Vendor risk management: A comprehensive guide for 2024

Vendor risk management (VRM) primarily involves assessing the risks each vendor, contractor, or service provider might bring to your company. This ensures that the vendors don’t jeopardize your company's cybersecurity environment, legal standing, daily operations, or reputation.

In 2022, Forrester found that 60% of security issues were due to external parties, and Gartner predicted that 60% of enterprises would emphasize third-party risk management in vendor-related decisions. This focus comes in response to a 300% increase in supply chain attacks last year, with expectations of a continued rise in vendor breaches in 2023, highlighting the growing importance of vendor risk management.

Increasingly, many businesses focus on managing these risks, exacerbated by data security and privacy concerns. Regulations like the EU’s General Data Protection Regulation (GDPR) also push companies to ensure their vendors handle data safely. 

In this blog post, we investigate important topics when it comes to vendor risk management, including:

• What is vendor risk management, and how does it work?
• What is the benefit of vendor risk management?
• How do you build a vendor risk management policy?
• What should you include in your vendor management policy?
• Vendor risk management best practices today

Let’s dive in!

What is vendor risk management, and how does it work?

Vendor risk management involves a detailed process to prevent business disruptions and minimize adverse effects on performance stemming from engagement with service providers and IT suppliers. 

This approach often leverages vendor risk management software, which helps managers evaluate, oversee, and control the risks associated with third-party vendors. These suppliers either offer IT products and services or have access to a company's information. 

In this context, the key aspect of a vendor risk management policy is to provide a strategic angle, ensuring that the relationships with these third parties do not jeopardize the enterprise's stability and operational integrity.

What is the benefit of vendor risk management?

The notable benefits of vendor risk management include:

1. Risk minimization

Categorizing vendors in your vendor risk management software as low-, medium-, or high-risk gives a clear view of potential risks. To minimize risks effectively, concentrate on medium- and high-risk vendors. Additionally, mandate risk assessments for those posing significant risks, leading to either their practice improvement or removal as a vendor.

2. Strong regulatory compliance

Comprehensive vendor compliance is a must-have for industries under regulatory scrutiny, including GDPR, CCPA, and HIPAA. With rising third-party breaches, regulatory bodies singularly hold companies accountable for their vendor management. 

A robust vendor risk management software not only aids in fulfilling industry regulations but also prepares you for regulatory evaluations.

3. Efficient cost and time management

Establishing a vendor risk management framework with a unified structure enhances organization-wide data accessibility. This inclusivity extends beyond vendor relations managers, incorporating teams from finance, legal, IT, procurement, and more. 

A synchronized effort in vendor categorization contributes to a more streamlined process, leading to time and cost savings in the long-term management of the vendor risk management program.

4. Strengthened defense mechanism

In an age where absolute security is hardly ever guaranteed, focusing on defensibility is key. In case of a breach, having a well-documented vendor risk management workflow can prove your due diligence. It also shows your efforts to monitor vendor risks and potentially reduce liability, especially if the breach stems from a third party.

5. Enhanced transparency

Vendor risk management software offers stakeholders a more transparent view of ongoing vendor management processes, including selection, assessment, and monitoring. This increased clarity builds trust, fostering better collaboration and decision-making among stakeholders and organizations.

How do you build a vendor risk management policy?

Creating a vendor management policy is not a one-size-fits-all task, as each organization has its unique array of vendors and sensitive information to safeguard. Here are important aspects to remember while establishing a solid framework for overseeing vendor interactions.

1. Purpose

The purpose section is an introductory overview, outlining the policy's scope akin to a thesis statement. 

For instance, a purpose statement might state that a company employs third-party goods and services to further its objectives, and this vendor management policy outlines the guidelines for safeguarding information while using these third-party offerings.

2. Audience and scope

These sections specify who the policy pertains to. Diligently identifying your vendors ensures comprehensive monitoring and minimizes the risk of overlooking any vendor. 

