How do you match vendor risk with your org's risk tolerance?

1 Define your risk tolerance

Your risk tolerance is the amount of risk that you are willing to accept in pursuit of your goals. It depends on factors such as your industry, regulatory environment, market position, financial situation, and organizational culture. To define your risk tolerance, you need to establish clear criteria and thresholds for evaluating and prioritizing risks, as well as the acceptable levels of impact and likelihood for each risk category. You also need to communicate your risk tolerance to your stakeholders, vendors, and employees, and ensure that it is aligned with your mission, vision, and values.

2 Assess your vendor risk

Your vendor risk is the potential harm that a vendor can cause to your organization, either directly or indirectly, through their products, services, or operations. To assess your vendor risk, you need to conduct a comprehensive due diligence process that covers aspects such as financial stability, reputation, security, compliance, quality, performance, and resilience. You also need to categorize your vendors based on their criticality, complexity, and dependency, and assign them a risk rating based on their impact and likelihood of causing a negative outcome.

3 Mitigate your vendor risk

Your vendor risk mitigation is the action that you take to reduce, transfer, or avoid the risks that exceed your tolerance level. To mitigate your vendor risk, you need to implement effective controls and measures that address the root causes and consequences of the risks, such as contracts, policies, standards, audits, monitoring, reporting, and contingency plans. You also need to collaborate with your vendors to ensure that they comply with your requirements and expectations, and that they share your risk management approach and culture.

4 Monitor and review your vendor risk

Your vendor risk monitoring and review is the ongoing process of tracking and evaluating the performance and behavior of your vendors, as well as the changes and trends in the external and internal environment that affect your risk exposure. To monitor and review your vendor risk, you need to collect and analyze data and feedback from various sources, such as metrics, indicators, surveys, audits, incidents, and complaints. You also need to update and adjust your risk assessment and mitigation strategies based on the results and findings, and report and escalate any issues or gaps that need attention or action.

5 Learn and improve your vendor risk

Your vendor risk learning and improvement is the continuous process of identifying and applying the lessons and best practices that emerge from your vendor risk management activities. To learn and improve your vendor risk, you need to conduct regular reviews and audits of your VRM processes and outcomes, and identify the strengths, weaknesses, opportunities, and threats that they reveal. You also need to solicit and share feedback and insights from your vendors, stakeholders, and employees, and implement changes and improvements that enhance your VRM capabilities and performance.

Matching vendor risk with your org's risk tolerance is not a one-time or static exercise. It requires a dynamic and proactive approach that adapts to the evolving needs and expectations of your organization and your vendors. By following these steps, you can ensure that your VRM strategy is aligned with your business objectives and risk appetite, and that you can leverage your vendor relationships to create value and competitive advantage for your organization.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?