Just as risk management has particular considerations when it comes to addressing vendors, the process of managing those vendors and their associated risks should change as their business relationship with you changes. Much as there is not a one size fits all risk assessment for every third-party vendor, there are multiple stages of the vendor risk management lifecycle that should be focused on different, particularized areas of concern beginning before any official vendor relationship and extending to after contract termination and off-boarding.
We've written a lot about how third-party risk management should be a whole enterprise approach for the best results. That can look like different things across the entirety of the VRM lifecycle. Let's take a look at some of the key considerations in each of these stages.
Bid Solicitation and Pre-contract
It is critical to start the risk assessment process during the pre-contract phase. Whether you are soliciting bids from a large number of potential vendors or only a handful, assessing the unique risk profiles presented by each option will help you narrow down your field. Why accept a high-risk vendor when other lower-risk options are on the table?
This is also a good time to integrate personnel from other segments of your company into the risk management team. Information security can assess the vendor's security controls if this vendor will be holding customers' personal information or other sensitive data, and your audit component can review financial statements and set benchmarks for reporting guidelines. This is where a solid vendor management portal will shine. The ability for employees involved in the risk assessment and management process to be able to access, enter, and update information all in one location will prevent any inconsistencies from slipping through the cracks.
Inherent Risk Scoring
Related to the prior category but with some notable differences, the inherent risk scoring process deserves its own special consideration in terms of the third-party risk management lifecycle. Does a third-party vendor that provides daytime janitorial services present the same inherent risk exposure as an IT vendor that holds customers' protected health information? Of course not, and to treat each with the same level of scrutiny can either waste precious time or not delve deeply enough.
Similarly, a vendor with a critical position in your supply chain carries significantly more inherent risk than one with a less central role. Evaluating this level of criticality to your continued business operations will help you define the terms needed to most successfully mitigate risk through your next step in the lifecycle–contracting.
If the pre-contract phase is when you can use assessments to best limit your risk exposure, then the contracting process is where you can set guidelines, boundaries, and avenues of recourse that define your relationship with your vendor. In some cases, you may even be able to transfer a portion of that liability onto the vendor by requiring some form of indemnification at the contractual level. While this may not always be possible given local civil laws, your industry, or your vendor's services, an option that reduces the inherent risk in a vendor relationship should be explored.
The contracting process is also an important time to expressly lay out what sort of reporting requirements you will hold your vendor to, and what right to audit their documents and finances you may have. A solid audit clause in a contract can pay dividends later should you find yourself the victim of fraud or embroiled in an information security issue. This is also the appropriate time to set forth some of the off-boarding standards as well. Time limits on data retention, methods of return or destruction of data and other items, and more should all be memorialized in an effective contract for the protection of all parties.
Without a doubt, the most significant component of managing third-party risk is the task of continuous monitoring. All elements of the vendor lifecycle up until now have defined risk, scored risk, and established relationships, but here is where all of those pieces of the puzzle come together to form the full picture. The complete assessment was leveraged into an effective contract, and now it is time to execute the terms of that contract and ensure that you are performing your due diligence in line with best practices.
Again, a vendor management program is essential when it comes to continuous monitoring. Just as it was a single repository for all facts during the assessment process, this program can keep you on track across all disciplines in your risk management team and prevent duplication of effort during your monitoring process. Automated services are a force multiplier with the ability to send out questionnaires, assessments, contact information update requests, or document upload requests directly to your vendors. Cloud-based programs offer the flexibility to let your teamwork from anywhere or even to outsource some or all of your monitoring and TPRM processes to industry specialists.
Specific Areas of Concern
Within your continuous monitoring activities, it's easy to be distracted by the minutiae. That's why they use of automated vendor risk management programs is considered a best practice. It allows you to direct your due diligence efforts into areas that may otherwise be overlooked. You should continually monitor not just your vendors but their own vendors for:
- Security breach notifications
- IT infrastructure and web application security
- Mentions on the dark web
- ESG compliance
- Regulatory compliance
- Financial concerns
Scaling the monitoring of your fourth party and Nth party vendors should be done by the identified risk exposure to your own business. This lets you direct your efforts to the areas in which you have the most inherent risk. Your third-party vendors should also be subject to the ongoing performance reviews, audits, and inspections that should have been placed into the contract language. It's also during this process that residual risks should be identified and addressed, even if that only entails acknowledging and accepting the risk exposure.
Contract Termination and Off-boarding
Third-party risk management does not end at the conclusion of a contract. There are residual risks that remain even after the close of a business relationship. That is why it's an important aspect of the lifecycle to address within the contract, and this holds doubly true if the termination is due to a vendor's failure to perform and not simply the conclusion of a contract term. A thoroughly written contract simplifies your off-boarding process to ensure compliance with already agreed upon terms such as data destruction, revocation of access to networks and databases, and the delivery of any final reporting requirements.
This can be an overwhelming process for a small business, and even large businesses can feel the time and financial stressors associated with a robust, whole enterprise third-party risk management process. Venture Lynk Financial can provide a wide variety of services from onboarding to audits or even vendor financial risk assessment. Leveraging the talents of industry experts can free your employees up to operate in their own areas of expertise.