Considerations for the policy should include various security aspects such as human resources, physical environment, network systems, data, access control, IT procurement, management of fourth-party vendors, incident handling, business continuity, and compliance.

3. Internal roles and responsibilities

Provide details of the roles involved in vendor management, specifying each role's responsibilities. This should include who is accountable for enforcing and updating the policy.

4. Vetting process

The vetting process sets the stage for establishing a secure and reliable relationship with third-party vendors. Here, you should outline the steps taken to thoroughly evaluate potential vendors before entering into agreements. 

Key elements include:

• Initial screening
• Risk assessment
• Capability analysis
• Compliance checks
• Interviews and site visits
• Reference checks

5. Vendor compliance criteria

Vendors must meet to comply with your organization's standards and policies. It is a benchmark for ongoing vendor evaluation and ensures that all vendors consistently adhere to the required standards. 

Elements to include are:

• Regulatory compliance
• Security standards
• Performance metrics
• Reporting requirements
• Ethical standards
• Review and auditing

6. Policy enforcement

Finally, articulate how the policy will be enforced, including potential repercussions for non-compliance, such as contract termination, access revocation, or legal penalties.

Vendor risk management best practices

To manage risks effectively, we have curated some vendor risk management best practices you can follow:

1. Use a procure-to-pay (P2P) system

Effective vendor management, from the initial onboarding to the development of mutually beneficial partnerships, requires a holistic and integrated approach, particularly in a comprehensive P2P system. 

Incorporating Spendflo's Third-Party Risk Assessment into a P2P system enhances vendor management by providing clear visibility into spending and vendor behaviors. This streamlines onboarding, ensures compliance management, and offers real-time monitoring and analytics for a more secure and data-backed vendor management process. 

The result is a more streamlined, informed, and resilient P2P process—decisions are based on financial considerations and a comprehensive understanding of vendor-related risks.

2. Assign a dedicated risk team

Creating a dedicated team to oversee vendor risk can immensely help. This team is responsible for identifying and addressing issues promptly, formulating and enforcing policies. As a result, everyone in the organization is considered a stakeholder in vendor risk management.

3. Formalize risk assessment

Your procurement team should onboard vendors following established protocols, starting with a formal vendor assessment. This process, ranging from simple questionnaires to sophisticated digital assessment tools, is facilitated by a superior P2P solution. 

This identifies and eliminates unsuitable suppliers while scrutinizing qualified ones more effectively.

4. Track vendor performance

Metrics such as cybersecurity robustness, HIPAA compliance, delivery punctuality, and use of sustainable materials should be incorporated. Tracking these KPIs helps in monitoring supplier performance. 

Vendor management solutions can streamline and accelerate this process, allowing for consistent monitoring and real-time adjustments to the supply chain to prevent potential risks.

5. Watch out for fourth-party risks

In some cases, even without formal agreements with your suppliers, vendors can pose risks. To counter this, implement stringent vendor risk management standards for your suppliers to manage their vendors effectively. 

Suppliers adhering to these standards are preferable, reducing overall risk and streamlining your supplier assessment and onboarding processes.

6. Include risk management in business continuity planning

Supplier-related risks, from data security breaches to unethical behaviors, can also threaten your business. Vendor risk management is closely tied to disaster response and recovery. 

Make sure your vendor risk management program has strategies in place for quickly substituting any supplier that doesn't comply with your criteria and presents intolerable risks.

Take control of your vendor risk management with Spendflo

SaaS buying and optimization platform Spendflo simplifies vendor risk management by automating and streamlining the process, significantly reducing manual work and ensuring uniformity. 

The tool effectively monitors vendors' adherence to various frameworks and facilitates audits effortlessly with its built-in audit tool. The intuitive dashboards provide a quick overview of which vendors are compliant and which are not. Therefore, your teams can concentrate on business-critical tasks by leveraging Spendflo for automated vendor risk management. 

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