Published February 04, 2020 • 4 minute read
Who are third-party vendors?
A third-party vendor is defined as a company or entity outside of your own that provides a product or fulfills a service on behalf of your company through a written agreement. This can include suppliers, contract manufacturers, distributors and other agents you are in business with.
Working with these companies is a vital function of running a successful business, especially the larger a company gets. It also, however, carries with it several additional risks that the business must account for. The three major types of vendor risks include:
Financial and Reputational Risk
This category reflects the risk that a third party may pose on the company’s financial success or reputation. It can include weak financial terms, non-compliance of financial terms, or insolvency.
For example, if your company relies on vendors that provide technologies to process financial transactions, such as payroll or electronic billing, failure by the vendor to meet its obligations could lead to a delay in access to revenue or lost revenue for your company.
Operational risks are those that may cause disruption to the activities or processes of your company. They can include substandard quality in the product or service, a shortfall in quantity produced, missed delivery dates, information risks, or data breaches.
For example, in 2013, a security compromise at a third-party vendor led to Target suffering a data breach that exposed millions of shoppers’ credit and debit card information. This caused major operational issues for Target, along with financial and reputational repercussions.
Legal and Regulatory Risk
Vendors can put client companies at risk on a range of issues related to local legislation, regulation, or contract arrangements between client and vendor. Specific legal and regulatory risks may include violation of labor rights, bribery or corruption, fraud, or unenforceable contract clauses.
For example, if a third party engages in product marketing practices on behalf of a client that are found to be deceptive, the client can be found in violation of the Federal Trade Commission Act. Similarly, if a vendor that is engaged to provide credit services to a client’s customers is found to be using discriminatory lending practices, the client may be found to be in violation of the Equal Credit Opportunity Act and the Federal Reserve Board’s Regulation B.
Compounding the need for proper vendor risk management is the fact that the risks above are not mutually exclusive, but rather interconnected. A delay in production can lead to underperformance in revenue. A legal conflict can damage a company’s reputation. As such, it’s important for companies to know what they can do to reduce those risks.
Five Ways to Find Vendor Risk Management Success:
A certificate of insurance is a document that provides verification of a vendor’s insurance and contains essential details of the insured’s policy, such as the policyholder’s name, the policy effective date, the type of coverage and policy limits. Having a vendor’s certificate of insurance on hand is necessary to be compliant and protect your organization.
Pre-qualifications ensure that a vendor abides by laws and regulations concerning health and safety, and that its standards align yours. By doing so, they protect your company from legal and regulatory risks, such as labor rights violations.
Companies can protect themselves and reduce risks by ensuring that vendors they do business with are in compliance with federal and state laws, rules, and regulations. Third-parties should be screened prior to contract negotiations and during contract to make sure they abide by the ever-changing regulatory landscape.
Secure document management is a key pillar of a vendor risk management strategy. By managing documents and legal paperwork in one centralized location, companies can streamline the collection, processing and ongoing monitoring of mission-critical information. Risk can be further mitigated by placing important documents, such as tenant lease agreements, vendor service agreements, and supplier purchase orders, among others, in a secure location – whether physical or digital.
Vendors with poor financial standing place clients at considerable risk, due to concerns including vendor conflicts of interest, business continuity, and more. As such, financial screening of potential vendors can help to mitigate this risk. Credit and financial stability checks in the United States and beyond can help clients to determine a vendor’s overall financial standing as part of the contracting process.
How BCS Helps
Developing and executing vendor risk management strategies can be a time-consuming process that causes companies to divert resources that could otherwise be focused on achieving key goals and objectives. BCS's full-service solution makes vendor risk management simple and cost-effective for companies, providing solutions and tools — like certificate of insurance tracking, safety pre-qualification, regulatory screening, document management, and financial screening — and the team to oversee it all.
If you have the expertise and bandwidth for a more hands-on approach, the self-service option can be a valuable tool to simplify the tracking process.