With the world becoming smaller by the day, it’s imperative that businesses work together to thrive and grow. The most successful brands have a robust network of carefully selected third-party vendors who enable them to connect with their target customers more efficiently and effectively.
Even though third-party suppliers provide essential competitive and strategic support, outsourcing may pose reputation, supply chain, and compliance risks. Developing strategies to mitigate risks to safeguard the profitability and sustainability of your business is crucial.
One of the best ways to manage the risks from third-party suppliers is by developing a vendor governance framework. Let’s dive in and discuss what it is and why it is so important.
Focusing on Costs, Risks & Value
Simply put, a vendor governance framework is a protocol or set of policies tailored to help your business better manage vendors in your supply chain. By streamlining processes and communication between you and your vendors, a well-implemented “VGF” will help you control costs, mitigate risks, and increase value. The result: More ROI (return on investment) from each vendor.
Of course, vendor due diligence is not a one-time event, but a continuous process with four significant facets:
Managing communication with each vendor – from onboarding to every stage of the third-party relationship lifecycle, including offboarding – is crucial in your vendor governance framework.
Top 6 Types of Third-Party Risks
To create a robust vendor governance framework, you must first identify the third-party risks. There are six common risk types to keep in mind when assessing vendors – and consistently balancing and refreshing them is key to success.
Non-compliance risk often emanates from infractions of internal processes, policies, and regulations put in place to steer clear of regulatory hazards – which can be quite costly. Every company has its rules, but some requirements apply in all sectors, such as the Payment Card Industry Data Security Standard (PCI DSS) and General Data Protection Regulation (GDPR). It is crucial to make compliance a centerpiece of your vendor governance framework.
Your company may risk losing its license or potentially incur fines if a vendor fails to comply with the stipulated standards. Ensure that all vendors’ activities align with regulatory requirements to avoid legal tussles and unnecessary financial burdens.
In 2021, CNET reported 1,862 recorded data breaches, compared to 1,506 in 2017 – an increase of over 20% in just four years. The increasing speed of cyber-attacks and sophisticated methods hackers use to penetrate firewalls are alarming.
The first step to estimating the cybersecurity risk associated with a vendor – another key part of your vendor governance framework – is determining your business or organization’s risk tolerance. The acceptable risk thresholds will guide you in evaluating the vendor’s security performance and implementing necessary improvements. Key steps will include reviewing the safety of their network settings by narrowing them down to potentially infected devices.
Note that while hacked systems may not result in the loss of sensitive data, they will provide insight into how the vendors detect and mitigate intrusions.
Third-party financial risk arises when vendors fail to meet financial performance criteria. The result can be missed revenue, higher operating costs, or both.
If not promptly addressed, vendor-generated financial risk can create unnecessary expenses that may plunge your business into financial turmoil. Use your vendor governance framework to keep tabs on vendors’ expenditures by performing regular audits that can detect financial misappropriation and any breaches in contract terms.
You can manage lost revenue by listing which vendors directly influence your brand’s revenue-generating operations. Such vendors should be monitored and given more attention.
Companies gravitate toward vendor brands that are accredited and reputable – and with good reason. Third-party vendors or suppliers can damage your credibility in several ways, including:
- Sour customer feedback
- Interactions that are not aligned with company requirements
- Infractions of regulations and laws
Be safe by reviewing the vendor’s governance and ethics policies for handling disputes and compliance. Part of the vendor governance framework should focus on how a third party deals with disputes. Identified red flags should be resolved promptly to avoid additional challenges.
Strategic risks arise when vendors make commercial decisions that don’t coincide with your set company goals and objectives. Such risks will not only affect the financial stability of your company but also cause reputational and compliance risks.
You can cushion your company from strategic risks by implementing key performance indicators (KPIs). Use the KPIs and your vendor governance framework to monitor third-party operations and resolve detected weaknesses promptly before they wreak havoc on your business and reputation.
Operational risk is a threat from a vendor that may directly or indirectly affect your business operations. For example, an IT vendor system may be compromised, causing your systems to break down.
The vendor governance framework should have a business continuity strategy to mitigate such operational risks. You should still be able to operate even if a vendor decamps or suffers a system failure.
Why You Need a Vendor Governance Framework
There is no one-size-fits-all when creating and implementing a vendor governance framework. Understanding your organizational risks is the secret to selecting the ideal framework for your business.
Consider the following to develop the best framework for your business:
- Can the framework be used to automate data collection?
- How exactly does the framework integrate with your existing processes?
- Is there a benchmark provided for the framework, and if yes, where can I access it?
- Are regular updates made to the framework to keep up with evolving risk levels?
A vendor governance framework aims to identify vendors whose processes and systems lower your business’ risks. It can also help establish collaborations that don’t expose your business to unacceptable potential risks.
For 20 years now, Atlas Systems has been assisting various global brands to scale up by enabling them to adapt and adopt modern technologies. Our objective is to expand the capabilities of our clients and help them realize the full potential of the business by leveraging new-generation technologies such as Cloud and AI. Reach out to us today for robust Third Party Risk Management (TPRM), IT security, managed IT services, and software development.