March 21, 2022

What Is Vendor Risk Management Software & Do You Need It?

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Vendor risk management (VRM) monitors and reduces the risks that arise when dealing with vendors, service providers, and IT suppliers.

VRM software is focused on making sure vendors and service providers do not cause business disruptions or damage. It can give organizations the ability to monitor their vendor relationships over time, identify new risks as they arise, and measure vendor performance.

In the age of the internet, businesses must safeguard themselves against third-party security risks. Large organizations often use an extensive number of vendors, and having a simple list of the vendors is not enough to prevent them from causing business disruptions. The most damaging risk events caused by vendor relationships are often a result of security breaches.

By implementing dedicated VRM software, companies are capable of generating a vendor risk assessment based on concerns, such as cybersecurity, regulations, and financial health. VRM software also collects vendor risk data and manages it to protect businesses from data breaches, compliance issues, and supply chain vulnerabilities.

Read more on IT Business Edge: How to Prevent Third-Party Vulnerabilities

The Purpose of Vendor Risk Management Software

Similar to other types of risk management software, the primary function of VRM software is to create documentation and workflows, as well as automating risk management procedures — primarily for third-party vendor risk. VRM makes the process of securing, organizing, and optimizing vendor relationships easier.

The software will produce supplier ranking as well as a risk classification system reports. These can be customized to meet different corporate requirements, such as business disruption planning and regulatory compliance.

Compliance officers and legal teams often use VRM software to assure federal regulations (FFIEC, CFPB, and HIPAA) and corporate policies are being met. Vendor risk management software is also used by procurement specialists and supply chain managers to minimize operational risks. The four categories vendor risks typically fall into are:

  • Legal and regulatory
  • Reputational
  • Financial
  • Operational

Third-party Vendors and Their Risks

A third-party vendor is basically any business providing a service or product to your organization, but does not work directly at your organization. Ideally, an organization would want to partner with a vendor that is both efficient and affordable.

Unfortunately, careless vendors can have a negative impact on a business’s performance. Data breaches, data loss, and human error are all hazards when combining digital technologies with a vendor relationship.

Here are some concerns businesses must be aware of when researching vendor risk management software:

  • Data security: Third-party vendors may need network access to company information. This means cyber criminals can enter your system via third-party vendors.
  • Security slippage: As trust develops with long-term vendors, security controls will often become more relaxed. A cyber criminal can take advantage of this by posing as a member of a vendor’s staff and stealing sensitive information.
  • Data protection laws: Privacy laws require data governance policies for processing personal data. Breaking these laws can lead to massive fines and, in some cases, the loss of a business license.
  • Legal action: Negligence by a vendor may result in a lawsuit against your company, a loss of clients, and damage to your reputation.
  • Stolen research or intellectual property: Outsourcing work to third-party vendors may involve sharing intellectual property or sensitive research. This shared information can be accessed through data breaches or even stolen for competitors.

Depending on the kind of business that is developing a VRM program, some risks may have more impact on the organization than others. While one company may suffer damage to their reputation and stolen customer information, another may lose money by paying an invoice that had been surreptitiously downloaded into their accounting system.

Read more on Channel Insider: Top Vendor Risk Management (VRM) Software & Tools

The Benefits of Vendor Risk Management Software

Effective VRM software will centralize information about vendors and assess their potential risks. This process will help protect your business and communicate security issues to the vendor.

Any company or individual supplying services or goods to your business is a potential risk. This includes contracted marketing teams, consultants, legal advisors, manufacturing suppliers, accountants, and more.

While many organizations have in-house teams to deal with the different aspects of day-to-day operations, recent trends have shown an increase in outsourcing to specialist vendors. Rather than hiring a full-time employee, businesses can save money and increase efficiency by using VRM software. Additional benefits include:

  • Automation: Using vendor risk management software allows an organization to automate due diligence and monitoring tasks.
  • Centralization: VRM software will centralize your vendor program processes and maintain organization.
  • Better vendor visibility: VRM software offers easy access to vendors and tracking, helping IT develop vendor risk assessments more quickly.
  • Contract management: The software makes contract terms and renewal or termination notifications easily accessible.
  • Error reduction: Using automated software reduces the probability of mistakes caused by manually inputting and updating data.
  • Ease of reporting: Risk management software allows for the creation of customized reports that clearly address vendor risk issues.

Choosing Vendor Risk Management Software

When choosing VRM software, a thorough analysis of your business’s current vendor risk management program is a good place to start. This should be followed by a plan describing how the organization will operate in five years, with the goal of integrating new technologies smoothly.

Ideally, the chosen VRM software will meet the needs of your organization now, while supporting the evolution of your technology in the future. This analysis can also provide questions to ask software providers, so they can assist in making your plans a reality. Here are some things to consider:

  • Can your business afford VRM software? Pricing ranges from $60,000 per year to $99 per month per user.
  • How many vendors do you have? This includes contractors, cloud services, accountants, and utility companies.
  • What processes will be automated? The more, the better.
  • What are the current issues with vendors? This can range from late deliveries to security concerns.
  • Will the software work with your computer system? Are you planning to get a new system in the next five years? And if so, will the software still be compatible, or will the VRM software need to be replaced?
  • Is the software updated on a regular basis? As with any software, patch and update management is crucial for VRM.

Read more: The Importance of Risk Management in Construction Projects

Stay Updated

Vendor risk management is not something that’s performed once and then checked off forever. It is an ongoing process. VRM software often overlaps with data privacy management software and governance, risk, and compliance (GRC) software. Each category emphasizes risk management for regulatory compliance and business impact purposes.

The regulatory environment is constantly evolving, and new requirements can impact your business in complex ways. If your software provider isn’t tracking changes and making adjustments as necessary, you’re not receiving an appropriate level of risk management.