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6 Steps for Establishing a Vendor Risk Management Program

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A lot plays into a successful vendor risk management program. One must consider many factors including the time devoted, the subject matter experts involved and a thorough understanding of the evolving regulations. At times it can become a laborious task to fully understand all facets that should be part of your organization’s vendor risk management in order to be a thriving program.

How to Establish a Vendor Risk Management Program

We suggest the following 6 steps to establish a vendor risk management program:

1. Develop Governance Documents Appropriate to your Organization.

The documents you need for your program will vary depending on the complexity of your situation. At the minimum, you’ll want to begin with a well-documented policy which lays out the high-level guidance of what you’ll need to do moving forward. A program and desktop procedures are two other documents that can be extremely helpful as you continue to build the details of your process. The program is a comprehensive set of steps for senior management and the lines of business and the procedures will outline the day-to-day vendor risk management responsibilities in great detail.

2. Have a well-defined vendor selection process.

Forming a defined vendor vetting process is critical to the success of the organization’s vendor relationships. The process should be executed by your organization as a starting point for selecting any vendor who might provide a product/service. The vendor vetting process may include:

  • Issuing a Request for Proposal (RFP)
  • Comparing the vendor to competitors
  • Completing a risk assessment and other due diligence requirements (these should be defined in your policy!)

3. Establish contractual standards.

It's important to remember that not all contracts are created equal. Yes, you can have a standard template that your organization begins with when entering a new vendor relationship; however, there should be a lot of communication and understanding of both parties’ responsibilities before finalizing a contract draft. Within your organization’s contractual standards, be sure to incorporate a negotiation process, a review and approval process and an understanding of how contracts will be stored and monitored for key terms/changes. Complete and thorough contracts are very important in vendor risk management. 

4. Keep up with periodic due diligence and ongoing monitoring.

An established vendor risk management program is only as strong as the due diligence process that has been implemented at the organization. Continue to perform due diligence on a periodic basis, as appropriate to the vendor’s inherent risk. This means that a high-risk or critical vendor should be re-evaluated at least annually, but lower risk vendors can be scheduled out on a less frequent basis. It’s vital that you understand any vendor changes that may impact the risk posed to your organization. Remember, due diligence isn’t just about requesting and receiving documents. You must analyze those documents as a part of your vendor risk management process. Here is a snippet of what periodic due diligence would look like if done correctly:

  • Reviewing the vendor’s financial statements every time they are released. Poor financials show more than just bad numbers! This could also indicate a decline in the vendor’s service levels, which is especially risky if your vendor communicates with your customers. It could even reveal the imminent possibility of the vendor going out of business.
  • Continuing to request and evaluate the vendor’s SOC reports, business continuity and disaster recovery plans and information security procedures. All of this can impact your organization and customers significantly if there are gaps of faulty security controls.
  • Completing annual assessments in different areas including risk, performance, information security and more.

5. Define an internal vendor risk management audit process. 

Implement an internal audit process into your vendor risk management program. This will act as your catch all before an examiner arrives on site. It’s much more preferred to catch and resolve an error or program gap well before your examiner does. An internal audit will help you verify your organization has the appropriate controls in place to mitigate risks present.

6. Establish a robust and comprehensive reporting process.

The board, senior leadership and appropriate stakeholders will greatly benefit from consistent reporting so they can make informed decisions and be aware of the vendor risk environment. This reporting should include a few specific items like a high-level summary of your vendor portfolio and risk assessments, along with any new regulations and ongoing due diligence. It’s also worth noting that reporting to your organization’s leaders is not just a best practice, it’s a regulatory requirement!

By following these 6 steps, you’re on the horizon of a program that will assist your organization greatly with adequate vendor risk management.

Many components and processes makeup a third-party management program. Download the checklist. 

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