Last updated on Mar 10, 2024

How do you measure vendor risk?

If you work with external vendors, you need to assess and manage the risks they pose to your business. Vendor risk management (VRM) is the process of identifying, evaluating, and mitigating the potential threats and impacts of outsourcing your products, services, or operations to third parties. In this article, you will learn how to measure vendor risk in six steps.

1 Define your risk criteria

The first step is to establish your risk criteria, which are the standards and thresholds that you use to measure and compare the risks of different vendors. Your risk criteria should align with your business objectives, regulatory requirements, and industry best practices. You should also consider the nature, scope, and complexity of the vendor relationship, as well as the potential consequences of a vendor failure or breach.

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Anna Zasada

Procurement Manager Direct & Indirect #purchasingstrategy #category management #procurement#purchasing #sourcing #contract management #TCO #supplyriskmanagement
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What about Vendor/Supplier Risk Management Policy, as a part of SRM Supplier Relationship Management Programme? I recommend it for consideration and implementation. On corporate/ global level such document should gather mission, vision, aim and criteria and rules.

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2 Categorize your vendors

The next step is to categorize your vendors based on their risk level and impact. You can use a risk matrix or a scoring system to assign each vendor a risk rating, such as low, medium, or high. The risk rating should reflect the vendor's criticality, performance, compliance, security, and reputation. You should also prioritize your vendors based on their risk rating, so that you can focus your resources and attention on the most risky ones.

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3 Conduct a risk assessment

The third step is to conduct a risk assessment for each vendor, using the risk criteria and rating that you defined and assigned. A risk assessment is a systematic and structured analysis of the vendor's capabilities, processes, controls, and performance. You can use various methods and tools to conduct a risk assessment, such as questionnaires, audits, interviews, reviews, or tests. The goal is to identify and document the vendor's strengths, weaknesses, opportunities, and threats.

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4 Implement risk mitigation strategies

The fourth step is to implement risk mitigation strategies for each vendor, based on the results of the risk assessment. Risk mitigation strategies are the actions and plans that you take to reduce, transfer, avoid, or accept the vendor risks. Some examples of risk mitigation strategies are contract negotiation, service level agreements, contingency planning, monitoring, reporting, or termination.

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5 Monitor and review vendor risk

The fifth step is to monitor and review vendor risk on a regular basis, using the risk criteria and rating that you defined and assigned. Monitoring and reviewing vendor risk involves collecting and analyzing data and information on the vendor's performance, compliance, security, and reputation. You can use various sources and indicators to monitor and review vendor risk, such as reports, feedback, alerts, incidents, or benchmarks. The goal is to detect and respond to any changes or issues that may affect the vendor risk.

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Susan Nuccio
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It is alluded to in this section, but I would stress always understanding the scope of what a vendor is delivering to your organization and making sure to monitor the vendor closely, working with the business, to ensure any scope increases of services or products from the vendor are tracked as those increases change the risk rating.

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6 Communicate and collaborate with vendors

The sixth and final step is to communicate and collaborate with vendors on their risk management. Communication and collaboration involve sharing and exchanging information, expectations, feedback, and best practices with the vendors. You can use various channels and formats to communicate and collaborate with vendors, such as meetings, calls, emails, or portals. The goal is to build and maintain a trusting and transparent relationship with the vendors, and to foster a culture of continuous improvement and innovation.

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Ian Rowlands

Writer (Self-employed)
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I agree with the steps proposed -- but this one is out of sequence! Put it first. Let your vendors know, and give them an opportunity to think about where they stand and then get their house in order. Ideally, do this before you do business! Make compliance with your risk management processes a contractual obligation.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Susan Nuccio
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This sounds basic, but if presented with an ISO 27001 certificate from a vendor, confirm that the services the vendor is providing your organization are included in the scope of the ISMS certified to ISO 27001.

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Joe Ogbechie

Author - MBA, ITIL, AWS
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In addition, 1. Security controls evaluation: Assess the vendor's security controls and practices. This involves evaluating their information security policies, data protection measures, access controls, encryption methods, and vulnerability management processes. Determine if the vendor aligns with your organization's security requirements and standards. 2. Compliance assessment: Review the vendor's compliance with relevant industry regulations and standards, such as GDPR, HIPAA, or PCI-DSS. Ensure they have the necessary certifications and demonstrate adherence to these requirements.

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How do you measure vendor risk?

1

2

3

4

5

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1 Define your risk criteria

2 Categorize your vendors

3 Conduct a risk assessment

4 Implement risk mitigation strategies

5 Monitor and review vendor risk

6 Communicate and collaborate with vendors

7 Here’s what else to consider

Vendor Management

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How do you measure vendor risk?

1

2

3

4

5

6

7

1 Define your risk criteria

2 Categorize your vendors

3 Conduct a risk assessment

4 Implement risk mitigation strategies

5 Monitor and review vendor risk

6 Communicate and collaborate with vendors

7 Here’s what else to consider

Vendor Management

Rate this article

Thanks for your feedback

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