Vendor Risk Management

Chapter 1

What is a Vendor Risk Management Program?

Most businesses must open themselves up to third parties as they hire vendors to provide goods and services necessary to keep the business running.

While there are obvious benefits to this, it also brings a ton of risk.
A vendor risk management program allows you to manage and plan for third-party risk. In other words, it is a framework to identify, monitor, and mitigate third-party risks.

Vendor risk types vary and can include cybersecurity, legal, operational, privacy, and reputational. Ultimately, the goal is to protect your organization’s assets against the potential risks of working with third parties.

A vendor risk management program allows you to standardize processes that manage and mitigate risk. An effective vendor risk management program should span the entirety of the vendor lifecycle – from onboarding to offboarding.

Beyond internal procedures for managing vendor risk, your vendor risk management program should also include compliance requirements at the local, state, federal, global, and internal levels.

Let’s look at some of the other risks vendors can bring to the table:

Cybersecurity Risk

Cybersecurity risks associated with vendors include the potential for data breaches, system infiltrations, and other cyber threats that can arise through third-party partnerships. These risks are heightened if you’re dealing with vendors involved in anything data-related.

Cyberattacks and data breaches can present serious threats to organizations – especially those with unmitigated cyber risks. If one or more of your vendors transmit, store, or process your or your customers’ data, you are at risk.

For example, a vendor’s compromised software could serve as a conduit for hackers to access a company’s protected information, leading to significant data breaches. This could include the unauthorized access of customer personal data, financial information, or proprietary company secrets, exposing the organization to regulatory penalties, reputational damage, and financial loss.

You need a proactive approach to manage these cybersecurity risks. This means conducting thorough security assessments of vendor practices, continuous monitoring of vendor networks, and the implementation of stringent cybersecurity standards and protocols in vendor contracts.

Operational risk

Operational risks associated with vendors encompass the potential for disruptions or failures in a vendor’s service or product delivery that could impact an organization’s day-to-day operations. This type of risk is rooted in vendors’ internal processes, technology failures, or human errors that lead to the inability to meet contractual obligations or service levels.

An example might include a critical software provider experiencing downtime due to a technical glitch. This would halt operations if your organization were reliant on that software for its core activities.

Operational risk highlights the importance of evaluating vendors’ operational stability, disaster recovery plans, and performance history as part of comprehensive vendor risk management to ensure continuity and reliability in operations.

Legal risk

Legal risks focus on the potential legal implications and liabilities arising from a vendor’s actions or failure to meet regulatory compliance. These risks can stem from various sources, including breaches of contract, intellectual property infringements, or non-compliance with laws and regulations governing data protection, labor, and environmental practices.

For instance, if a vendor improperly uses licensed technology or proprietary information, it could expose your organization to lawsuits or legal disputes over intellectual property rights. Similarly, if a vendor fails to comply with GDPR or other data protection regulations, both the vendor and your organization could face significant fines and reputational damage.

Managing legal risks requires thorough due diligence during the vendor selection process, clear contractual agreements outlining compliance expectations, and ongoing monitoring of vendors’ adherence to relevant legal and regulatory requirements.

Regulatory and compliance risk

Regulatory and compliance risks associated with vendors form a crucial aspect of vendor risk management, particularly if your organization operates in a heavily regulated industry. These risks arise when vendors fail to adhere to industry standards, laws, or regulations. As a result, the vendor implicates their clients (i.e., you!)in regulatory violations.

An example of this could involve a vendor handling customer data without complying with data protection regulations such as GDPR in Europe or CCPA in California. If a data breach occurs or if the vendor is found to be non-compliant, the vendor will be penalized. Additionally, you, as the client organization, could face severe penalties, legal scrutiny, and reputational damage.

Ensuring your organization’s compliance means grasping (via a vendor risk assessment) each of your vendors’ adherence to regulatory requirements and standards. This isn’t something you set and forget; ongoing monitoring of vendor compliance status (and absence from sanctions and debarred lists!) is important.

Reputational risk

Reputational risks are those that can tarnish your organization’s image and/or standing in the market due to inaction, bad actions, or failures by your vendors. Unfortunately, news travels fast in a digital world, and public perception of your organization can change in an instant due ot something your vendors do or don’t do.

Let’s look at another example. Let’s say one of your vendors is accused of unethical practices, such as labor violations in their supply chain or environmental misconduct. It’s bad for them, and it’s bad for you. That fallout can quickly engulf you as the contracting organization. Your customers and other stakeholders might look at you as complicit or negligent, especially if due diligence wasn’t followed. As a result, you lose the trust of your customers and face attrition, boycotts, or worse.

