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Small startups to global corporations all deal with risk. There are different levels of risk and many causes. Most companies need to work with vendors for supplies and services. These vendors can expose your company to enormous risk and even ruin your company. The key is understanding vendor risk management and collecting tools for mitigating and avoiding risk. Below, we discuss what vendor risk management is, the common types to watch out for, and some vendor risk management solutions, including the right vendor risk management tool that can help keep your business safe.

What is Third Party Vendor Risk Management (VRM)?

Business risk covers a wide range of possible dangers. Vendor risk management (VRM) is a specific process for ensuring that the companies that you work with don't cause your business harm. A good vendor risk management program identifies, assesses, and mitigates vendor risk when using third-party suppliers or other services. It means taking a hard look at any vendors or partners to ensure their business practices don't expose your business, operations, finances, or reputation to risk. By implementing strong third-party vendor risk management strategies, businesses can better protect themselves from external threats.

Most companies rely on third-party products or services, putting them at risk. The larger issue is that connecting with these vendors could compromise your network's security or create compliance issues for your company, leading to government sanctions.

Common Types of Vendor Risks

The vendor risk management life cycle includes onboarding, the life of the entire partnership, and even offboarding when you terminate the relationship. Some common types of vendor risks include the following:

  • Financial Risk: Financial risk concerns your vendor's financial position and ability to meet their financial obligations. The financial solvency of your vendor can put you at risk if they lose revenue, have poor credit, are in financial trouble, or are at risk of closing. When you come to rely upon them to supply you with products or services, if they are not managing their money well, it could hurt you. A thorough background check before signing a contract with them could save you a lot of headaches later.
  • Cybersecurity Risk: If any vendor has access to, stores, or collects your company, customer, or employee data, and they do not have sufficient security in place, that information could be exposed online and end up in a data breach on the dark web. It's your job to ensure the vendor has the proper controls in place to fully secure any data they are holding or accessing from you. Cyber vendor risk management must be essential to your company's overall risk plan.
  • Reputational Risk: Reputational risk refers to the many ways that a partnership with your vendor could hurt your reputation, damage your brand image, or associate you with something sullied. Your business could be hurt if your partner is engaging in illegal or unethical behavior, and you are associated with them.
  • Compliance Risk: Your business could be subject to various governmental and industry-related rules. If your vendor does not comply with these regulations, you, by association, could be sanctioned. For example, a healthcare vendor risk management program must include HIPAA standards, and any vendor with access to patient information must also comply, or the parent company might be at risk.
  • Strategic Risk: Every company has its own strategic objectives and plans. If your partner operates in a way that is incompatible with your strategy, it can affect quality, deadlines, and customer satisfaction. You must ensure that anyone you partner with is aligned with your business goals and needs.
  • Operational Risk: Some vendors offer crucial supplies, services, or products your company needs to stay operational. If their internal processes, supply chain, or systems break down, it could halt your operations, causing significant delays and financial losses. You may find yourself unable to meet customer demands. Too much reliance on very few vendors is risky.
  • Business Continuity Risk: If some unforeseen event affects your vendor and they cannot continue operating, it will trickle down and affect you as well. Your partner may fail to have redundancy plans in place to continue operations when something fails.
  • Environmental, Social, and Governance (ESG) Risks: ESG risks are when a vendor puts your company at risk by violating human rights or environmental laws by treating people or the environment poorly. Their bad behavior can reflect back on you. This can also hurt you if suppliers have affiliations with known criminals or enemy states.
  • Legal Risks: The bottom line is you are responsible for your customers', company's, and employees' information. If a vendor experiences a data breach and your customer data is exposed, you are the one responsible, not them. When this occurs, you could be facing costly lawsuits.

Why is Vendor Risk Management Important?

As companies rely more heavily on third-party vendors, vendor risk management becomes a crucial aspect of business. Some of the finer details about why vendor risk management is so important are:

  • Vendor Dependency: So many companies these days rely on third-party vendors for software solutions, cloud services, AI enhancements, and products that allow you to do business. If something disrupts the flow of these products or services, you could be in trouble quickly.
  • Compliance Issues: Many industries are heavily regulated and must comply with specific rules. Without a robust vendor risk management system, you could find yourself out of compliance and face severe penalties. Your vendors are an extension of your business and must be held to the same compliance standards as you are.
  • Data Privacy and Security: Many third-party vendors can access your sensitive company, employee, and client data, exposing it to risk. If your vendor does not have security measures in place and they experience a data breach, your company could be exposed and face serious consequences, including damage to your reputation.

