What Vendor Risk Can Do to Your Company and How to Manage It
Vendor risk is a natural part of doing business when you work with third-party vendors. You can’t really have full control over what your third-party vendors and suppliers do, but you need to minimize the risk of them causing trouble for your company by failing to meet their obligations. If you don’t, your company could suffer.
Without appropriate vendor risk management, your company could find itself held accountable for the failure of a third party to adhere to regulatory requirements. You could find yourself struggling with a break in the supply chain, fighting a data breach, or struggling to repair a damaged reputation. You need to establish third-party risk management with clear goals and objectives, a clear plan of action, and strong leadership. Only with appropriate risk assessment and ongoing risk monitoring is it safe to welcome a new vendor relationship.
The Risks of Vendor Relationships
These days, we don’t really have a supply chain so much as a supply web of deeply interconnected networks. Many companies work closely with third parties and vendors around the world, and while there are benefits to collaborating with more vendors, there are drawbacks.
For example, you bear the burden of increased regulatory and legal risks when you work with vendors geographically located far away, especially in countries with less regulatory control than the United States. It gets harder to make sure that vendors are following regulations around forced labor, for example, or the use of conflict minerals. You run the risk of data or systems breaches when third-party vendors are given access to sensitive information or to company servers. And, these days, you’re increasingly at risk for reputational damage if it comes out that even the most distant supplier — a fourth- or fifth-party vendor, even — has poor environmental or labor practices.
And then there are other kinds of third-party vendor risks. For example, what if a vendor you’ve worked closely with for years shuts their doors, and you can no longer access the crucial materials they supplied? Where will you turn? What if political unrest or a natural disaster renders your vendor unable to operate temporarily? You could even suffer from systemic instability in a vendor organization, like high turnover or an aging digital infrastructure.
Managing Your Vendor Risks
The key to managing vendor risk is to start with a well-structured program. You need a third-party risk management framework that allows you to assess current risk and monitor ongoing risk at every stage of the vendor lifecycle, from procurement through contracting, onboarding, relationship management, and offboarding. Ideally, ownership of a vendor risk management program is centralized within an organization, so that strong leadership and executive oversight can lead to clearly defined objectives and processes.
You will need to perform a detailed risk assessment of each new vendor during the procurement process. This may be the most crucial time for risk assessment, because it’s the only time you can easily avoid taking on unnecessary vendor risk without putting your organization through the upheaval of transitioning to a new vendor and risking the reputational, financial, regulatory, and cyber security damage that discovering an unacceptable vendor risk can bring.
You still need to remain vigilant about vendor risk after the procurement assessment is completed. Risk levels need to be monitored continuously throughout your relationship with a vendor, and you need clear guidelines and defined processes for assessing and monitoring risk throughout your vendor relationship. Once you have completed initial due diligence and you’re ready to onboard a new vendor, you can take the opportunity to establish expectations for regulatory adherence, cyber security, operations, and oversight. You will need to continue to monitor risk throughout the contract period, especially as both of your organizations change and grow with time. Don’t forget to have formal procedures in place to mitigate risk during offboarding, too.
Vendor risk can do irreparable damage to your company if you let it, but there’s no need to let it. With the proper third-party risk management processes in place, you can keep vendor risk at bay and enjoy long, profitable relationships with all of your third-party vendors. With strong vendor risk management, everyone wins.