The best way to guard against reputational risks is to do your due diligence on every vendor. Remember (ongoing) sanctions and debarred list checks. Conduct thorough background checks on potential vendors. Practice continued monitoring of their practices. Be sure your contract clearly states the type of ethical behavior that is expected and required.

Financial risk

Financial risks are straightforward: it’s the money you could lose due to bad behavior or a failure on the part of your vendors. If a vendor is financially unstable and goes bankrupt, it might be unable to refund payments or complete a project. Subsequently, your organization faces monetary losses and significant disruptions.

Financial risks are wide and all-encompassing. Nearly every risk described above has financial risk tethered to it. For example, compliance risk has inherent financial risk. You could face fees or penalties for regulatory non-compliance passed on by the vendor.

Mitigate these financial risks by conducting thorough financial assessments of your vendors before you onboard them. Include checkpoints for the other risks outlined above as you’re onboarding vendors. The more you can automate the process and remove the possibility of human error, the better.

Take a self-guided demo to see how PaymentWorks secures your vendor onboarding process.

Explore the Platform

Chapter 2

Building a Vendor Risk Management Checklist

A vendor risk management checklist is more than just a handy tool. It’s a critical guide that can help outline the entire risk mitigation process for vendor managers.

It seems every single day, risk mitigation has become complex and complicated. Documenting the necessary steps not only ensures that they get done but can help safeguard your organization from falling out of compliance – and the consequences of such.

Check out our video to understand the importance of risk mitigation (and how PaymentWorks helps vendor managers sleep better). Use this article as a guide to creating your own vendor risk management checklist.

Risk Management Video Summary

Tammy Slusser

Controller, Kent State University

One of the things that attracted us to PaymentWorks was the ease and efficiency of getting a vendor onboarded by going through the portal and not having to have all of this paper shared back and forth with email. It is a much more secure process. So, we did have an attempted fraud with one of our construction vendors on changing banking information. So we were really looking for something that would help with the security around change management with vendors.

Kim Flippence

Purchasing Agent, Utah State University

Not having all the faxes, emails, the stacks of W9s on your desk or in your folder or in a file somewhere – that's a huge selling point. And they do so many verifications for us as far as the IRS verification, the sanction list alerts…

Allen Kong

Director of Procurement, Rutgers University

Now, once the supplier submits the registration with all that information, again, tax ID addresses, and legal name. And then PaymentWorks behind the scenes would perform the background checking. For us at Rutgers, we are interested in whether the supplier has been debarred or if they are on the government sanction list or the OFAC list, etc…

Michael James Giuffre

Business Analyst, Tufts University

Speaker 4: And then there's that additional fraud protection and banking validations as well. Um, we've actually had a fraud attempt into one of our accounts that that payment was able to, to catch and prevent that from happening. They were there trying to take over an account and provide banking information. And we actually have some invoices that were queued up to be paid within the following weeks. And PaymentWorks had caught that before any changes could be made in our vendor master file.

A quick reference vendor risk management checklist

1 Verify the vendor is real

It’s critical to confirm your vendor’s identity – that they are who they say they are. You also want to validate the documentation and details they provide via third-party data checks and cross-referencing submitted documentation against references and other data sources.

2 Verify vendor information

Validating vendor information (e.g. TIN, address, and banking info) is a must-have on your vendor risk management checklist. To validate, you first need to collect. If you’re manually onboarding vendors, that means you’ll need to be thorough in the information you ask for.

You will most likely need addresses, licenses, insurance certificates, banking account info, and contact details for the business representative. Grabbing all of this information may require you to use a few different sources and third-party tools.

Let’s walk through each of those steps below:

• 2A – Basic vendor information: If you’re using an in-house vendor form like an Adobe PDF, you’ll start by emailing the vendor and asking for the information they can provide.
• 2B – TIN: Tax ID confirmation can be done via the IRS Taxpayer Identification Number (TIN) Matching service. The vendor desk and/or accounts payable should make sure tax ID numbers are verified.
• 2C – Banking account info: You can use a tool like Early Warning System (EWS) to verify US banking information, which verifies the link between the account you intend to pay and the confirmed tax ID of your vendor. The vendor desk and/or accounts payable usually handles this step. (Note: EWS covers roughly 50% US business banking accounts. In other words, you’ll need to use a more intensive check to handle bank account verification beyond EWS.).

3 Scrub vendor against debarred and sanctions list

Sanctions and debarred list screening enables you to remain compliant and ensures you aren’t doing business with people on bad lists. It’s a major component of mitigating regulatory risk, and it can require significant effort.

