6 Best Practices for Successful Vendor Risk Management

Today, nearly every organization relies on third- party vendors for competitive advantage, costs savings, and improved profitability. Third-party relationships offer a host of benefits, but they also come with strategic, reputational, regulatory, financial, and security risks.

The best practices listed below can help any organization build a successful vendor risk management program.

1. Create Policies

The first step is to create policies around data classification. Employee records, sensitive organizational information, financial data, and any client data should be considered as confidential data. After that create policies for type of assessments that need to be conducted based on the classification of data that each vendor stores or processes.

2. Vendor inventory

Create an inventory of all third-party vendors the organization has a relationship with to determine the data type they have access to. Reviewing existing inventories and contracts and analyzing accounts payable are good places to start when building an inventory. Remember that some vendors supply multiple services, and each of them should be assessed separately. Alternatively assess only those engagements that have highest level of risk.

3. Risk rating methodology

A third-party risk rating is a standardized, repeatable, and scalable due diligence process that identifies risks and categorizes third-party providers in light of those risks. While the process is standardized, the risk rating applied to any given third party vendor is unique to an organization's risk tolerance for specific activities.

At minimum, capture risk into 3 categories, inherent, control, and residual risk. Typically, inherent risk is a measure of impact and likelihood. To simplify matters, you can add likelihood measures where the liklihood is obvious. For example, for sensitive data, the likelihood is high if sent offshore whereas if data is accessed onsite then likelihood is low (assuming proper internal controls).

For quantifying the risk, you may choose simple Low-Medium-High or use a numeric rating system from 1-100. Numeric rating introduces a level of complexity to the process but is helpful for comparative rating across vendors.

4. Manage and Assess Third-Party Risks

With policies, vendor inventory, risk methodology in place, proceed to assess the third party risks. Each third-party vendor provides different services. Don't forget that vendors often bring their own-third parties with them, so your vendor risk assessments need to take into account the risk posed by each vendor’s supply chain.

When a robust vendor risk management framework is put in place, it allows organizations to act quickly when a vendor's actions might place it at risk. A well-defined risk management program often means those risks can be mitigated and even eliminated.

5. Adopt a Comprehensive, Proactive Approach

Third-party risk management must include ongoing monitoring and escalation processes. Taking a proactive approach means monitoring a vendor’s risk profile throughout the life of the relationship, not just at the onboarding stage. Doing so not only helps you track material changes, but it also helps to ensure that third parties continue to meet your organization’s needs and are in compliance with their contract. Monitoring can be customized to fit each vendor’s risk profile. For example, you might schedule more frequent reviews for high-risk vendors.

6. Invest in the Right Tools

An automated online vendor management system tailored to your business’ specific needs can:

- Help your organization manage vendor risk more effectively.

- Quickly identify whether risks are sufficiently covered.

- Analyze trends and patterns.

It also gives you a broad overview of the risk exposures and deep dives into individual third-party vendor relationships.

Other tips you should consider building into your vendor risk management program include:

- Encrypting data in the cloud.

- Using multifactor authentication to restrict access.

- When possible, using two different vendors to minimize vendor lock-in risk.

Finally, be sure to develop comprehensive SLAs so that you know how each third-party vendor (and their vendors) are using your data. Details like moving data out of the country for backup, offshore development support, and types of reporting and documentation should be clearly defined.

A good third-party vendor risk management software will help you build better assessments of vendor risks, prioritize those assessments, and monitor risks on an on-going basis.

In an increasingly complex outsourced environment, it is crucial for organizations to partner with a vendor risk management company and establish third-party risk management initiatives that protect their data, their reputation, and their revenue.

The author of this article is an expert in vendor risk management and has over 5 years of experience in the industry. In this article, he lists six best practices for successful vendor risk management. Visit https://www.complyscore.com/ now.

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