How to Minimise and Manage Vendor Risk

And as you start to work with more vendors, the amount of risk that you have to deal with on a day to day basis will also increase. This does not mean that you have to operate your business on the precipice of disaster.

Effective vendor management is a balancing act between trusting suppliers to fulfil their obligations, holding them accountable to do the same—and mitigating the risk of any agreement breach.

With proper vendor risk management, you will be able to maintain this balance and ensure consistently smooth operations.

In this article we will look closer at the various processes involved in risk management, as well as the tools and technologies that are available to steward risk and safeguard your business interests.

Manual versus Technology-driven Vendor Risk Management

Any discussion on effective vendor risk management should include the use of the right technology and tools to keep vendor risk to a minimum. With manual risk management, it's really only possible to take care of the most important risk vectors.

Even if you use outdated software, it won't give you the ability to take care of the smaller risk issues that have the proclivity to grow into something much larger down the line.

So if you are still using manual processes to manage risk—or software that isn't specifically tailored towards managing risk—your business might be exposed to unnecessary risk.

There  are several software tools available to manage vendor risk that will allow you to proactively take control of vendor risk in a strategic fashion, while also striking a good balance.

With the help of risk management software, you will be able to take control of vendor risk and always keep a step or two ahead of any problem.

The software will help you to identify risks before they materialise. This means that you will be able to proactively implement strategies to mitigate risk. You will also be able to automate your compliance.

The effect of ineffective vendor risk management

The main goal of vendor risk management is to mitigate any potential risk before it negatively impacts your business. You will also be able to avoid legal penalties for non-compliance. You will also be one step ahead of any potential disaster, and can avoid serious financial setbacks.

Ineffective risk management, on the other hand, could cause serious disruptions to your daily operations.

Other consequences of ineffective vendor risk management include security breaches or the very real possibility of lost revenue. Or there might be compliance issues with one of your vendors with regards to specific regulations.

This is where the right technology tools are invaluable. Vendor risk management software gives you a level of visibility into the risk status of each vendor that is truly revolutionary.

When you don't have proper visibility into the risk status of each vendor, it becomes impossible to plan ahead to avoid and mitigate that risk.

Using software to manage vendor risk

Risk management software allows you to control and mitigate vendor risk to a high degree.

Since you will be able to foresee risk vectors before they become a problem, you will be able to proactively take steps to remedy the situation and so avert disruption to your business operations.

Here are some of the ways that risk management software will be able to minimise vendor risk and improve your business prospects:

1. Better vendor data management

If you want to have an accurate picture of the amount of risk that each vendor poses to your company, you need proper insight into the risk status of each vendor. This will also allow you to mitigate potential risk before it becomes a problem.

How will you be able to gauge the degree of compliance for each vendor, you don't have access to current, up-to-date and accurate records on each vendor?

If you don't have access to good data, you're always facing the risk of running foul of the authorities.

Dedicated software will allow you to mitigate regulatory risk. The software offers a self-serve platform for vendors and will prompt them to keep their records and data up to data. It will then store this data in a confidential and secure database.

When all of your data is stored in a centralised location, records can easily be recalled and verified. A further benefit of this type of system is that it delegates the data gathering responsibility to vendors. The software holds each vendor accountable for the integrity of their records. Which means that you can proactively minimise compliance risk vectors from the get go.

When all your records are accurate and available from a centralised, secure system, you will have a much broader visibility into the risk status of each vendor. The system will help you to flag records that need to be updated ahead of due dates specified by legislation or regulation changes.

2. Identify and mitigate vendor risk

It's not really possible to formulate an effective risk mitigation plan for your business, if you're unable to define what risk means for your organisation. You also need to figure out the level of response needed for each level of risk—as well as the person or persons responsible for responding to that risk. You don't want something to go wrong, and no-one to respond to the risk because their duties weren't properly defined ahead of time.

In other words, you need to formulate a survey of the risk landscape as it pertains to your business. Which means you need to make a proper analysis of the probability of things going wrong, what the effect of these turn of events will have, and what strategies you will implement to keep your business safe.

When you use vendor risk management software, you will be able to identify risk according to specific categories, as well as the type of vendor that might cause the risk. The software will then be able to calculate a risk score for each vendor, and each type of risk.

The scores are a good indication of the seriousness of each type of risk. This will allow you to devise strategies for risk mitigation that is prioritised.

It then becomes possible to define clear cut roles for the particular individuals that are responsible for implementing the risk mitigation strategy. Which makes it much easier to hold them accountable and to ensure that the work gets done.

You want your risk management to transition from a place of putting out fires, to implementing proactive steps that will prevent problems before they occur. No longer is risk management about solving problems after something went wrong, but it becomes preventative.

The system will also be able to automatically issue notifications when someone needs to take an action. For example, a vendor can be notified before documentation expires to take the necessary steps to meet the appropriate regulatory requirements. In this way, all stakeholders are able to resolve issues and make them a priority before there's any escalation.

