RiskTech Forum

Realizing the Benefits of Vendor Risk Management

Posted: 1 November 2012  |  Author: Malissa Lundgren  |  Source: BPS Resolver


Vendor Risk Management is no longer just an option in today's business world – if companies don't analyze and evaluate their suppliers, distributors and other partners, they may be opening themselves up to significant losses.However, at the same time, Vendor Risk Management shouldn't be treated like a box that needs to be checked as a part of greater threat mitigation programs. When certain elements become "requirements," some businesses have a tendency to cut corners rather than devoting their full attention. Taking this approach to risk management can be detrimental not only to your business, but also vendors, clients and customers.

 

What happens when companies don't take their Vendor Risk Management initiatives seriously? You don't need to look any further than the recent diaper crisis to see the negative impact. A supplier of acrylic acid, a substance used to produce diapers, recently suffered a catastrophic explosion. Because the chemical was used in approximately one-fifth of the world's diaper supply, there is expected to be a massive shortage throughout the next year. This is all because many in the business relied on this one supplier to produce materials for their diapers.

Vendor Risk Management can be a very beneficial function for any business that relies on third-party relationships. Here are two core value propositions that it brings to the table:

1. Creating Better Terms
The company-supplier relationship involves two parties coming together to mutually benefit each other. In most cases, the company is able to reduce costs while streamlining and prioritizing core operations, while the supplier is compensated monetarily for performing these tasks. In the process of coming to these terms, both parties will share sensitive information with each other – the client will reveal secrets pertaining to products and services, while the vendor exposes operational details.

Vendor Risk Management ensures neither party accidentally jeopardizes this sensitive information and, by extension, leads to better contract terms. Specific controls, monitoring and security measures can be built into the contract from the get-go, which helps fortify a company from the start. When businesses are well aware of potential risks, they can negotiate better deals with vendors as well, allowing them to maximize the value of these deals.
Additionally, knowing potential risks in advance ensures companies and vendors aren't constantly revising the terms of their contracts. Repeatedly reworking terms is bad for both companies because it distracts them from other tasks that need to be accomplished.

2. Take Relationships to the Next Level
So many businesses treat vendor relationships like "set it and forget it" meals – they assume their partners will do their part and figure out the best ways of completing their ends of the bargain. Vendor risk management allows companies to create relationships, rather than business contracts.

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