Vendor Risk Assessment
A vendor risk assessment, is a process that helps companies choose and monitor their business partners. During this process, you identify and evaluate the potential risks of working with a vendor. Then, you decide whether the rewards of the partnerships would outweigh the risks.
Before you can begin evaluating third parties, you need to know all of the types of risk you could face when entering into a business agreement.
There are many different types of risk and potential risk scenarios when working with a third party. However, knowing the risk a vendor poses before you sign a contract with them can save you money, time and your reputation if something goes wrong.
Strategy risk:
Will they steal your trade secrets, ideas or intellectual property?
Financial risk:
Are they financially stable?
Compliance risk:
Do they follow relevant laws and regulations?
Geographic risk:
Do they operate in a risky location?
Technical risk:
How sound are their IT and data management processes and infrastructure?
Subsequential risk:
Do they use third parties for any of their processes that could affect your company?
Resource risk:
Do they have adequate resources to do what you’re paying them for?
Replacement risk:
How easy would it be to replace them if they ceased operations?
Operational risk:
How could their day-to-day policies and procedures put your company at risk?
Reputational risk:
How will working with them affect your company’s reputation internally and externally?
There are two types of risk assessments you should conduct when bringing on a new vendor:
1. A risk assessment for the organization itself
2. A risk assessment for the product or service you’re purchasing from them
Risk assessments aren’t reserved for high-priority vendors related to your product or service offering. Every single vendor that’s in your systems must be scrutinized, no matter how small they are. After you’ve assessed every vendor, it’s important to categorize them by risk. Build a clear schedule that lets everyone know the frequency of your risk assessments, and more importantly, stick to it!
Consider things like:
• Regularly checking in on third-party process changes.
• An annual or bi-annual in-depth assessment to ensure you’re up to date on third-party changes.
• Reviewing the smaller elements of your partnership with a third party, like external contractor access and data storage requirements.
Depending on your industry, laws and regulations change often. As such, it’s important to keep up to date with these changes to ensure you’re working as safely as possible with your third parties.
As this new information is published, it’s important to adjust your risk assessment framework and factor this into every third-party risk assessment you run.
Read also: How to Conduct a Vendor Risk Assessment?
Resource Person: BARBARA PIROLA
