Vendor Management Issues: Mitigate Third-Party Risks

Jun 22, 2022

When you involve a third party in any aspect of your life or business, you’re adding uncertainty to the equation. 

In business, that uncertainty increases risk. Maybe the vendor won’t deliver on time, or the quality of their product or service may not be as expected. Vendor management issues can arise when your organization is unable to mitigate this risk.

It’s an essential aspect of the procurement process, but what is vendor management? Vendor management is the process of managing all aspects of your affiliation with external suppliers. It includes nurturing ongoing relationships, auditing suppliers, planning and executing contract negotiations, managing vendor performance to ensure they meet the agreed-upon terms, and mitigating associated risks that may arise.

While most major companies implement standardized procurement processes, SMEs may need to define and document how to manage vendors. Internal standards and performance guarantees can help mitigate common vendor management issues that could put your company at risk.

Defining the Vendor Gap

A growing company needs to implement a strategy to mitigate the risks stemming from vendor management issues — and defining your vendor gap is an excellent way to start.

Vendor gaps are the differences between what the procuring company expects and what the supplier is prepared to deliver. It’s natural to assume there’s an available supplier that meets every specification just waiting for your request for a proposal. But that’s often not the case. 

A new vendor may be the best fit and still meet only 80% of your requirements. Recognizing where they fall short is a critical first step to solving your risk management challenges.

Once a gap is defined, you must work with your suppliers to determine the next steps. Maybe some gaps are critical and must be closed, but other holes can be accepted as-is. Managing vendors and deciding how to handle such gaps is essential to building a robust supply chain.

Common Vendor Management Issues

Vendor management issues can be a significant concern for companies today. For your business to succeed, your vendors must deliver as expected. Strong vendor risk management practices can help curb these risk management challenges.

Poor Vetting Process 

It’s essential to vet all vendors thoroughly before engaging them. But finding the right third-party partner is difficult if you don’t know what you need. Ensure your vendor expectations are clear, then ask questions and request references from other customers. Don’t be afraid to look into their history and even social media before engaging a new supplier.

Lack of Due Diligence on Existing Vendors

Companies often overlook the risks posed by existing vendors, such as those with inadequate security measures, outdated software versions, or outsourced contractors. This inattention can lead to significant data breaches if these third-parties fall victim to hackers or other cyber criminals targeting organizations across industries.

Limited Visibility Into Vendor Activities

You need to know what your vendors are doing, how they’re doing it, and when they will deliver. But often, a customer has no justification for seeing every aspect of a vendor’s business and must rely on vendor transparency. 

The lack of visibility also extends to assets and data environments, e.g., cloud computing.

Organizations want to ensure that vendors manage their data security risks well and comply with industry standards.

Third-Party Risk 

Most vendors also use vendors, ranging from subcontractors to third-party services such as cloud providers and software vendors. Third parties can provide access to tools and resources that might not be affordable on your own and may even help reduce costs for your business. 

But this comes with a risk — handing over control of sensitive data to another company. All the security measures you require from your vendors must also be applied to third parties. They must also have adequate security measures in place to not become a weak link in your overall security strategy. International organizations like ISO exist to ensure quality and process standards are met without each customer auditing each vendor.

Best Practices for Mitigating Third-Party Risks

Third-party risk management is a necessary part of operating a business. Most companies have no choice but to use third parties, but third parties can be a source of risk and liability if they don’t act professionally and ethically. Mitigating third-party risks can save your company a lot of stress in the long run.

Clear & Well-Maintained Documentation

The first step in mitigating third-party risk is understanding what the company does, its operations, and your contractual relationship with them. Keep precise records of all contracts, agreements, certifications, and other relevant documents to outsourced projects.

Train Your Staff Properly

Many companies don’t properly train their employees to deal with third parties. As a result, they’re unsure how to react or respond effectively when an issue arises. Regular training helps ensure everyone can manage these situations responsibly and effectively.

Adapt to Changing Forces

If a third party becomes more than just another vendor or supplier, you’ll want to ensure you’re prepared for any changes. For example, if you’re working with a local business that’s expanding internationally, understand its plans so you can adjust accordingly when necessary.

4 Steps of the Issue Management Process

A proven way to mitigate third-party risks is through a four-step issue management process that helps you identify, prioritize, and mitigate issues before they become problems.

1. Identify the Issues

An effective issue management process starts with identifying potential issues before they occur, including the third parties that could cause problems and assessing their vulnerabilities. 

You should also consider how your existing processes and procedures might increase risks. Inadequate security policies or a lack of visibility into what third parties are doing on your behalf can open up your company to uncertainties.

2. Draft Remediation of the Issues

Once you’ve identified issues with your vendors, you must draft remediation plans for each topic. Outline how you intend to fix them within your organization and with other partners. 

3. Negotiate the Remediation

Negotiation involves working out details such as how quickly you need to see results or what steps will be taken if talks fail. You may also negotiate financial compensation for any losses caused by the third party’s failure to perform as expected. They may also request compensation from you if your requirements changed after they began work.

4. Implementation & Execution 

Once the parties align on how best to address the problem, it’s time to work together and implement solutions. This cooperation will minimize disruption in operations and reduce costs associated with fixing these problems down the road (e.g., litigation).

Communication is Key

When you’ve resolved the issues you and your team are aware of, it’s not time to put your feet up and relax. While letting your vendors work is essential, you also must maintain open communication lines. 

Ensure you’re following up with your vendors at every project stage. Work closely and make them comfortable providing feedback on their progress or any issues. Problems caught early on are often easier and less expensive to fix than those that are allowed to simmer.

  1. About the Author:

  2. About the Author:

    Heather Hubbard is a managing partner of Valesco Industries. She is responsible for managing the firm, strategy development, portfolio management, new investment origination, and team development.

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