Six Step Guide for Vendor Risk Management Programs

Enterprise Risk Management has been gaining relevance in today’s time due to the dynamic nature of regulations and a competitive market environment. Risk management internal to the company is where the majority of companies are focusing on which special emphasis on optimizing internal controls and processes. However, the major party of enterprise risk management is vendor risk. Managing multiple vendors, suppliers and partners are now difficult. With shrinking margins always the concern for corporates, companies can only focus on optimizing its costs in which effective vendor management plays an important role.

With businesses now focusing on specializing in a specific part of activities, outsourcing the critical processes and systems to vendors makes the vendor management a very important task.

Vendor risk management program is a challenging task due to the complexity arising from a large number of internal and external participant’s involvement and the vendor.

Your six step success guide for effective vendor risk management process:

Internal Controls: Establish strong and organization-wide internal controls. This would standardize the quality and requirements of the vendor. This would help in clearly assessing the vendor on various required parameters. Setting an internal control parameter on pollution levels to help judge the vendors on their products or services pollution level.

Vendor Contracts: In order to mitigate vendor risks and clearly communicate the value which vendor needs to provide, contracts are the most preferred way for a relationship. Mutual agreement of the necessary terms and conditions would bring both the vendor and customer on the same page with a clear understanding of each other’s role. Key elements should include review period, audit rights and security requirements.

Risk Assessments: Vendor Risk Management typically involves three distinct risk categories namely Business Profile Risk, Control Risk and Relationship Risk. Business Profile Risk addresses the financial, regulatory compliance, and geopolitical nature of the vendor; Control Risk addresses the processes and policies a vendor adopts to effectively deliver on the contract agreement. Relationship Risk is the risk associated due to engaging in business with a vendor.

To assess the risk, it is important to perform due diligence of the vendor. During risk assessment, set-up high-risk controls to measure, and indicators to alert when problems arise.

Onsite Audit: Conduct on-site audit to assess critical processes adopted by the vendor. Establish an audit plan before the visit so that critical areas are inspected and correct and relevant findings are documented for further review.

Reporting: Report your findings in a concise audit report providing important guidance to an internal team like legal and logistics to review the vendor and provide suggestion to the vendor to improve on its weak controls in order to be compliant with the organization.

Monitor Risks: Constantly monitor changing business environment of organizations as well as the vendor. This would help the organization to predict any risks arising due to non-compliance. You can effectively manage vendor risks by setting necessary compliances on  VComply.  Monitor the vendor’s financial health, regulatory compliances, internal controls and security measures.