Risk is a natural part of running a business. Companies need to find an effective method to manage risks while remaining solvent, whether related to vendors and supply chains or spend risk. One of the most significant challenges today is following through on due diligence to assess your suppliers and ensure your business (and your customers) are not adversely affected by spending risk associated with third parties. Managers need to take a new approach to the process, which begins with making a good risk management strategy. Making risk assessment an integral part of your risk management strategy is key to fostering good relationships and building future success. Here are just a few ways to mitigate, assess, and manage supplier risks at your organization:
Understanding third party risk
The concept of third-party risk is relatively straightforward and concise. It’s essentially the threat to a business’s data or financial information from the organization’s vendors, supply chain, or any outside parties that may have access to its systems. It can be a serious problem with severe consequences. Third-party risk easily breaks down into five categories:
Operations risk – If a third-party vendor provides any critical component to keep a business running, they may pose an operational risk. Whatever happens to that party—a data breach, for instance—can have far-reaching consequences for the organizations they serve.
Financials – Financial risk comes in a few forms. It can cover lost revenue from a vendor’s inability to stay within your budget/scope or meet your organization’s financial performance metrics. Anything that has a direct effect on sales, revenue, or profits can fall under this category.
Reputation – This risk deals with how customers see your business and can be impacted by third-party behavior or data issues.
Strategy – This is where vendors aren’t working with the same strategy as your business.
Compliance – Vendors should follow the compliance standards laid about your organization. Failure to do so can have profound legal, customer impact, or other consequences.
Each one can significantly impact your organization’s various aspects, so creating a risk management strategy is vital to preventing future problems or negatively affecting your organization. Watching these issues and other third-party risks (such as rogue spending or data loss) is the cornerstone of effective risk management.
Using risk assessment techniques to reduce spend risk
Rogue spend (where a vendor spends money outside established purchasing policies) can be an issue with high-risk suppliers, whether it’s intentional or not. The most precise method for mitigating rogue spending and other issues (such as missed deliveries, poor service, or a data breach) is to assess third-party risk regularly. Maintaining visibility into spend risk is crucial to your success. Disreputable vendors can have a potentially negative impact on your organization, which can impact many factors. The best way to handle the problem is to gain a better perspective on your spend visibility. Use risk assessment and analysis techniques to review/monitor a vendor’s procurement and sourcing decisions. This technique can help you glean some insight into where the money is going. You can also use real-time invoice assessment to get a clear picture of the vendor’s work, supplies, and other spending factors. In doing so, you can optimize a relationship with a vendor, reduce potential risk, and minimize any damage they may cause to your organization.
Monitoring vendors and supplier performance
A high-risk vendor or supplier can cause significant problems to your product, data, and profits. High-risk vendors generated about 44% of data breaches in 2019. So what can you do to prevent such problems? The key to successfully managing third-party risk is through regular, comprehensive risk assessment. Using metrics to measure vendor performance, liability, risk ratings, reputational impact, and more can ultimately create a better relationship between you and your vendors. Use a combination of due diligence, key performance indicators, and measuring business impact. Consider implementing a full-scale third party risk management software solution to help automate the process and put a comprehensive monitoring tool right at your fingertips.
Use comprehensive data and risk scoring to control spend risk
Data can be the single most valuable tool in your vendor management toolbox. Start by compiling as much data as possible. Examine how vendors are performing concerning your organization’s needs. Then, consider assigning risk scores to them. A risk score can help determine if a supplier is risky based on multidimensional factors. These cover how well they comply with your established financial policy, how they affect your reputation, and how well they follow cybersecurity standards or insulate themselves from potential data breaches. With risk scores in place, you can choose the right supplier every time.
Know how to respond to risks in real-time
Employing some sort of vendor management software can help managers respond to risks in real-time. With a good software solution, you can prevent payments immediately if needed and see all of a vendor’s invoices/financial data in seconds. You can also put a high-risk supplier on review pending further review or even alter/review a vendor’s contract. Risk scores can help make these vital decisions as well, with the software providing suggestions on potential actions. By handling these in real-time, you can position your business for success and dramatically reduce potential third-party risks to your organization.
