What is Vendor Risk Management (VRM)?

Vendor Risk Management (VRM) is the process of systematically identifying, assessing, and mitigating risks associated with external vendors.

It ensures businesses have comprehensive visibility into vendor relationships, control over their performance and early insights needed to safeguard compliance.

Factors considered as part of VRM include the vendor's overall performance and stability, compliance with legal and regulatory requirements, contractual obligations and agreed key performance indicators.

This knowledge allows stakeholders to make informed decisions about whether to reward, renew or terminate a vendor relationship. Defining and implementing a vendor risk management process is in the best interest of all parties.

In this article, we’ll explore everything you need to know about VRM, including:

• The role of vendor risk management within a VCLM approach
• Common types of vendor risk
• Vendor risk management best practices
• How to automate vendor risk management with Gatekeeper

The role of Vendor Risk Management within a VCLM approach

Vendor Risk Management (VRM) is a vital component of a Vendor and Contract Lifecycle Management (VCLM) approach.

VRM naturally sits within vendor lifecycle management efforts, but it should seamlessly integrate with contract lifecycle management (CLM) and third-party risk management (TPRM). This ensures the holistic management of vendor relationships and contracts.

Let’s take a look at how all three work in tandem.

1. Risk Identification in Contract Negotiation: VRM is crucial during the contract negotiation phase of CLM. It helps identify potential risks associated with a vendor, which can be addressed in the contract terms. For instance, if a vendor is identified as having cybersecurity risks, data protection clauses should be included in the contract.

2. Contract Compliance and Performance Monitoring: VRM continues to play a role throughout the contract's lifecycle. It ensures that vendors comply with the terms agreed upon in the contract, especially regarding risk management and mitigation. This ongoing monitoring helps in the early identification of any deviation from contract terms, allowing businesses to mitigate risks proactively.

3. Renewal and Termination Decisions: Vendor risk management feeds into the decision-making process for contract renewals or terminations. If a vendor poses increasing risks or fails to comply with risk management standards, this will influence the decision to renew or terminate a contract.

4. Holistic Risk Assessment: Third Party Risk Management focuses on the broader scope of risks that third parties might pose to your business, including vendors. Vendor risk management is a subset of TPRM, concentrating on vendor risks. Integrating vendor risk management into TPRM ensures a comprehensive risk assessment, covering all aspects of third-party engagements.

5. Consistent Risk Management Framework: By tying VRM to TPRM, your organisation ensures a consistent approach to managing risks across all third parties. This consistency is crucial for maintaining control over the diverse risks your business may face in its external engagements.

6. Strategic Decision-Making: Understanding the risks associated with vendors helps in strategic decision-making at the TPRM level. It guides the organisation in prioritising resources and efforts in managing third-party risks, based on the criticality and risk profile of each vendor.

Common types of vendor risks and how to manage them

In a Gartner survey of 100 executive risk committee members in September 2022, 84% of respondents said that third-party risk “misses” resulted in operations disruptions, while 66% experienced adverse financial impacts.

It indicates that vendor risk management still isn’t being treated as a priority within some businesses.

Without the ability to identify and resolve vendor risks, your business could be impacted by compliance violations, financial loss, reputational damage and strategic misalignment with its vendors.

Watch the video below to discover how to mitigate vendor risks and read on to find out about the most common types. 

So what are some common vendor risks?

1. Financial Risk

Financial risk pertains to the vendor's financial stability and ability to meet its contractual obligations, as well as industry-specific regulations such as the Sarbanes-Oxley Act (SOX). It involves assessing the vendor's creditworthiness, liquidity, and overall financial health.

If not assessed and mitigated, financial risk can lead to disruptions in the supply chain, as financially unstable vendors may go bankrupt or encounter cash flow problems. This can result in production delays, increased costs, and potential damage to the company's reputation.

2. Cybersecurity and Data Privacy Risk

This risk focuses on the vendor's cybersecurity practices and data protection measures. It involves evaluating the security of systems, handling sensitive data, and adhering to data privacy regulations such as GDPR.