What is a Vendor Risk Strategy?

A vendor risk management system is a structured approach (strategy) to identifying, assessing, and mitigating vendor risk. The strategy contains components that begin with sourcing and end with the termination of the third-party vendor.

A clear vendor risk management strategy helps companies stay on track, protect sensitive data, ensure regulatory compliance, avoid costly and legal issues, maintain a good reputation, and avoid operational delays.

What Does a Risk Management Framework Include?

Although your company's third-party vendor risk management framework may vary slightly, most businesses will share the same core components. They are as follows:

  • Risk Identification: Risk identification is the first item on your vendor risk management checklist. Before dealing with any potential risks, you must understand what they are and how they could occur. Some things to consider are operational disruptions, financial losses, data security breaches, financial instability, and compliance violations.
  • Risk Assessment: Vendor management risk assessment is where you determine the likelihood of the risk occurring and the impact it could have on your business.
  • Risk Mitigation: These are steps you take to minimize the impact or mitigate the overall effect of the risk. It involves developing a strategy and specific policies and procedures for dealing with any potential risks.
  • Continuous Monitoring for Vendor Risk Management: As a final step, you must continuously monitor your vendors, suppliers, and partners to ensure the risk to you and your business stays clear. Monitor the vendor's performance, financial stability, and behavior closely.

What are Vendor Risk Management Workflows?

Vendor risk management workflows are the structured policies, procedures, and plans you use to identify, assess, and mitigate risks associated with working with third parties. A workflow is like the blueprint you work off when performing vendor risk management tasks. A typical workflow may look something like this:

  1. Vendor Selection/Onboarding: Find and review possible candidates and identify those you want to work with.
  2. Due Diligence: Conduct due diligence researching and assessing their financial stability, cybersecurity posture, and compliance history.
  3. Draft a Contract: Draft a clear, detailed contract before beginning work with the vendor.
  4. Risk Assessment: Perform a detailed risk assessment of the potential downsides of working with a particular vendor, paying close attention to your reliance on them and how it might affect your operations.
  5. Risk Mitigation: Develop a vendor risk management policy and mitigation steps to avoid potential risks or quickly respond to them if they occur.
  6. Ongoing Monitoring: Create a plan or use automation to monitor the vendor's performance, reliability, and other factors on an ongoing basis.
  7. Vendor Performance: Develop specific key performance indicators (KPIs) to monitor the vendor's performance and alert you if something changes.
  8. Vendor Termination: At the end of the contract or when you change vendors, have a clear-cut process for offboarding the vendor, have them transfer all of your company data back to you, and formally terminate the contract.

Although these tasks can be performed manually, some may be improved using vendor risk management software. Automating vendor risk management removes the human equation from the process, improving your accuracy, speed, and efficiency. You can choose from many vendor risk management platforms to automate the process.

The benefits of an effective vendor risk management workflow are:

  • Reduced Risk: Proactively addressing any potential risks can help avoid them altogether.
  • Enhanced Security: Ensuring your partners are secure is a surefire way to strengthen your security posture.
  • Improved Compliance: An ironclad workflow ensures you cover all your bases, including compliance, to avoid penalties or government sanctions.
  • Streamlined Vendor Risk Management Process: Vendor risk management is too important to take lightly. A solid workflow that covers every aspect can help streamline the entire process, making it easy for employees to follow.
  • Better Vendor Relationships: Establishing clear expectations and managing vendors effectively can help you build stronger, more pleasant relationships. By vetting each vendor, you get a higher-quality partner who will satisfy your needs for the long term.
  • Operational Consistency: Vendor risk management workflows help you retain operational consistency by properly assessing your vendors so that when you need them, they are there.