3. Risk Scores

One of the key benefits of using Vendor Risk Management software is its ability to represent your vendor relationships as workflows. This helps you to identify the actions you need to take to minimise risk.

For example, the system will show you when it's time to update documentation or a particular certificate, or making sure that a certain service is delivered at the appropriate time. Another example is the system notifying you to take a vendor through a performance review  to make sure that KPIs are met.

The system will also allow you to automate the actions needed to remedy potential risk vectors. For example the system could automatically send out requests for documentation and performance updates. It could send notifications ahead of deadlines to avoid disruptions in your operations, not mentioning the amount of time and stress it will save all the parties involved.

Since the different parts of the vendor relationship are treated as workflows, the system will automatically keep tabs on vendor performance via Risk Scores. The system will then notify all vendors and other stakeholders when they have to take certain remedial actions. These escalation workflows ensure that everyone collaborates in mitigating risk. Since the system works automatically behind the scenes to reduce your risk exposure, you have a wonderful means of keeping risk at acceptable levels and avoiding potential disruptions to your business.

This automation is invaluable for detected risk vectors that might previously have gone undetected. These risks can then receive the appropriate priority and be addressed in time before they become a problem.

The system will keep track of each risk and how it was resolved and by whom. This information can be made available to all stakeholders involved, which means everyone is kept accountable and has a record of how risk was addressed in the vendor relationship.

The system will automatically trigger escalation workflows when necessary, so that risk mitigation becomes automatic as well.

4. Risk Surveillance

When you have a constant feed of accurate and up-to-date information about the status of each of your vendor relationships, you will be able to manage risk with confidence. This takes a lot of guesswork out of the vendor risk management process.

So for example, if anything changes on your vendor's side, you will receive an instant status update. So when a vendor's risk profile changes, you will be able to set your legal team on the task of triggering your strategies for risk mitigation. You will be able to set the appropriate steps in motion to prevent risk factors from escalating. When you have instant feedback when the status of a vendor changes, you will be able to implement a proactive approach and put the right measures in place to prevent problems.

In this way, you will also be able to track the compliance history of all your vendors. Some vendor management software also gives you access to a vendor's credit profile and litigation history. Which will allow you to make informed decisions about your vendor relationships, and monitor the status of each vendor on a continuous basis.

This data can be made available to all the relevant stakeholders in your organisation. Which means that both your financial and legal teams have access to current information in their decision-making process.

So when it comes time to recruit new vendors, reconsider existing arrangements with your current vendors, or even consolidate your vendor base, everyone in your team will have the business insight to be able to make informed decisions. You will always know what is going on with your vendors, and when you have to make a change in the relationship.

5. Monitor vendor performance

Surely one of the goals of vendor relationships is for there  to be open collaboration between the two of you. Which means there has to be some level of confidence in the abilities of the other partner, and trust that both parties will fulfil their obligations.

This means that the expectations between the partners have to be clearly defined. One way to manage expectations, is to agree on a set of key performance indicators (KPIs), with matching obligations, that will define the vendor relationship. These need to be ironed out during the contract negotiation phase of the relationship. These sets of KPIs and obligations will act as a guide between the parties, to ensure that everyone knows if the relationship is being successful.

When a vendor under-performs, it can increase the risk to your company. For example, when there are disputes or straight-out breaches of contracts, these differences have to be resolved—which can be costly.

Tracking the cause of poor performance and resolving the issue takes time and expense. And while all this is going on, your business operations might be negatively impacted. Which means that contract breaches and disputes are real risks to your business that have to be managed. These types of issues have to be monitored on a continuous basis. The business relationship has to be analysed for problems, so that possible issues can be communicated with the appropriate parties before it causes a setback.

Vendor risk management software will be able to monitor your vendor performance on a continuous basis. Vendor performance is assessed on a regular basis with the use of scorecards and other means. These results are presented in a visual way and analysed in an intelligent fashion—which will clearly expose potential problems before they materialise.

This data gathering and analysis function also provides concrete evidence that can be provided to vendors, so that they can take the appropriate steps to mitigate the risk. When you can clearly communicate areas to the vendors where they need to improve, they are being held accountable.

In this way, you minimise the risk of any contract breach, or obligations not being met. This is because the system empowers vendors to track their own performance and take the appropriate corrective action.

Conclusion

There are clear-cut reasons why your company will benefit from using dedicated vendor risk management software. Chief among them, is the ability to optimise your risk management processes. The software also makes it easier to develop and implement risk mitigation strategies.

Dedicated software will allow you to automate some of your core risk management processes. You will also be able to keep tabs on the risk profile of each vendor—which means you will be able to recognise problems before they become a major issue.

There's no two ways about it. Putting the investment into vendor risk management software will end up saving you a ton of money and headache in the long run.