The Importance Of Vendor Risk Management

A strong organization is only as strong as its network. When scaling an organization, strong vendors need to be present to allow for certain services to come together and affect your target audience. Very rarely can organizations become self-sustaining with the exceptions of Amazon and Apple, which still have a handful of vendors that are essential to their processes. With the importance of vendors in mind, it should not be a foreign concept to practice third-party risk management and vendor risk management. If it is important to minimize risk within your own organization, it is equally as important to minimize risk with any vendors that interact with core business processes.

What Is Vendor Risk Management?
The concept of vendor risk management is to manage and monitor risks that originate with third-party suppliers, vendors, and providers. Vendor risk management deals with the same risks that a core internal risk management team would handle from within the organization. Cybersecurity, reputational, operational, financial, strategic, and legal risks are all important risks to minimize when practicing any kind of risk management including vendor risk management.

There are many driving factors that show the importance of vendor risk management and what conditions have an effect on the degree of vendor risk present at an organization. A major driver is regulatory changes. With scandals like Nike’s unsafe labor violations becoming more evident, regulators around the world are imposing new laws that detail how organizations should approach dealing with vendors. These regulations put pressure on organizations to practice forms of vendor risk management.

Market conditions have an effect on everything including vendors as well. In times of tough economic times, vendors may become a hassle due to increasing costs, lacking efficiency, or changing partners.

Reputation is important as well. If a vendor drops the ball and is essential enough to the organization, the lack of performance or failure can cause issues in providing services. A great example of this could be the damaged reputations of AMD and NVIDIA is the microchip shortage that stems from poor vendor management.

Lastly, technology is a major driver as well. A vendor must be up to date on their practices so they can deliver the services needed for that organization to thrive. This can be a major issue if a vendor offers a specialty service to an organization or a vendor is located overseas.

Common Vendor Risk Management Problems
To go off of the driving factors, what are some common problems that organizations face when practicing vendor risk management? A major problem is a regulatory and social compliance. Organizations need to make sure that their vendors are in line with regulations such as health and safety. On top of this, organizations need to make sure that vendors are in line with social responsibilities due to the risk of bad reputations that can occur from what your audience might deem unethical business practices. Lastly, resilience and security are frequent problems as well. When the going gets tough, your vendor needs to make sure they can deliver to ensure that your organization doesn’t drop the ball with their clients. On top of this, can vital information you give to your vendor be protected? A data breach not only from your organization but against a vendor can be devastating to a company.

I hope this helps!