Vendor Risk Management (VRM)

What Does Vendor Risk Management (VRM) Mean?

Vendor risk management (VRM) is the part of supplier relationship management (SRM) that deals with the strategic management of third-party products and services. The goal of VRM is to limit risk exposure and ensure that the use of third-party products and service providers will not result in a disruption of business or negatively impact business performance.

Techopedia Explains Vendor Risk Management (VRM)

Vendor risk management (VRM) involves a comprehensive plan for the identification and mitigation of potential business uncertainties as well as legal liabilities in regard to the use of third-party products and services. VRM plays an important role in supply chain management.

Importance of Vendor Risk Management

VRM has become even more important because of the prevalence of outsourcing information technology to the cloud. Because some organizations entrust some of their workflows to third parties, they lose control of those workflows and have to trust the third party to do their job well. But disruptive events like natural disasters, cyber-attacks and data breaches are often out of the organizations’ control and are becoming more frequent. Even with all the benefits of cloud computing, such as heightened efficiency and the ability to focus on core business objectives, if vendors lack strong safeguards and controls/restrictions, customers could be exposed to operational, regulatory, fiscal or even reputational risk.

A good VRM strategy may include the following:

• First and foremost, there must be a contract that outlines the business relationships between the organization and the third-party.
• There should be clear guidelines pertaining to access and control of sensitive information as per vendor agreement.
• There should be consistent monitoring of vendor's performance to ensure that each line of the contract is executed properly.
• The organization must ensure that vendors meet all regulatory compliance within the industry and should create a method to constantly monitor this compliance.

Vendor Management Systems

A vendor management system (VMS) is a Web-based application that allows an organization to secure and manage third-party services on a temporary, permanent or contractual basis. Twenty years ago, when outsourcing was still an emerging trend, the term was used primarily in the context of human resource partnerships. Today's its use has broadened to include the use of cloud services.

A VMS generally involves the following:

• Automatic payment capability
• Business intelligence (BI) functionality
• Monitoring and reporting features