VRM, or vendor risk management, involves a comprehensive strategy for the mitigation and identification of possible business uncertainties and legal liabilities regarding hiring 3rd-party vendors of IT services and products. Compliance Education Institute offers a Vendor Management Course.
Vendor risk management has now become even more critical due to the prevalence of outsourcing. Due to some organizations entrusting some of their workflow to 3rd parties, they wind up losing control of these workflows and must trust the 3rd party to handle their responsibility well. However, disruptive events such as cyber-attacks, natural disasters, and data breaches often are out of an organizations’ control and are now becoming more consistent. Even with the advantages of outsourcing, like heightened efficiency, as well as the capability of focusing on core business goals, if vendors lack solid safeguards and restrictions/controls, the organizations might be exposed to regulatory, operational, reputational or fiscal risk. Vendor risk management is the tool needed for the mitigation and identification of those risks.
Contracting with a third party will subject businesses to risks with the possibility for substantial reputational and financial harm, like from breach of contract, fraud, breach of confidentiality, error, data loss, etc. However, the risks related to vendor relationships, may be unique and will vary depending upon the vendor and the process or service outsourced. Typical areas for vendor risks involve:
* Credit risks
* Transaction risks
* Operational risks
* Compliance risks (that is, the Health Insurance Portability & Accountability Act, the UK Bribery Act, the Foreign Corrupt Practices Act, and the Sarbanes-Oxley Act)
* Geographical risks
* Industry risks
* Reputation risks
* Strategic risks
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An excellent vendor risk management plan might include these:
* First off, there has to be a contract outlining the business relationships between the third-party and the organization.
* There must be concise guidelines that pertain to control and access of sensitive data as per vendor agreement.
* There must be consistent observation of vendor’s performance to make sure that all lines of a contract are properly executed.
* The organization has to make sure that vendors meet each regulatory compliance inside the industry and must develop a way to consistently observe this compliance.
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