Neglecting cybersecurity and data privacy risks can expose a business to data breaches. These breaches can lead to regulatory fines, legal liabilities, reputational damage, loss of customer trust, and the high costs associated with resolving the breach.

3. Operational Risk

Operational risk concerns the vendor's ability to deliver products or services consistently and reliably. It includes factors such as production capacity, supply chain resilience, and performance history.

If operational risks are not considered, disruptions in the supply chain can occur, causing delays in product delivery, customer dissatisfaction, and lost revenue. It may also result in difficulties in meeting contractual obligations and maintaining business operations.

4. Compliance and Legal Risk

Compliance and legal risk focus on whether the vendor adheres to industry regulations, standards, and contractual obligations. It involves assessing the vendor's compliance with relevant laws and agreements.

Non-compliance may result in lawsuits, breaches of contract, financial penalties, and damage to the company's reputation.

5. Reputational Risk

Reputational risk involves the vendor's ethical practices, social responsibility, and the potential impact of their actions on the company's brand image and reputation.

Ignoring this risk can damage the company's reputation if a vendor's actions or practices are deemed unethical or socially irresponsible. This can lead to negative publicity, public backlash, loss of customer trust, and ultimately, financial repercussions.

What are Vendor Risk Management Best Practices?

Defining and following vendor risk management best practices is a crucial aspect of maintaining secure, efficient, and reliable operations. Here are ten best practices for vendor risk management that do not specifically focus on technology:

1. Thorough Due Diligence in Vendor Selection: Conduct comprehensive due diligence before engaging with any vendor. This involves evaluating the vendor's financial stability, reputation, compliance with regulations, and performance history. Select vendors who align with your organisation's values and standards.
2. Clear Contracts and SLAs (Service Level Agreements): Ensure all contracts with vendors are clear and detailed. Include specific SLAs that define performance metrics, expectations, responsibilities, and penalties for non-compliance.
3. Regular Risk Assessments: Regularly assess and categorise vendors based on the level of risk they pose to your organisation. Consider financial risks, operational risks, compliance risks, and reputational risks.
4. Diversified Vendor Portfolio: Avoid over-reliance on a single vendor. Diversifying your vendor portfolio can reduce the impact of one vendor's failure or issues.
5. Ongoing Vendor Performance Monitoring: Continuously monitor vendor performance against agreed SLAs. This includes tracking their delivery timelines, quality of service or products, and adherence to contractual obligations.
6. Strong Vendor Relationships: Building strong, collaborative relationships with vendors can lead to better service, improved communication, and quicker issue resolution.
7. Compliance and Regulatory Adherence: Ensure your vendors comply with relevant industry regulations and standards. This is particularly important in sectors like finance and healthcare, and wherever personal data is handled.
8. Training and Awareness for Internal Teams: Educate your internal teams about the importance of vendor risk management. Include training on processes for vendor selection, monitoring, and management.
9. Incident Response Plan: Have a well-defined incident response plan for vendor-related issues, including steps for communication, mitigation, and resolution.
10. Continuous Improvement: Regularly review and update your vendor management processes. Learn from past experiences and adapt to new challenges and changes in the business landscape.

Download our vendor risk management checklist for a practical roadmap to safeguard your operations, reputation, and bottom line.

How to automate vendor risk management with Gatekeeper

Gatekeeper's Vendor and Contract Lifecycle Management platform offers a modern, efficient, and effective solution for VRM. One of the key advantages of Gatekeeper is its ability to automate many of the repetitive and time-consuming tasks associated with vendor risk management.

Its automation of key processes, real-time monitoring and dedicated Vendor Portal helps businesses to mitigate risks while optimizing their vendor relationships.

Let's take a closer look at how you can automate VRM with Gatekeeper. 

Wrap Up

Vendor risk management isn't a mere best practice—it's a lifeline. It's the tool that ensures smooth operations, safeguards your business’s reputation, and fuels growth.

By strategically applying vendor risk management, considering diverse risks, and adhering to best practices, procurement teams can fortify their foundations and elevate their impact.

In a world where disruptions loom large, vendor risk management isn't a luxury; it's a strategic advantage that propels organisations forward.

If you're ready to put VRM into practice, get in touch today.