By: Editorial Staff, Date: September 25th, 2022

What is vendor risk management?

Vendor risk management (VRM) means mitigating, monitoring, and identifying potential risks from third-party vendors and suppliers.

It helps ensure that third-party products and services won’t cause legal liabilities, cybersecurity risks, financial and reputational problems, and other business interruptions.

Today, VRM is highly important as a cybersecurity initiative and strategic tool to save businesses money.

When a business collaborates and partners with a third-party service provider, a significant portion of confidential data is entrusted to that external party. Thus, it’s paramount to rigorously review and assess –are your suppliers putting you at risk?

Failure to mitigate risk more efficiently and choose the right vendor exposes the entire business to pitfalls and potential damages.

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Highly Damaging Vendor Risks to Watch Out For

  • Financial Risks

Defective components from a third-party supplier can compromise revenue and financial standing of your business. It could be in the form of costly fines due to violations and substandard outputs.

  • Cybersecurity Risks

Third-party suppliers have become the favorite target of cybercriminals today. The growth and sophistication of cyberattacks and data breaches infiltrating third-party systems and supply-chain links remain threatening for vendors and their partners.

Attackers take advantage of the vendor’s security gaps to access confidential information of multiple customers.

  • Strategic Risks

The risks stem from poor business decisions and practices of third-party providers. It only shows that the vendor’s strategy doesn’t complement the organization’s strategic goals.

For example, failure to keep up with the changing market trends and regulations exposes a company to potential pitfalls.

  • Compliance Risks

Outsourcing doesn’t hedge your business against legal liabilities. An organization can be liable once the third-party vendor violates a rule or legislation.

For instance, failure to implement strong security controls can result in data privacy violations which may cause you financial and reputational damages.

  • Reputational Risks

Your supplier can directly or indirectly harm your company’s reputation. It may be through poor customer service, deceptive practices, data security breaches, and lawsuits. Though it’s not your fault, these can all result in negative opinions about your business.

Choosing a third-party partner can either help you reach new heights or drag you down, so choose carefully.

  • Operational Risks

Operational risks may result from a vendor’s defective controls or systems that could interrupt business operations. If your third-party supplier gets hacked, hit by a natural disaster, or failed to properly resolve issues, your business is affected negatively.

7 Leading Strategies for Effective Vendor Risk Management


  1. Create a Reliable Vendor Inventory

The first step to implementing a vendor risk management program is maintaining an accurate vendor inventory. This will help you avoid under-the-radar risks and give you great visibility to gauge the vendor risk level.

  1. Continuously Monitor

Constantly monitoring and assessing vendor performance helps ensure that no issue will fall through the cracks.

Paying close attention to the vendor’s security posture, regulatory compliance, and control effectiveness allows you to detect blind spots before they snowball to a bigger risk. You may conduct site inspections and vendor audits, and use a risk assessment questionnaire.

  1. Communicate Openly

Communicate honestly with your supplier to avoid misunderstandings. Let them know your standards and expectations. And ask your vendor to be transparent about their operations relating to your business.

  1. Regulatory Compliance

Make regulatory compliance a top priority for your VRM strategy. Since regulatory standards are rapidly evolving, your vendor relationship must stay up to date with the legal developments in the industry.

  1. Watch Out for Fourth-Party Risk

If your vendor relies on another vendor, you might fall victim to fourth-party risks. Today, monitoring a fourth-party vendor remains a huge risk management gap among businesses. Thus, organizations must start developing a robust fourth-party risk management program to promptly address issues and mitigate risk exposure.

  1. Anticipate the Risks

Disasters and security incidents to your third and fourth parties could leave you headaches, but less painful if you have an incident response and business continuity plan in your pocket.

Planning equips you to navigate the worst-case scenario with confidence, minimize damage, patch things up, and reduce customer churn.

  1. Choose the Right VRM Platform

Successfully navigating every stage of the vendor life cycle requires a comprehensive VRM platform.

After selecting your vendors, you can constantly monitor and manage them through a consolidated platform to streamline your VRM process.

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