnish your company’s image by association. The worst possible reputation damage would probably be having a vendor who had just suffered a major security breach and was going through all the embarrassment and recovery that the situation calls for.
Compliance Risk
It’s entirely possible that even though you are in full compliance with all local and federal regulations and requirements particular to your industry, you are working with one or more vendors who are not. If you’re in the financial industry, this could be a huge problem, because any apparent lack of compliance there could be accompanied by heavy fines and censures. It will also have a major impact on those in the healthcare industry, or who are in government agencies.
Operational Risk
There is a risk that a vendor whom you collaborate with can cause a significant problem with your Operations. This goes usually under contractual Service Level Agreements, and if the problem is serious enough, you may have to break off relations with that particular vendor. For this reason, it’s a good idea to have a backup vendor at the ready whenever you might need one.
Strategic Risk
You could associate with a third-party vendor who becomes an impediment to you achieving your business objectives. When this happens, they will have become a strategic risk, because they may be dragging you down in some area and preventing you from reaching the business objectives you had set for yourself.
Financial Risk
It’s entirely possible that you have affiliated yourself with a third-party vendor who represents a financial risk to your company. The best thing to do when this happens is to find a suitable replacement for that one vendor, so you can get back on track and restore your earnings to what you anticipated.
Why is Vendor Risk Management so Important?
The reason it is so critical these days is that you could go awry in any one of the risk areas described above, and that might easily drag your company down into the muck. Having good vendor risk management is essential if you’re to maintain good cybersecurity, regulatory compliance, and business continuity. An effective program of vendor management can help vendors under your umbrella and minimize the damage done by any overspill in your own company.
This is very much the case for businesses that fall under heavy regulatory scrutinies, such as government industries or healthcare industries. Given the fact that so much emphasis today is on effective vendor management, it has become extremely important to manage vendor performance and to monitor their operation for any possibility of injecting risk into your relationship.
Why you need Vendor Risk Management
There are quite a few reasons why every reputable company would need vendor management, starting with the need to comply with all regulations. Global regulators are scrutinizing operations more closely than ever before, and you simply must adhere to all known requirements of your industry. In addition, many companies need to outsource some of their operations, in order to reduce costs and remain in business. That almost forces you to be in collaboration with a third-party, so you are automatically exposed to whatever conditions prevail in those companies.
Because reputational damage can be so severe, senior management in many companies are now insisting that vendor management is in place, so as to protect them from such incidents. Using more offshore vendors has likewise opened up the door to increased vulnerability because as the saying goes, you’re only as strong as your weakest link. And these days, organizations are much more dependent on services and products from specialist vendors because they simply cannot be purchased in-house, and sometimes not even domestically.
Importance of Third-party Vendors
With all the inherent risk, you might be wondering why companies even bother to affiliate themselves with potentially risky third parties. Part of the answer lies in the fact that there is such a high degree of specialization in most businesses. It’s also fairly impractical for most small companies to do every single operation necessary for the production of their goods. By working with a third party, you can focus on your core strengths, and allow a specialist to do the operations which are not in your streamlined workflow.
You can usually benefit from economies of scale when working with third-party vendors, and this will save you money in the long run. Many businesses serve global clients, and it has become necessary to collaborate with global suppliers in order to satisfy that demand. So third-party vendors are here to stay, and it’s up to you to have good vendor management to save your company from any related distress.