How to Manage Vendor Risks

Managing vendor risks is a process specific to each industry. For example, healthcare vendor risk management will primarily focus on patient data privacy and safety. In contrast, IT vendor risk management focuses more on the security aspects of the business (software, networking, hardware, etc.). Regardless of the industry or type of business, you have four main options for dealing with risk. They are as follows:

  • Avoid: Avoiding means not partnering with the vendor or engaging in any activity that may put you at risk.
  • Mitigate: Mitigation means you devise a strategy to deal with risk. This may include testing scenarios, making backup plans, and implementing safeguards to reduce the likelihood of the risk occurring.
  • Transfer: You can use insurance policies or contracts to transfer the risk to someone else. If you take out insurance, the insurance company will pay to restore things if anything happens. You can also use strict contracts to transfer the financial responsibility. However, you still may be impacted in other ways, such as a ruined reputation.
  • Accept: Risk is always possible, and in some cases, it makes sense to accept it and move forward anyway. If the benefits outweigh the risks, this option makes sense.

The option(s) you choose will be specific to your risk threshold and strategic goals. Risk management is an ongoing process that you may change over time.

What About Fourth-Party Vendor Risk Management?

Remember to consider fourth-party vendor risk while building your vendor risk management procedure. These companies are connected to or affiliated with your third-party vendors or partners. Even though they are once removed, these connections can still affect you. A good example would be a supplier who uses a specific web hosting company to house all its data. If that web host is insecure and your vendor has your customer data stored on its website, it could more easily be breached, and you would suffer because of it.

Along with vetting your third-party partners, check out the companies they use for business services.

Challenges in a Vendor Risk Management Program

When building a risk management program, you may encounter various challenges. The process itself is complex and requires careful planning. Below are some of the more common challenges your business may face when building a vendor risk management program.

  • Identification: If you have been in business for a while and are just now developing a risk management strategy, you may have difficulty identifying your third-party vendors, suppliers, and partners. Before you can outline a strategic workflow, you must identify all vendors who may pose a risk. These suppliers could affect multiple departments or locations.
  • Assessing: Assessing the risk of the identified vendors can also be exhausting. It takes time, and the process may be confusing and complex. If you use manual systems, this task may be even more challenging. Consider automation for this phase of the process.
  • Defining Your Risk Tolerance: An essential aspect of vendor risk management is determining how much risk your organization can handle. Once you decide on your third-party risk thresholds, you can develop a structured mitigation approach. By categorizing your vendors into tiers, you can easily see your exposure and the response needed. Without this step, you could be fumbling around in the dark.
  • Due Diligence: Your company must have robust due diligence processes to evaluate each new vendor as they arise. Conducting due diligence will be a customized approach depending on where your risk lies. Pay particular attention to the vendor's financial stability, compliance, and security measures. Putting together a due diligence process that works for you may take several attempts. Rest assured, there are software and commercial options that can help.
  • Contract Compliance: Once you have a signed contract with your vendor, implement a monitoring process to ensure they adhere to the contract terms. Include all the items most important to you in the contact, and regularly check to see if they are following them. Contract compliance can be tricky to enforce.
  • Monitor Performance: Monitoring vendor performance is another challenging aspect of the vendor risk management process. Even if you use an automated risk management solution, this takes time and resources. You need to continue to monitor their progress (in a variety of ways, based on your individual KPIs) for the life of the relationship. Be prepared to address any issues that arise along the way.
  • Regulation Changes: It seems like regulations change every day, and keeping up with the ever-changing rules may be difficult. Although you may be on top of compliance regulation changes, your vendors may not. Some areas you need to monitor constantly are cybersecurity laws, industry regulations, data privacy, and ESG rules.
  • Executive Buy-In: Executive buy-in is essential to your company's success. If the top-tier execs aren't behind the vendor risk management efforts, they may fail. A solid risk management strategy takes careful planning and support. If those above do not agree with the direction of the risk management process, it may be very challenging to get what you need to do the job.
  • Internal Resources: Any good risk management plan requires many internal and external resources. Some of the work may be outsourced or handed off to automation, but there is still plenty that needs to be done by a human being.
  • Collaboration: A successful risk management process requires close collaboration between all departments, such as IT, security, operations, procurement, legal, compliance, and administration.

