Different Types of Vendor Risks That Are Important to Monitor

Different Types of Vendor Risks That Are Important to Monitor

By: Beaconer, May 13, 2024

Different Types of Vendor Risks That Are Important to Monitor

It is essential to understand the kind of vendor risk that might impact your company. Outsourcing intricate tasks to third-party vendors can save businesses money and enhance efficiency. However, there are a few risks involved with outsourcing services. Firms should understand and manage these risks by creating an extensive vendor risk management program and fully understanding the varied types of risks.

The global market size of third-party risk management has increased a lot in recent times. It is projected to grow from $5.18 billion in 2023 to $6.08 billion in 2024 at a growth rate of 17.3%.  

In our post today, we are going to check out the different types of vendor risks that businesses often encounter. Each of the segments will offer a greater knowledge and the possible effect of them on your organization.

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Overview of Third-Party Vendor

The entire term, the third-party is typically used in several variations all around numerous industries. The third-parties are normally the external entities that any company is performing businesses for carrying out specific operational activities. Third-party, suppliers, vendors, etc, are interchangeably used across different industries.

It is the common term used mainly as an umbrella for different expressions that firms refer to as outsourcing entities. These comprise the legal advisors, consultants, suppliers, marketing firms or teams, etc.

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What is Vendor Risk Management?

Third parties are the vital pillar behind any business success. Companies of different sizes are relying majorly upon the parties for their growth, innovation, and digital transformations. However, it might prove risky. The amount of third-party risk is essential to the shape of the risk, resilience, and the company’s reputation using third-party vendors. 

It proves tough and expensive to handle any third-party incident that results in regulatory actions, reputation damages, and revenue loss. It is where third party due diligence is a necessity to meticulously assess the risks, ensuring that the organization is secure and protected.

Why is third-party risk management important?

As each company is taking adequate measures to close cybersecurity risks, cybercriminals will locate the rest. Vendor risk management involves a lot to close the common security gap that is often exploited.

Organizations often work with vendors who need more security infrastructure and processes on par with the hiring company. Cybercriminals often derive benefits from such weaknesses by using them to gain access to intricate systems. To reduce risk exposure to any company, the impact of vendor risks is minimized. These firms create and implement vendor risk management programs to upgrade security and streamline the entire operations.

Types of Vendor Risk You Must Monitor

Now that you understand the essence of a strong vendor risk management program, you can hardly dive head-first into creating one. You have to know about the types of risks present. After identifying and assessing vendor risks properly, you can handle them effectively.

The following are a couple of types of vendor risks that the companies often face:

Cyber Security

The cost of cybercrime across the cybersecurity market is estimated to rise by $5.7 trillion between 2023 and 2028. Due to the pace at which cyber threats are evolving, it is important to monitor vendor risks. You should initially identify the company’s risk threshold at acceptable levels for assessing third-party security performance.

While assessing performance, it is essential to aim toward the affected system present in the vendor network and continue to update these evaluations to match the ever-rising cyber threats. This constant process helps build vibrant cybersecurity measures that can proactively manage the risks connected to third-party vendors.

Strategic Risk

The possibility that the third-party vendor might prevent your firm from achieving its objectives, resulting in strategic risks. For instance, a reseller across the global markets is acquired by one of the competitors that closes every ability to sell the goods in the markets till you locate the new distribution channel.

It is important to remember that these are the topics that overlap frequently. For example, whenever a company is suffering from a security breach and customer data gets stolen, it presents compliance, operational, reputational, and financial risks and leads to strategic risk.

Regulatory Risk

Regulatory or compliance risk is the scope where the third-party vendor violates the regulation or rule that you are contractually obligated to follow. Along with the internal institutional policies, vendors should follow the laws, regulations, and rules that are set through the regulatory bodies impacting the industry and business. 

If compliance needs are not fulfilled, your firm is often subject to heftier fines, enforcement actions, and reputational damages.

Market Risk

At times, the changes in the climate and economic conditions of the market might impact the relationship between a supplier and a customer. For example, it is harmless to assume that owing to the evolving climates of the market, your firm will decide to move from this marketing-led growth to the product-based growth models.

The marketing operations for this model are significantly different from the earlier months as you require a series of features and operations that the SaaS vendors might not offer. In a couple of instances, the vendor might shift their direction to meet the evolving needs of the customers; however, these are the changes that need to align with your company.

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Reputational Risk

At times, suppliers might indulge in activities that leave a negative outlook toward your brand. This could range from using pirated software to the ill-treatment of employees, with their behavior ending up throwing negativity toward your brand due to the customer-supplier relationship.

System Failure Risk

A system failure occurs when something happens to the system and is not communicated with the system of the third-party provider or whenever the system fails. Service interruptions, data loss, and business downtime result from system failure. A trustworthy backup strategy is one tactic for minimizing the chances of system failure. 

You should need your suppliers to have another plan satisfying your needs. You need to test the backup strategies regularly ensuring that it is operating as planned. However, before hiring the right vendor, it is important to get the pre-qualifications for vendor registration done, benefiting the company.

Financial Risk

It involves risks, including revenue losses or exorbitant expenses due to poor financial management by vendors. Proper audits are needed to ensure that suppliers’ expenses comply with the contract conditions. The risk is often minimized by identifying the suppliers who are important for revenue generation and performance monitoring.

Conclusion

A vendor risk assessment is often an arduous and time-consuming process involving creation, execution, and management. But there are other options here. While companies are constantly striving to enhance their cybersecurity, these attacks search for new risks. 

Vendors are often attacked because it is seamless to breach them instead of targeting any organization. A robust vendor risk assessment program will offer a better return on investment to enhance overall security. Clear and open vendor relations enable the stakeholders to work together to mitigate the risks, combat the threats, and facilitate a productive connection.

Author Bio

Nagaraj Kuppuswamy

Nagaraj Kuppuswamy is the Co-founder and CEO of Beaconer, an esteemed enterprise specializing in managed third-party risk using the cloud native AI based solution. With an extensive portfolio of accolades and industry certifications, Nagaraj stands out as a seasoned expert, boasting over 16 years of dedicated involvement in the field of Cybersecurity. Throughout the course of their career, he has predominantly focused on elevating the realm of third-party risk assessment.

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