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How to Protect Your Business from Vendor Risk

Vendor risk threatens any business that cultivates relationships with third-party suppliers or distributors. And the more important those suppliers are to your business operations, the higher the risk. Vendors offering business-critical services or supplies could potentially cause a business disruption if they don’t uphold their contractual obligations toward your company, even if the reason for the failure isn’t the vendor’s fault. And because vendor risks aren’t always predictable or even preventable, you can’t eliminate them all.

But you can still do a lot to protect your business from vendor risk. Understand the risks that different vendor relationships bring and take a systematic, centralized, and standardized approach to mitigating them. With screening, risk scoring, and ongoing monitoring, you should be able to keep most vendor risks from impacting your company, and you’ll be in a better position to bounce back when they do.

The Risks You Run in Third-Party Relationships

It’s important to understand the risks of third-party relationships, especially because they can differ from one vendor to the next. For example, a vendor located in a region that has seasonal monsoon flooding could present some weather-related risk that would need to be mitigated with protocols intended to keep seasonal flooding from impacting third-party vendor operations. A vendor that violates human rights laws or leaves customers dissatisfied could expose your company to reputational risk.

There are all kinds of risks that can affect vendor operations enough to disrupt your own operations, and they can be more or less serious depending on how important a specific vendor is to your business operations. The more business-critical the vendor’s services or goods, the higher the risks associated with the business relationship.

Take a Centralized Approach to Risk Management

Even managing the risks associated with working with a single vendor can be challenging, and when you start building relationships with additional vendors, it becomes even more so. You need a centralized approach to vendor risk management, with staff members dedicated to managing each vendor relationship, and a single digital depository for every contract, service level agreements (SLA), and statements of work (SOW). Staff who manage vendor relationships need to be able to access these documents easily — so a digital database is a better solution than a filing cabinet full of hard copies that need to be sorted through.

You should standardize your vendor risk management protocols so that you’re applying the same standards and requiring the same preventative measures from everyone. Not only that, but you should use the same security and business-continuity measures with vendors as you use within your organization. A standardized approach ensures that protocols are tight across the board and nothing is slipping through the cracks anywhere, especially during the onboarding screening process.

Don’t Let Your Guard Down

Vendor risk profiles can change rapidly with evolving circumstances. Data breaches, natural disasters, disease outbreaks, weather events, civil unrest — they can all happen fast, and you need to be prepared to take action to protect yourself. That’s why you need to monitor your vendors’ risk profiles on an ongoing basis.

Risk scoring can also help you and your vendors prioritize which concerns to address in which order. Scoring can give you an up-to-the-minute picture of vendors’ regulatory compliance, quality control, and information security. Your company’s risk scoring metric should be tailored to prioritize those facets of the vendor relationship that are riskiest for your business, but some common scoring metrics you’ll find in most software tools include quality control, regulatory compliance, and cyber security.

Audit vendor risk management protocols regularly, at intervals of every six months for the highest-risk vendors, to as seldom as every three years for the lowest-risk vendors. Most tools also allow you to set alerts for sudden, significant changes in risk level, including appearance on international and national watch lists. These kinds of notifications can be invaluable when it comes to addressing risk before it can damage both companies.

Vendor risk poses a serious threat to your business — and managing it can be a balancing act sometimes. But while it’s not always possible to avoid all vendor problems, third-party risk management protocols can do a lot to protect your company from the unpredictable.

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