Vendor Risk Management (VRM)

Definition - What does Vendor Risk Management (VRM) mean?

Vendor risk management (VRM) is a process that deals with the management and planning of third-party products and services. This ensures that the use of third-party products, IT suppliers and service providers does not result in a potential business disruption or in any negative impact on business performance. This process is meant to assist organizations in managing and monitoring the risk exposure resulting from third-party suppliers of IT products and services.

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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 hiring third-party vendors of IT products and services.

VRM has become even more important because of the prevalence of outsourcing. 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 the benefits of outsourcing, such as heightened efficiency and the ability to focus on core business objectives, if vendors lack strong safeguards and controls/restrictions, the organizations could be exposed to operational, regulatory, fiscal or even reputational risk. VRM is the tool necessary for the identification and mitigation of these risks.

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.