The messy state of vendor risk management and four steps you can take to address it

Discover why you might not be considering your vendors’ complete risk profiles, and how you can build a comprehensive risk management strategy.

Vendor risk management is a constant task in most companies. Many might see it as a cost driver, but it’s a crucial step to ensuring you’re working with the right partners.

In December, we ran a vendor risk management survey that revealed many leaders still take a mostly financially focused approach to their strategies. As a result, they often neglect the wider picture of their vendors’ risk profiles.

With recent advancements in risk management tools, you can now look beyond just a vendor’s financial profile and consider risk from multiple angles. And at a time when disruption frequently affects the supply, demand, and price of goods, considering every area of risk has never been more important.

Here’s a closer look at what you might be missing in your vendor management – and how you can close the gaps.

Common challenges in vendor risk management

As companies start to invest more time and effort in vendor risk management, they often encounter some common challenges, from gaps in their risk awareness to limited ability to tackle the risks they identify.

  • Disconnected information creates gaps in risk visibility

Many companies still rely on point-in-time credit risk checks as their primary source of information for judging a potential vendor, which comes with two problems.

First, it only considers a vendor’s financial stability, excluding other crucial elements such as ESG, cybersecurity, and operational stability. Second, it only captures the vendor’s risk at a specific point in time – there’s a good chance their risk profile could worsen after you onboard them.

Some of the biggest risks with vendors today come from areas such as data privacy, cybersecurity, and conflicts with ESG values, all of which can significantly affect reputation and operations. Just look at the palm oil industry, for example; major brands have been exposed for using vendors that rely on child labour.

However, these risks aren’t always easy to capture. Even when businesses have partners to help source risk data related to things like compliance and cybersecurity, these insights are often held in disconnected systems. This limits their ability to assemble a complete picture of a vendor’s risk profile.

  • Lengthy vendor onboarding processes slow down operations

Another key challenge comes from the length of time it takes to onboard new vendors. Many vendor due diligence processes can take as long as three to six months, involving highly manual tasks and multiple follow-ups. At times, Procurement teams can be hard pressed on capacity, and unable to even check and validate responses from suppliers – it happens more often than not.

During this time, information can become outdated, vendors’ risk profiles can fluctuate, and your own business needs can change. By the end of the process, you can’t be fully confident that the risks deemed manageable haven’t escalated, or that new risks haven’t occurred.

This time-consuming process can also add delays to your operations. When disruption hits – such as a geopolitical event affecting a commodity’s supply – and you need a new vendor quickly, the due diligence process can slow down your response.

  • Limited expertise prevents risk mitigation

While many companies may have a specific role or team dedicated to vendor risk management, it’s an area that requires a wide range of expertise across multiple disciplines.

This also means that no single partner can offer a complete solution. Many will offer competent tools for risk identification, but bringing those together to create a coherent vendor risk management strategy can be difficult.

And while some partners may be able to identify risk, few can offer solutions to mitigate it. When navigating a constantly changing threat landscape, you need to be able to address new risks as they emerge with guidance from experts.

Four steps to creating a robust risk management strategy

There can be a lot to consider when building your vendor risk management strategy, but there are four key steps you can take to immediately start filling the gaps in your own assessments.

1. Cover risk from every key angle

If you’re currently only looking at risk through a narrow lens, such as only considering financial risk or assessing just tier-one vendors, you need to expand your coverage.

Comprehensively covering vendor risk means considering multiple geographies, logistical modes, categories, and different risk areas, like ESG, operational performance, and cybersecurity. The right partner should be able to provide insights into all these elements and help you assess vendors at every tier you engage with.

2. Continuously monitor risks

Point-in-time risk assessments can’t give you the accuracy you need to confidently assess vendors. Instead, you need to be continuously monitoring risk indicators related to your vendors, especially critical ones.

This should include risks directly related to your vendors’ operations, such as issues in their supply chain or any changes to their financial wellbeing. It should also cover issues in the wider market, like weather events that might affect transport routes or shortages in the commodity you’re sourcing.

Ideally, you’ll want to be able to bring these insights together into a single dashboard that combines various risk signals.

3. Refine your due diligence process

A lengthy due diligence process can quickly slow down your relationships with new vendors. But with the right insights, you can accelerate this step.

Using “pre-diligence” intelligence – insights you capture before engaging with a potential vendor – you can identify potential risk factors early on in the process. In some cases, this will enable you to eliminate vendors before any engagement if they don’t meet your needs. For example, you might immediately spot a risk that goes against your compliance requirements.

In other instances, it’ll help you spot the risk factors you should focus on during your due diligence process, allowing you to refine and shorten the questions you ask any vendors. “Post-diligence” intelligence can then help you measure evolving risks as you follow up with vendors throughout the process or after you’ve onboarded them.

4. Mitigate risk with expert advice

Identifying risk is only half the challenge. You also need to be able to mitigate those risks that vary by their nature and impact, either before you start working with a vendor or as they emerge during your partnership. This calls for advice from experts in multiple disciplines, such as financial analysis, category strategy, commodity forecasting and TCO modelling.

Next, you need a comprehensive action plan to keep risk mitigation tasks on track while involving multiple stakeholders throughout your company, and ideally find a partner that can offer program management support to address any capacity or capability gaps in your team.

A more holistic approach to Vendor Risk Management

In today’s complex business landscape, managing vendor risk requires a multi-faceted approach. While no single solution can address every aspect of risk, partnering with the right provider can bring together various insights and support mechanisms, offering a holistic view of your risk landscape.

At The Smart Cube, we recognise the importance of collaboration and integration in effective risk management. Leveraging our extensive network of data partners specialising in finance, cybersecurity, and ESG, we integrate diverse insights to provide continuous visibility into risk factors across your vendor ecosystem, complemented by both internal and external risk indicators.

Our solution serves as a vital component in your risk management toolkit, working seamlessly alongside existing processes and technologies. By combining holistic risk assessments, expert guidance, and actionable recommendations, we empower you to make informed decisions and proactively mitigate emerging risks.

Get in touch with one of our experts today to discuss how you can improve your vendor risk management strategy or take our quick Supplier Risk Management Test for an instant assessment of your risk maturity and tailored tips for improvement.

  • Sayan Debroy

    Sayan heads the Supplier Risk Intelligence solution at The Smart Cube. He is an evangelist who keeps his ear to the ground to assess and address client needs with regard to Third-party Risk Management and Procurement Analytics. In his free time, he loves to cook new recipes, read up on politics and history, and watch thrillers.

  • Sayan Debroy

    Sayan heads the Supplier Risk Intelligence solution at The Smart Cube. He is an evangelist who keeps his ear to the ground to assess and address client needs with regard to Third-party Risk Management and Procurement Analytics. In his free time, he loves to cook new recipes, read up on politics and history, and watch thrillers.