Other Vendor Risk Management Considerations

During your remediation phase, you will want to report everything you learned about the risks and how you responded so you can avoid them in the future. Some questions to ask yourself are:

  • What happens when your controls fail? Does your organization have the resources to suggest the proper remediations? Is there an automated solution that can trigger a notification, so you are aware the minute things go wrong? Can this solution also suggest possible remediation tactics?
  • What is your process for predicting future risk after an incident? Spend some time working on this aspect and involve all necessary departments and executives.
  • How will you monitor a vendor's compliance with regulations? Do you have a tool that represents their performance in percentage terms?
  • Are you using AI and machine learning to the fullest to ensure you aren't missing anything in your risk management assessments?
  • What is your process for documenting your risk management findings?
  • Do you have solid risk management policies and procedures that anyone can follow easily?
  • Is the entire company educated on the importance of vendor risk management and how to do it?
  • Have you devised actionable steps that anyone can perform?

How EntityCheck Helps You Manage Vendor Risk

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A successful vendor risk management plan relies on people, policies, practices, and technology. Top-notch vendor risk management tools can help your risk identification and mitigation programs succeed. EntityCheck is a team of data professionals who gather, collate, and report information on businesses across the U.S. Using our specialized software for vendor risk management, you can run business background checks looking for any red flags and filling in the blanks of your vendor risk management profile. We collect our information from government, public, and private sources, and you can access everything you need from one easy-to-use dashboard.

The information you can find in an EntityCheck business background report includes the following:

Secretary of State Filings

The Secretary of State is the state repository for business filings, including Articles of Incorporation, annual reports, changes in ownership, and business entity type designations. An EntityCheck report can show all that information.

UCC Filings

UCC filings, or UCC-1 filings, are public notices filed with the Secretary of State that declare a creditor has a legal claim on assets. UCC filings help establish priority for payouts if the debtor files for bankruptcy or experiences other financial difficulties. These filings are used for various assets like equipment, vehicles, inventory, accounts receivable, and real estate. EntityCheck provides you with the following information on UCC filings:

  • Filing Details
  • Business Details
  • Classifications
  • Scores
  • Addresses
  • Creditor Details

Professional Licenses

Many industries, like real estate, dentistry, nursing, teaching, hairdressers, appraisers, electricians, etc., require professional licenses before doing business. Individuals must undergo the proper training and testing before earning these licenses. Professional licenses are credentials that verify a specific skill or level of knowledge in the chosen field. Governments issue these permits or licenses after the person has passed the final exam and paid the fee. These licenses let the public know that the individual or business is qualified to perform the services required and meet government standards. EntityCheck license information will show:

  • First Name
  • Middle Initial
  • Last Name
  • State
  • License Type
  • License State
  • Issue Date
  • Expiration Date
  • Last Known Status
  • Licensees
  • License Categories
  • License Types
  • Businesses
  • Business Owner(s)
  • Address
  • Phone

Court Records

Many court records are public and readily available for review. They contain a wealth of information about people, companies, and any related legal issues. You can generally find information on lawsuits against the company, bankruptcies, liens, judgments, and federal dockets, which can fill in many blanks about a business or its owners. Some of the court record information you will find with EntityCheck includes:

  • Case Number
  • First Name
  • Last Name
  • State
  • Bankruptcies
  • Debtor Info
  • Creditor Info
  • Court Info
  • Attorney Info
  • Trust Info
  • Federal Docket Details

Trademarks

A trademark is a legally protected sign, word, phrase, design, or symbol owned by a specific brand or product. It differentiates it from all others, prevents unfair competition, and ensures consumer protection. The purpose is so that consumers can quickly and easily identify a brand through its products or services. Trademarks protect intellectual property so that no one can duplicate them without permission. A few trademark examples are the Nike "swoosh," the phrase "Just Do It," and Coca-Cola. A trademark can even be a specific color or sound. EntityCheck provides the following information on trademarks:

  • Serial Number
  • Registration Number
  • Individual's Name
  • Mark

Employees, Agents, and Officers

A company is built on the people who own and run it. Finding out all you can about a company's officers, employees, and agents can help you determine whether or not the business is viable and worth partnering with. Since KYB is centered on company beneficiaries, this section is critical. Some of the employees/agents/officers' information you can find with EntityCheck includes:

  • Employee Details
  • Education

Patents

A patent is a government-granted legal right to an invention. A patent protects the invention from anyone else producing it, selling it, or using it for a period of "usually" 20 years. Patents are forms of intellectual property granting the holder exclusivity over their invention. Patents protect investments and protect products from being copied. EntityCheck provides the following information about patents:

  • Patent Number
  • Publication Number
  • Application Number
  • PCT Number
  • Internal Registration Number
  • Assignor Name

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