Factors to Consider in the Vendor Risk Assessment Process
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Many companies these days are relying on vendors to perform various services that they used to perform themselves in the past. When the company depends on vendors, they must engage in vendor risk management. The first step of this risk management is a vendor risk assessment for each potential vendor. When performing risk management, there are many areas to look at.
The first area to consider is organizational risk. This is an assessment of the personnel within the vendor's company. A good sign of a healthy company is a happy, stable workforce. When you look at the vendor, what do you see? Do the people seem to be staying with the company, or is there a lot of turnover among both the senior level people and the general population of workers? Are there layoffs? Are employees resigning voluntarily? Look at the highest levels. Are the president, chairman, and CEO all within the same family or even the same person? How many of the board members are from outside the company? Do other higher-level staff members have multiple roles as other employees leave? Probably the biggest organizational red flag of all is if the senior executives are selling their stock.
The next area to assess is the financial area. How much financial risk does the vendor present? In this area, it is important to look for patterns rather than just one or two risk factors. How much cash does the vendor have in the bank? What kind of credit rating do they have? Are they able to obtain financing or to negotiate a loan in order to make improvements to the business? Worst of all, have they ever declared bankruptcy? Take a look at their return on equity, return on investment, and return on assets.
Third is the support risk. Again, layoffs of employees that perform the tasks for which you hired the vendor indicate increased risk that needs to be addressed by your company. Does this lead to a reduction in the level of service that you have become accustomed to and expect to receive for your money? Are skilled workers being replaced by new workers who lack the level and skill and support? Do you see other fellow-customers leaving your vendor? What do they know that you don't? Is their product quality falling, are there shortages of spares, and a lower level of support for their products?
Another important risk to evaluate is the vendor's strategy risk. An assessment of strategy risk looks at the vendor at a higher level. Is there a change to the highest level set of directives that define the vendor's overall mission? Sudden changes to the directives can indicate unseen changes to alignment or a decrease in the depth of the vendor's vision. Keep a close eye out for sudden changes in the vendor's sales and marketing approach. Is the size of new deals declining? What about their vertical strategy or industry focus? Are you still comfortable with these?
Assessing the risk associated with your vendors is a difficult task, but the health of your company depends on the health of theirs.