Each vendor needs to be checked against debarred, denied, and restricted lists and databases to ensure they are risk-free. This step has become increasingly important in a world increasingly relying on international suppliers and vendors. Both global and domestic sanctions lists and regulations must be considered to avoid fines and reputational damage.

4 Verify COIs

Don’t forget to verify any certificates of insurance (COIs) which provide proof of insurance coverage. COIs will vary by vendor but should be requested from all vendors. Documentation should include the insurance type, the limits and terms of coverage, and the expiration of the COI.

5 Consider supplier diversity requirements and HUB documents

In many cases, organizations have supplier diversity commitments and goals. If this is the case for your organization, you’ll need to check if your vendor has obtained HUB (historically underutilized businesses) status.

Don’t forget to include this information as part of an audit trail as many organizations must report on supplier diversity progress to investors, shareholders, and board members.

6 Maintain audit trails and communication

Perhaps the most important part of the vendor risk management checklist is the audit trail for all the steps completed. Collecting information is a good first step; however, your vendor risk management checklist should also lay out how that information is recorded, tracked, and routed throughout your organization to ensure all stakeholders have what they need – and that there’s an audit trail.

Some of the information may also be needed across other departments, including tax, compliance, treasury, and risk. An audit trail can make it easier for the necessary parties to access what they need. In a best-case scenario, you’ll have a central repository for this information to make data-sharing seamless.

Enhance Your Vendor Risk Management Checklist With Automation

Automation streamlines each of the items on the vendor risk management checklist above. It starts by eliminating risky email. Automation means there’s no Adobe PDF to fill out manually.

Instead, your vendor can login to the vendor onboarding portal and enter their own information. Not only does this eliminate headache-inducing back-and-forths between the vendor desk and the vendor, but it’s a much more secure process, too.

Automation also makes the stack of paper on your desk disappear. No more faxes, emails, and stacks of W9s just waiting to get knocked over. Instead, that part of the vendor risk management checklist is automated and digitized.

Now, let’s get into the real risky stuff.

Automation means IRS verification and checks against debarred and sanctions lists can happen automatically and behind the scenes. Better yet, sanctions list checks happen continuously, so you’re alerted if there’s a change in the status of one of your vendors.

No more set it and forget it and pray. Working with vendors on bad lists is not just a no-no, it’s a potential compliance violation. Automation means nothing falls through the cracks that could cost your organization financially or reputationally.

Fraud protection becomes a breeze with automation as well. Banking validations are seamless. And since all validations and verifications happen right at the time of onboarding – and change requests trigger new approval workflows – you can be sure that you’ll never get caught sending money to the wrong person (aka a fraudster impersonating a vendor).

In short, automation streamlines everything from data collection to storage to verification to audit trails and more. As regulatory requirements become more complex (and you onboard more and more vendors), automation can free up your vendor desk to focus on more value-added, strategic tasks.

Chapter 3

How to Find the Right Vendor Risk Management Tools

Vendors bring value and expertise to your operations, but they also introduce risks that can cost your organization in money, reputation, compliance status, and more.

As a result, many organizations are on the hunt for the right vendor risk management tools to safeguard their interests and ensure business continuity. If this is you, we’re here to help you navigate the process and find the right vendor risk management tools for your business.

What’s your risk landscape?

Step one is analyzing your own risk landscape. Risk varies by organization type, industry, size, and other factors. Each of those elements can play a role in the type of risks you face. Heavily regulated industries like finance and healthcare need to pay special attention to regulatory and compliance risks, for example. Identify the types of risks most relevant to your industry and organization to pinpoint which features you need in a vendor risk management tool.

What should vendor risk management tools have?

Real-time monitoring and alerts

You can’t be reactive in a digital world. Proactive vendor risk management means finding a solution that offers real-time capabilities, including monitoring and alerts. For example, you should be continuously checking your vendors against sanctions lists, which can change at any time. A great tool will offer real-time alerts for those changes and potentially trigger new workflows for how to handle a change in status.

Integration with existing systems

For some, the “tech stack” is a point of pride, but you should try to keep that stack as short and simple as possible. The fewer tools you use, the lower the chances of information getting lost in translation. Look for tools that easily integrate with your organization’s existing systems, like ERP, CRM, and other procurement platforms. Simple integrations also mean you can get up and running more quickly without sacrificing data management or coherent operations.

Customization and scalability

Find a tool that offers customization options so you can adapt it to your specific requirements and scale as your vendor network grows. This can include everything from access control to setting up custom workflows and more.

