Vendor risk management (or third party risk management) is defined as a set of activities associated with identifying the risk posed with outsourcing a product or service and then taking all reasonable measures to qualify and reduce risk.
Companies often address vendor risk management in a document commonly referred to as a program. It's basically the organization's plan for managing vendor risk and third party risk.
6 Vendor Risk Management Best Practices
The term vendor risk management can be quite a lot to take in so let’s spend some time diving into some best practices to set up a well-developed vendor risk management program:
- Establish a policy, program and procedures. Quick tips include having a policy that broadly outlines the concepts and the structure with a focus on regulatory guidance, a program that is more in-depth and describes the concepts laid out in the policy and procedures that are clear and easy to follow so that even a person on their first day at the job could understand their role’s expectations.
- Identify your vendors. Reach out to Accounts Payable for a vendor list. Narrow down the vendors that need monitoring. Not every vendor will be an actively managed vendor. You can reference our vendor exclusionary policy for some guidance.
- Confirm that your vendor list is accurate. Check the list against your prior list and your program scope as needed.
- Understand the vendor lifecycle. I recommend reviewing the OCC Bulletin 2013-29. Even if the OCC is not your regulator, the guidance really set the gold standard for the vendor lifecycle. Examiners definitely compare notes and watch one another for vendor risk management best practices, whether formally through participation in the FFIEC, or informationally, just as you watch your competitors.
- Have a thorough risk assessment process. Review every actively managed vendor. Each one requires some level of review. You can prioritize by risk and concentrate first on your critical and / or high risk vendors.
- Have good contract management system and procedures in place. Keep in mind important contractual compliance clauses when entering a contractual relationship. Additionally, have a way to monitor contract terms and renewal notice periods so that you don’t accidentally miss an important date.
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