Understanding and implementing vendor risk management will help your business avoid unacceptable risks and protect its business reputation. When you identify potential third-party vendors to supply goods or services and after you outsource to a supplier, perform a vendor risk assessment to mitigate risk.
What is Vendor Risk Management?
Vendor risk management (VRM) is a continuous due diligence process implemented before and after purchasing from or outsourcing to third-party suppliers. Vendor risk management includes lessening risks of poor data security and cybersecurity failures, regulatory violations, and business interruption or disruption from supplier failure or significant supply chain delivery delays.
Vendor risk management may be called supplier risk management.
Why is Vendor Risk Management Important?
Vendor risk management is important because dependence on poorly performing or disreputable vendors will significantly impact your business operations, data and information security, financial results, and business reputation. You need to be sure that vendors meet regulatory requirements.
What are Some Vendor Risk Management Examples?
Vendor risk management examples include:
- Not having adequate contracts or approved purchase orders in place before procurement from a vendor
- A cybersecurity data breach traced to the third-party vendor or supplier
- HIPAA data leaks
- Poor working conditions and violations of labor laws at the vendor location (that can affect your business reputation)
- Violations of anti-money laundering (AML) or other global regulations
- Fraudulent vendors
- Vendor shutdowns or significant delivery delays due to poor financial management or financial failure that can impact business continuity
How Does Your Business Implement Vendor Risk Management?
Recommendations for implementing vendor risk management follow.
Establish a Company Policy for Vendor Risk Management
The company policy on vendor risk management should begin with vendor selection criteria, vetting procedures, and the number of vendors to choose from for sourcing each type of item.
Having multiple approved vendors may prevent supply chain disruptions. For example, a company may decide to vet and select three potential vendors, receive competitive pricing estimates, and rank the vendors before selection. If one supplier’s performance is poor, then the company will have other vendors to rely on.
Get Vendor Recommendations from their Customers
As part of the vetting process, get recommendations from the potential supplier’s customers.
Obtain Credit Report Information and Vendor Financial Statements
To prevent dealing with vendors that could be put on credit hold by their suppliers or go out of business, choose financially healthy vendors. Subscribe to a credit report information service like Dun & Bradstreet. Choosing an unstable vendor may result in prolonged delivery delays, customer relations risks, and financial impacts on your business.
Use a Vendor Risk Management and Control Matrix to Evaluate Vendors
A vendor risk management matrix is a valuable tool in your vendor risk management framework.
With a vendor risk management and control matrix, your business can calculate a current estimate of risks and probability of occurrence, assign a risk number, and determine any action steps required to mitigate unacceptable vendor risk. Perform a vendor risk matrix evaluation before vendor selection. Update the vendor risk matrix on an ongoing basis.
Have the Selected Vendors Sign a Service-Level Agreement (SLA)
As a tool in your vendor risk management program, using a signed service-level agreement will help you achieve better vendor performance or receive compensation in the form of “remedies or penalties” otherwise. SLAs may improve vendor relationships because vendors will understand your well-defined expectations from the beginning.
According to CIO magazine, “A service-level agreement (SLA) defines the level of service you expect from a vendor, laying out the metrics by which service is measured, as well as remedies or penalties should agreed-on service levels not be achieved. It is a critical component of any technology vendor contract.”
Onboard Suppliers Upfront upon Selection
Get required tax compliance forms from vendors electronically if possible. Screen the vendors against tax lists to validate the vendors.
Perform Ongoing Vendor Due Diligence
Throughout the vendor lifecycle, continue to review your suppliers for potential business risks. You may use a combination of questionnaires and real-time automated screening in your risk management process for vendors.
In larger companies, you may want to conduct internal audits as part of your vendor risk assessment to ensure that adequate controls exist.
Select and Use Vendor Risk Management Software
To the extent that you can perform ongoing monitoring of new vendors and established suppliers with software that automates vendor risk management functions, consider using automation software as your third-party risk management solution. You may find other software efficiencies to streamline your workflows and produce significant time and labor savings.
How Does AP Automation Software Provide Vendor Risk Management Solutions?
AP automation software screens vendors for fraud and non-compliance with global regulations (including AML, terrorism lists, and tax information matching) to prevent these types of payments and mitigate vendor risk.
The best AP automation software provides an integrated self-service supplier portal for onboarding, including tax compliance documents like W-9 forms, vendor-customer communications, and centralized contract and document storage. The system helps you conduct business and perform ongoing vendor risk assessments as a vendor management solution.
The AP automation software matches invoices to supporting documents, automates invoice approvals, and pays authorized bills to global vendors using mass payments for efficiency.
Summary – Vendor Risk Management
To lessen cybersecurity risks, other security risks (including HIPAA healthcare information privacy leaks), financial risks, and reputational risks, implement a comprehensive vendor risk management policy. And establish a vendor risk management program to exclude high-risk vendors, beginning with vetting and vendor selection. Continue monitoring throughout the vendor relationship.
Software that automates vendor risk management tasks in real-time will help companies perform ongoing due diligence on vendors and suppliers to reduce business risks, including operations risks, regulatory compliance risks, and fraud.