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According to Tolulope Michael, a driving force in the cybersecurity space, defined vendor risk management (VRM) as a crucial process that ensures the use of service providers and IT suppliers don’t pose an unacceptable threat to business continuity or negatively impact business performance. This is especially significant for large corporations, including Fortune 500 companies, which rely on a vast and diverse network of third-party vendors for their daily operations.
Nevertheless, managing vendor risks is no walk in the park. It calls for a systematic and forward-thinking approach that spans the entire vendor lifecycle, from initial due diligence and selection to continuous monitoring and, if necessary, termination. It also requires striking a balance between the advantages of outsourcing and the potential costs and consequences of vendor-related issues, breaches, or non-compliance.
In this article, we discuss some of the top practices in VRM for Fortune 500 companies based on insights and recommendations from industry experts and standards. These practices are designed to help organizations effectively and efficiently identify, assess, mitigate, and report on vendor risks.
Tolulope Michael Shares Best Practices in Vendor Risk Management for Fortune 500 Companies
1. Establish a VRM Program and Governance Structure
The initial step in VRM is setting up a formal program and governance structure. This framework defines the roles, responsibilities, policies, procedures, and tools needed to manage vendor risks. A successful VRM program should be aligned with an organization’s strategic objectives, risk tolerance, and regulatory requirements. It must also have clear objectives, scope, and metrics to evaluate its performance and effectiveness.
Supporting the VRM program is a governance structure that ensures accountability, oversight, and communication among the stakeholders engaged in VRM. This might include a VRM steering committee, a dedicated VRM office or function, business units or owners, procurement or sourcing teams, legal or compliance teams, internal audit or assurance teams, and external auditors or regulators.
A robust VRM governance structure should also outline an escalation process for addressing vendor-related issues, the frequency and format for reporting vendor risk information, and training and awareness programs for VRM staff and vendors.
2. Conduct Vendor Risk Assessments
The next step is to conduct vendor risk assessments that assess the potential impact and likelihood of vendor risks on an organization’s objectives. These assessments should be conducted at various stages of the vendor lifecycle, including:
Pre-contract: Prior to entering into a contract with a vendor, organizations should perform due diligence to confirm the vendor’s qualifications, capabilities, reputation, financial stability, security measures, compliance status, and alignment with the organization’s values and expectations.
Post-contract: After signing a contract with a vendor, ongoing monitoring is crucial to track the vendor’s performance, service levels, deliverables, incidents, issues, changes, audits, remediation actions, and feedback.
Periodic: At regular intervals (e.g., annually or quarterly), organizations should perform periodic reviews to reevaluate the vendor’s risk profile based on current information and changes in the business landscape.
Event-driven: In response to specific events (e.g., mergers and acquisitions, regulatory changes, breaches or incidents), organizations should conduct ad hoc reviews to reassess the vendor’s risk exposure and impact.
Vendor risk assessments should follow a consistent methodology that considers both inherent and residual risks. Inherent risk represents the risk level before any controls or mitigation measures are applied, while residual risk reflects the risk level after applying such measures. The gap between inherent and residual risks provides insight into the effectiveness of these controls.
Vendor risk assessments should also rely on a standardized scoring system that assigns ratings to each vendor based on their risk level. These ratings can be qualitative (e.g., low, medium, high) or quantitative (e.g., 1-5). These ratings can be used to prioritize vendors for further action or attention.
3. Implement Vendor Risk Mitigation Strategies
The third step involves implementing strategies to mitigate vendor risks, reducing or eliminating them to an acceptable level. Vendor risk mitigation strategies can include:
Contractual clauses: Including specific clauses in the contract that outline the vendor’s obligations, responsibilities, warranties, and indemnities.
Penalties: Imposing penalties on the vendor for instances of non-performance, non-compliance, or contract breaches. These penalties may be monetary (e.g., fines, discounts, refunds) or non-monetary (e.g., termination, suspension, remediation).
Controls: Implementing controls to prevent, detect, or rectify vendor risks, which can be technical (e.g., encryption, firewalls, authentication) or non-technical (e.g., policies, procedures, training).
Contingency plans: Develop contingency plans to address vendor disruptions or failures, including backup vendors, alternative sources, recovery procedures, or business continuity plans.
Vendor risk mitigation strategies should align with an organization’s risk appetite and tolerance levels, and they should be documented and communicated to vendors and other stakeholders.
4. Report and Communicate Vendor Risk Information
The fourth step in VRM is the reporting and communication of vendor risk information to relevant stakeholders, facilitating decision-making and action. This information encompasses:
Vendor risk assessments: The results of these assessments, including ratings, scores, findings, recommendations, and action plans.
Vendor risk incidents: Details of vendor risk incidents, including causes, impacts, responses, and lessons learned.
Vendor risk performance: Metrics and indicators reflecting vendor risk performance, such as compliance status, service levels, deliverable quality, customer satisfaction, and feedback.
Vendor risk information should be reported and communicated in a timely, accurate, consistent, and transparent manner, tailored to the needs and expectations of different stakeholders.
VRM stands as a critical component of enterprise risk management. It equips organizations to systematically and proactively manage risks associated with their third-party vendors. By adhering to the best VRM practices outlined in this article, Fortune 500 companies can strengthen their VRM capabilities and outcomes. These practices enable organizations to derive competitive advantages from their vendor relationships while minimizing their exposure to vendor-related risks.