Vendor risk is the potential for financial or reputational damage to an organization resulting from the actions or inaction of a third-party vendor. In other words, it’s the risk that your company takes on when it does business with another company. This type of risk is often overlooked, but it can have devastating consequences if something goes wrong. Here’s what you need to know about vendor risk and why it’s so important to manage it effectively.
What are the risks of doing business with a vendor?
There are a number of risks associated with doing business with a vendor. These include:
- Financial risks: The vendor may not be able to deliver on its promises, which could lead to financial losses for your company
- Reputational risks: If the vendor is involved in a scandal or other negative publicity, your company’s reputation could be tarnished by association
- Compliance risks: If the vendor does not comply with applicable laws and regulations, your company could be held liable for any resulting damages
- Operational risks: If the vendor fails to meet its obligations, it could disrupt your company’s operations and cause significant problems
Why is managing vendor risk so important?
Given the potential consequences of doing business with a vendors, it’s important to take steps to manage vendor risk effectively. Some of the ways you can do this include:
- Conducting due diligence: Before entering into a contract with a vendor, be sure to do your homework. Research the company thoroughly and speak with references to get a better sense of its capabilities and track record
- Putting safeguards in place: Once you’ve entered into a contract with a vendor, put some safeguards in place to protect your interests. For example, require the vendor to maintain adequate insurance coverage and establish procedures for handling confidential information
- Monitoring performance closely: Stay on top of things by monitoring the vendor’s performance closely. Be sure to address any problems that arise promptly and efficiently
Vendor risk is a real and serious threat to any organization that does business with third-party vendors. By understanding what vendor risk is and why it’s so important to manage effectively, you can help protect your company from the potentially devastating consequences of doing business with a less-than-reputable vendor.
Looking to manage your vendor risk? Check out our Third-Party/Vendor Risk solutions for Connected Risk.