What is a High-Risk Vendor?

When managing your supply chain, you rely on many external vendors to keep your operations running smoothly. However, not all vendors pose the same risk to your organization. You must identify high-risk vendors that could disrupt your business if issues arise.

Conducting thorough vendor risk assessments is crucial to determine potential risks and levels across your vendor network. Once identified, targeted action plans to mitigate vendor risks must be implemented, especially for essential high-risk partnerships. This involves crisis planning, increased oversight audits, contract management, and review processes tailored to the level of inherent risk.

Third-party uncertainties can be controlled by distinguishing high-risk, medium-risk, and low-risk relationships supported by robust risk management frameworks. This article explores best practices for identifying and mitigating risks posed by high-risk vendors.

What is a High-Risk Supplier?

A high-risk vendor is a third-party vendor with access to a company’s sensitive corporate information, handling its financial transactions, and having a high risk of information loss. A high-risk vendor is also a vendor that an organization depends on to run its operations.

Companies have been working with third-party vendors for years. But what has changed is the frequency and scale of third-party vendors’ use and the regulatory focus on how companies manage third-party vendors to address their inherent risks.

Typically, organizations have addressed third-party risk in a siloed manner, with people only looking at specific risks. For example, financial institutions might focus on securing data and the risks of sharing data with third-party vendors. Consumer product industry organizations might focus on the dangers in ensuring their products’ safety and quality.

However, to better manage third-party risk, a company needs to understand it holistically and manage it throughout the enterprise by implementing a robust third-party risk management strategy.

How to Identify a High-Risk Vendor

There are two primary methods to recognize high-risk vendors that can disrupt your [vendor risk management program:

1. Risk-Based Assessments

Conduct thorough due diligence on potential third-party vendors using criteria like:

• Financial health to avoid disruptions
• Review of reputational risks
• Evaluation of cybersecurity controls and data breach vulnerabilities
• Business continuity risks if the relationship is severed
• Contract analysis to pinpoint compliance risks
• Assessing vendors against these criteria reveals weaknesses and overall risk rating. High-risk vendors require extra protection given their potential security breaches and regulatory compliance impacts.

2. Criticality Analysis

Categorize your third-party provider inventory by criticality and level of risk to business operations. Rate them based on:

• Impact of failure on supply chain and operations
• Difficulty in switching vendors based on pricing, contracts, etc.
• Oversight required for sensitive data access levels
• Internal stakeholder dependence on vendor relationships
• Vendors with high criticality demand heavy risk mitigation to control inherent risks in these outsourcing partnerships. Streamlining this analysis allows security efforts to focus on crucial high-risk vendors.

Common Misconceptions About High-Risk Vendors

Some common misbeliefs about high-risk third-party vendors include:

• They are all small or new vendors: Even large, reputable vendors can engage in practices, making them high-risk. For example, offshoring sensitive functions without proper due diligence.
• Risk levels are static: Vendor risk profiles change over time as partnerships and vulnerabilities evolve. Regular assessments and reviews help detect rising cybersecurity risks.
• They should all be eliminated: Proper risk mitigation efforts tailored to tolerance thresholds can reduce risks to acceptable levels rather than severing all high-risk vendor relationships.
• Risk elimination incurs high switching costs: Strategic segmentation through automation tools allows security efforts to be focused on crucial high-risk vendors rather than entire supply chains. This streamlines the onboarding of new vendors as well.

Other common misconceptions:

• Information security is the only concern: Consider financial, operational, and reputational risks during due diligence. Create contingency plans to reduce business continuity impacts if failures occur.
• Low initial risk means no future oversight: Continuously evaluate vendor performance, cybersecurity, General Data Protection Regulation (GDPR), and financial risk through their lifecycle, even if the initial risk was low.
• All risk is adverse: Proper vendor selection provides crucial services: structure contracts and incentives to reward positive performance.

Third-party vendor risks can be accurately quantified and controlled with careful assessments, segmentation, and oversight.

Best practices for high-risk vendors

Once high-risk vendors are identified through assessments, targeted risk mitigation practices should be implemented, including:

• Establishing strict service provider performance benchmarks and oversight controls in contracts
• Increased user access reviews and audits to enforce cybersecurity and compliance
• Business continuity planning for potential relationship termination
• Tighter inventory controls limiting data access for high-risk third-party suppliers
• More frequent vendor risk management evaluations of issues like Staff turnover or financial changes
• To minimize inherent uncertainties, extra vigilance via the above controls, audits, and questionnaires is required when managing high-risk vendors. Low and medium-risk relationships still warrant continual reviews on extended cycles.

Segmenting vendors allows focusing mitigation efforts on crucial high-risk relationships and helps streamline workflows and operational efficiencies. For example, automating cybersecurity assessments and procurement administration based on established risk tolerance thresholds.

Mitigate Vendor Risks with ZenGRC

ZenGRC offers an integrated platform that allows you to mitigate vendor risks with assessments, performance tracking, issue logging, and remediation. Centralized supply chain visibility improves high-risk vendor oversight.

Schedule a demo today to learn more about streamlining P2P processes while strengthening vendor governance. With robust P2P automation and vendor risk management capabilities, ZenGRC enables you to secure your supply chain.