5 Key Steps for Effective Vendor Risk Management
- March 31, 2023
- Category: Vendor Management
Risk evaluation of your existing vendor network is critical to ensuring your vendors are meeting your compliance standards, complying with regulatory requirements, and operating in a manner that aligns with your organization’s policies and values. By following the below-mentioned key steps, you can effectively manage the risks associated with your relationships with existing vendors.
Map all third parties first
Before you can determine risk, you need to know who all your third parties are and understand exactly how much is being shared with each. A clear view of what data your vendors can access and how they are using it will help you ask for the right compliance information from each of your vendors. Once you know who your vendors are, it’s important to know what data and networks they’re able to access. Do they need the level of privilege they have? If not, you’ll need to set some limits a few steps (mentioned below) down the line.
Assess vendor risks
An effective third-party risk management process begins by comprehensively identifying third-party risks such as process risks, contract risks, legal and regulatory non-compliance risks, and information system failures.
One way to conduct a vendor risk assessment is to identify what could go wrong in outsourcing work to vendors and, identify the correct risk parameters. Once identified, map the risk parameters to various vendors and assign a risk score to determine the vendor risk category (high, medium, or low-risk vendor). Based on the vendor risk category, determine the nature, extent, and timing of your audit procedures.
Follow it up with an audit
The next step after a risk assessment is to prepare and roll out the audit questionnaire(s). If a third party does not want to fill out the questionnaire or will not fill it out completely, don’t just walk – run away from doing business with them. The questionnaire should always (not be limited to) seek information on:
- The compliance regime of the vendor, including documentation for code of conduct, anti-corruption, and anti-data theft programs, and related training materials
- Compliance training and awareness
- How the vendor handles red flags that arise during their own third-party due diligence
Talking of the audit method, you may go for interviews with relevant vendors (ideally on their premises), which is a better way to get insight into potential weak spots in their compliance practices. The results of this audit can then be used to improve the vendor’s performance, identify remedial actions, and help you make informed decisions about its relationship with the vendor.
Remember – a good audit questionnaire is critical in ensuring an effective audit process. Operational assessments and transactional testing are essential components of a comprehensive audit questionnaire. Documenting non-conformities should be another key element of the questionnaire. Capturing information on documentation through the questionnaire will enable you to identify gaps in compliance and recommend remediation actions to address these gaps.
Drive early remedial action with risk mitigation workflows
Consider how you can minimize any type of vendor risk revealed after audit findings. Your business should also consider the criticality of your vendors. If your biggest vendor can’t prove their compliance, what impact can this have on your reputation? If a vendor shares confidential business-critical information, can it completely disrupt your business? For each vendor, you need to re-evaluate, at minimum, the following:
- How does the vendor support my overall business objectives and strategic plans?
- How critical to business operations is the vendor?
- How important is the vendor to business continuity?
- What information does the vendor access?
- What networks, servers, software, and devices do the vendor access?
- What level of access do I need to provide the vendor to my networks, servers, software, and appliances?
Based on the results of your compliance audit and answers to the questions featured above, evaluate if you would want to continue doing business with critical vendors who do not remediate the non-conformities by taking the corrective actions proposed.
Create/revisit your vendor management policy
Once you have segmented your vendors and know what levels of risk they can introduce, your need to create/revisit policies. Policies in this context are a defined list of actions that stakeholders commit to minimizing risk. To apply best practice, you need to:
- Build a cross-functional team, including stakeholders from operations, compliance, and training to define the policies
- Identify all regulations, and certificates that vendors need to be complied with.
- Formalize what policy failure looks like and the actions required when this occurs
- Get buy-in from all stakeholders (including leadership) and confirmation that they understand the policy
- Execute the policy in full and notify vendors
- Make sure the vendor management policy is made visible to the entire organization.
Mention everything that can have an impact on vendor risk management. For instance, as per your audit findings, you can add new vendor success metrics, insert tolerance statements as a baseline for acceptable risk, or even mention the specific steps to be taken to ensure that your vendors correctly handle any liabilities in the future, etc.
Consistently monitor vendor performance
You need to give your vendors every opportunity to succeed. Part of that is monitoring their performance. Using the contract and past performance as a guideline, you can set vendor KPIs. You also need to document (through policy and procedure) a process that monitors vendor activities, tracks compliance obligations, and maintains vendor data to ensure that you are up to date on vendor performance and can react accordingly if performance deteriorates.
Just remember – vendor KPIs need to be mutually agreed upon and also benefit both sides. Without an element of understanding and buy-in from your vendors, the KPIs laid out will fail to have any meaning or impact.
Parting Words: By taking proactive steps to identify and mitigate potential vendor risks, you can minimize the impact of regulatory fines and data security incidents, align with CFPB compliance, and ensure the continuity of your business operations. To help you dig deep into the steps mentioned above and how each tip ties back to vendor management, we have compiled a comprehensive vendor compliance management guide. To download your copy, click here.