Reporting and analytics

Data is the name of the game. You need visibility via insightful reporting and analytics so you can make informed decisions. These features should enable you to easily generate reports and tap into a dashboard view to monitor and take action where needed.

Approval workflows and audit trails

Approval workflows and audit trails help you keep tabs on where things are in the process — and how they got there. On top of that, fine-grained permissions for certain roles can help you keep sensitive information secure without causing a traffic jam in the process. These types of controlled processes help you keep a close eye on every step of vendor vetting and onboarding while also creating the right conditions for favorable insurance coverage.

No matter the route you take, continuously evaluate your vendor risk management tool. The business landscape and associated risks are always evolving, and your tool should evolve, too. Regularly review the tool’s performance and stay updated on new features or alternative solutions that might better serve your needs.

Finding the right vendor risk management tools requires you to understand your risk landscape. Choose the features and benefits best-suited for your organization and select a tool that aligns with your unique needs.

Take a self-guided demo to see how PaymentWorks secures your vendor onboarding process.

Explore the Platform

Chapter 4

Why You Should Automate Vendor Risk Management

We’re going to rewind to the second section in this lengthy vendor risk management guide to remind you that vendor risk management and vendor onboarding need to work together. Subsequently, it makes sense to automate vendor risk management, at least in part, by automating vendor onboarding.

Traditional manual processes for vendor risk management are time-consuming, prone to human error, and often ineffective at keeping pace with the dynamic nature of risk. When you automate vendor risk management, you transform it from a daunting task into a streamlined, efficient, and more reliable process. Consider the benefits your organization can enjoy when you automate vendor risk management by automating vendor onboarding:

Enhanced efficiency and time savings

Manual risk management during vendor onboarding involves endless spreadsheets, physical documents, and an unholy amount of human labor. These processes are not just slow; they’re prone to oversights and errors. Automating vendor risk management condenses these tasks, allowing software to rapidly perform what would take humans hours or days. This efficiency frees up your team’s time to focus on strategic decision-making and value creation instead of getting bogged down in administrative tasks.

Real-time risk monitoring and alerts

The risk landscape changes every second, with new threats emerging at a moment’s notice. Automated vendor risk management tools allow you to monitor risks in real time. This means you get instant alerts when potential threats are detected. In other words, when you automate vendor risk management, you transform your process from a reactive one to a proactive one. In turn, you can respond to issues as they arise rather than days or weeks later.

Consistency and standardization

Manual risk management is inconsistent. Different team members often use varied criteria or processes to assess risk. As a result, vendors are evaluated and monitored in different ways. These discrepancies introduce more risk. Automation standardizes the entire process, applying the same rigorous criteria across all vendors. This uniform approach keeps things fair for your vendors and makes it easier to audit and review vendor risk management activities.

Improved accuracy and reduced human error

We’re going to come right out and say it: humans are fallible. Even the most diligent worker can make mistakes (fat finger syndrome, anyone?), especially when dealing with complex data or repetitive tasks. Automated systems can perform these tasks without error, keeping risk assessments accurate and reliable. This way, you can focus on making informed decisions about which vendors to engage with and under what terms.

Scalability

Your network of vendors will change over time. Your organization will grow, and your list of vendors will get bigger, too. Managing more vendors means more complexity and more risk. This is where inherently scalable, automated platforms can simplify everything. These platforms allow you to easily onboard new vendors into the system and manage them alongside existing ones without creating a ton of extra work.

Comprehensive reporting and analytics

Automated vendor risk management tools often come with advanced reporting and analytics capabilities. These features allow you to generate detailed reports on demand so you can get insights into your overall risk posture, areas for improvement, and trends over time. This empowers your vendor desk – and the entire organization – to make data-driven decisions and engage in strategic planning.

Regulatory compliance

Compliance is a hot-button issue because the consequences can be dire. Many industries are subject to strict regulations regarding vendor risk management. Additionally, manual processes can make it challenging to ensure and prove compliance. Automated systems are designed with these regulations in mind and incorporate the necessary compliance checks into the workflow. Better yet, they keep detailed records of all activities that you can use as an audit trail or to secure favorable insurance coverage.

Automating vendor risk management is not really an option when you consider the factors above. Modern organizations need modern solutions. When you automate vendor risk management and onboarding, you increase efficiency while mitigating risk. You also enhance consistency, accuracy, scalability, and compliance. Automation can help you safeguard your business against potential risks and position it for sustainable growth and success in an increasingly complex environment.