A business is exposed to vendor compliance risk when a vendor falls short in meeting internal policies, contracts, or regulations. There’s a host of vendor compliance risks, from data loss and privacy issues to labor noncompliance. These risks can adversely affect a single or multiple levels of the supply chain. Traditional risk management systems often erroneously classify compliance risk management as a standard check-the-box activity, whereas the opposite is true. It should be a central pillar of vendor governance.
Table of Contents
Table of Contents
Establishing a Strong Compliance Framework
A starting point for dealing with the vendor compliance risk problem is the creation of a compliance framework that is as clear as possible. This is designed for outlining what your organization expects from its vendors, considering compliance with the GDPR, HIPAA, SOX, and other regulations that may apply to them. The framework should also be designed with internal controls, monitoring, and response to violations.
The importance of structuring these elements is paramount. A 2023 Deloitte report noted that 45% of organizations surveyed said that they experienced a third-party risk incident in the past year, and for 11% of those organizations, there was a regulatory compliance action and/or penalty. In many of these situations, the lack of formalized processes and vendor monitoring was the root cause.
Developing a strong vendor compliance policy and incorporating that policy into contract templates and onboarding processes will ensure that all parties have the same understanding from the outset. This will help reduce uncertainty and create a culture of accountability.
Assessing Risk Before Onboarding Vendors
The most effective strategies for managing vendor compliance begin before contract signing. Thorough due diligence is essential. Prior to vendor onboarding, make sure to perform a comprehensive risk assessment of their prior history, financial status, legal status, data security, and operational control.
In managing risks, organizations must implement a segmentation approach. For instance, data-sensitive and mission-critical vendors require more reviews and controls than those with neutral risk. Tools such as financial audits, ISO 27001, and other vendor control certifications and background checks serve to protect and meet the requirements of the vendor control framework.
Also, the use of standardized risk assessment tools for managing third-party risks (e.g. the Shared Assessments and SIG (Standardized Information Gathering) tools) will economize and expedite the assessment process while covering (almost) all areas.
Implementing Ongoing Monitoring and Auditing
Risk doesn’t disappear once a vendor has been onboarded. In fact, it evolves over time. One of the most overlooked aspects of managing vendor compliance risk is the need for continuous oversight. To identify compliance gaps and newly exposed risks, companies have to develop a framework for ongoing reviews, audits, and re-certifications.
Tools like GRC (Governance, Risk, and Compliance) automation and platforms also provide management proxies to keep compliance and risk management current, resulting in continuous oversight. These tools can evaluate vendor performance, identify legal compliance, and contract breach. Vendor audits in finance and healthcare are legally required and, therefore, are works in these critical areas.
Having proactive systems allows companies to mitigate issues before they become problematic; for instance, a vendor with data compromise due to a lack of resources on data provisioning.
Enhancing Communication and Vendor Collaboration
In the context of compliance risk management, the importance of a vendor’s and vendor’s organization clear and open communication channels cannot be overstated. Vendors are often kept unaware of regulatory and policy changes. Keeping the communication channels open with training, ongoing communication, and workshops can help reinforce incentives and compliance culture.
Furthermore, it is equally important to define contact and escalation points. Vendors need to understand who to communicate with and what to do when there is an issue. Documented escalation paths streamline the response to incidents and also show the regulatory bodies that the organization is concerned about vendor management.
Last, having a vendor code of conduct can promote a uniformity of ethical principles across all third parties. This document needs to be clear about expectations that are related to labor, the environment, bribery, and data privacy, as these issues are very important to international supply chains management.
Leveraging Technology for Vendor Risk Management
The growing number of third party vendors businesses are working with means manual compliance processes are becoming obsolete. By incorporating automation technology, especially AI and Machine Learning, monitoring, identifying, and managing compliance risk can be done more efficiently.
AI powered analytics tools are able to monitor and analyze vendor communication, invoices, and transaction records to look for abnormalities and red flags. Vendor failure prediction can also be done through the use of Machine Learning models by analyzing historical performance data or other external risk factors.
In addition, vendor risk management (VRM) platforms that are hosted on the cloud offer the ability to streamline and centralize the processes for the tracking and management of vendor documents, credentials, and audit reports. These platforms also automate processes to the reduce management and administrative workload while also improving the accuracy of processes and the speed of responses.
Developing Contingency Plans for Vendor Failures
No matter how good your risk mgmt strategies are, vendor failures are sometimes unavoidable. This is why contingency/exit strategies are just as important. These strategies consist of alternative suppliers, backup service agreements, and current vendor files.
The Covid-19 pandemic illustrated just how fragile the global supply chain and how important resilience planning is. Following the pandemic, 60% of businesses surveyed by PwC increased investments on supplier risk management. This included diversifying their vendor bases and building redundancy in critical systems.
Preparing for delays means your operational flow won’t come to a complete stop if a vendor fails, It demonstrates to your stakeholders that your company values both continuity and compliance.
The Role of Internal Stakeholders in Compliance Management
Vendor compliance risk management isn’t just a concern for procurement or legal teams. It is a concern for IT, finance, compliance, and operations as well. Each team has specific viewpoints and insights important for a more holistic understanding of a particular risk.
Vendor risk committees or specific oversight roles help cover all the bases involved in the process. Internal reviews and training, as well as periodic evaluations, serve to focus and clarify role and responsibility alignment.
Vendors will follow the lead of the employees. A strong internal compliance culture influences the behavior of vendors. If employees are more compliant and set a high standard, the vendors will be more compliant as well.
Navigating Regulatory Complexity Across Jurisdictions
International companies face additional hurdles in the management of vendor compliance risks owing to the different requirements across country borders. Data privacy, labor, and environmental regulations differ by region.
To remain compliant, companies engage local counsel and track changes to regulations across the globe. Moreover, vendor requirements and local certifications (e.g., SOC 2, ISO 9001, etc.) can be implemented to address this challenge.
Legal audits of vendor agreements coupled with a current inventory of regulatory obligations will help to minimize the legal exposure of your firm, irrespective of the location of the vendors.
Risk Management Is a Journey
The fast changing world of business means that the management of risk allied to the compliance of vendors must be an ongoing undertaking. It demands ongoing refinement, an active approach, and strong collaboration. With the growing number of failure events tied to vendors and the increasing scrutiny of the legislating agencies, companies must not risk a laissez-faire approach.
In the end, companies that invest in vendor compliance management supported by well-developed management structures, properly conveyed engineering communications and the application of compliance management technology will not only reduce vendor risk but will also vertically integrate vendor compliance with operational and strategic goals of the company to mitigate vendor risk.
