What Is a High-Risk Vendor?

Today, it’s common practice to engage in business relationships which require putting a lot of trust in another company. It could be that they access or store a massive amount of your data, they have keys to your castle, you allow their people to interact directly with your customers, etc. Inherently, these relationships pose significant risk to your organization because of the level of trust required to keep your organization safe. But, there is a difference between an inherently high-risk vendor and residually high-risk vendor.

Inherent Risk vs. Residual Risk: Key Differences You Should Know

An inherently high-risk vendor is one that, based on the nature of the relationship, requires a lot of trust because they could potentially cause a lot of damage. A residually high-risk vendor is one that isn't doing the things they need to do to keep that trust. As such, if there is no inherent risk, there won’t be residual risk.

For example: You have two vendors that both have keys to your office and chat with your customers. There is potential for a lot of damage, here, because these vendors could harm your reputation, get you in legal trouble, compromise your sensitive information and more. For these reasons, they would both be inherently high-risk relationships.

But, keep the following in mind for high-risk vendors:

1. Vendor 1 has a robust training process for their employees who have successfully completed background investigations. They have strict protocols when speaking with your customers and their employees always follow the script and never get complaints. They sign in and out whenever they’re in your office and are always quick to provide any assurance you may need – insurance documents, copies of their polices and procedures, etc.

2. Vendor 2, on the other hand, tends to bring new employees on pretty frequently who don’t seem to be very knowledgeable of their client base. You’ve received a couple customer complaints about Vendor 2’s interactions with them, and you have trouble tracking down the appropriate people because they occasionally forget to sign in. Furthermore, any time you ask Vendor 2 to provide evidence of training and background investigations, it takes them a long time to respond, if they do at all.

As I mentioned, both vendors are inherently high-risk because of the nature of what they’re both doing for you. You trust them to uphold your reputation, honor your security protocols and do their part in assuring the right people are on the job. Vendor 1 is doing those things well. They demonstrate that they have the right controls in place to mitigate that inherent risk to a lower residual risk. On the contrary, Vendor 2 would still be high residual risk, because they aren’t implementing controls as they should be, and the likelihood that something could go wrong seems pretty high.

Are High-Risk Vendors Always Critical?

It’s often a misconception that high-risk vendors are critical vendors and vise-versa, but this is NOT the case.

Let’s go back to our Vendor 1 and Vendor 2 example. While they’re both inherently high-risk vendors, they may or may not be critical. It all depends on what would happen if they suddenly disappeared or weren’t able to show up to do their jobs for a certain amount of time. Here are some more examples: 

• Scenario 1: Vendors 1 and 2 come on site to provide essential call center services that you’re contractually and legally obligated to have available to your customers. Furthermore, you don’t have the staff available to fill in if need be. That would make these vendors critical, because you could face serious repercussions if they weren’t there to do their job. 
  
  
• Scenario 2: Vendors 1 and 2 come on site to supplement your sales department by trying to generate new leads and/or upsell. If they were to suddenly go out of business, it wouldn’t really affect your operations. It may take a little bit more time to generate more leads, but all-in-all, it’s an add-on service that isn’t too essential. These same vendors who pose high-risk inherently are actually not critical at all.
  

The words “critical” and “high risk” may set off alarm bells, but truthfully there’s nothing inherently bad about either. In fact, none of our organizations could operate without them. Just like other areas of third-party risk management, it’s all about properly identifying those vendors so we can adequately manage and control the risk.

Do you know the difference between your high-risk and critical vendors? Download this infographic to help.