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Governance, Risk and Compliance
By Resolver Modified September 20, 2021
Given the current economic climate, many companies are looking to trim the fat and focus on core specialties. In order to realign their priorities, corporations are outsourcing key functions to third-party vendors or suppliers, ranging from accounting tasks to manufacturing. This practice is effective in that it can essentially reduce costs, enhance performance, free up vital resources – such as time – and streamline the way a company works.
But while this practice may alleviate some tedious or arduous functions and enable the business to excel at what it does best, it also opens companies up to various risks through the actions of these third-party vendors. This is especially the case when it comes to large corporations dealing with multiple vendors or suppliers.
Bigger companies are inherently more complex, and managing a multitude of supplier and vendor relationships adds even more volatility that needs to be tracked. Different departments may conduct communications with vendors through a variety of means, which makes it difficult to identify potential risks. In many situations, there is little accountability for the management of these relationships and the subsequent risks they can have.
Suppliers and vendors are effective for outsourcing the day-to-day nitty-gritty details of a time-consuming process or activity. But ultimately, the company that hires these vendors is still responsible for what they do and key stakeholders must make sure vendors are meeting all the compliance requirements that their business is accountable for.
There are several risks associated with the vendor-company relationship, the Consumer Compliance Outlook notes. While that isn’t to say these partnerships are always risky, corporations still need to be aware of these issues any time they enter into a new partnership.
For example, if a company hires an accountant who is overworked and booked with other clients, this could lead to missed details. This will have a trickle-down effect on the company that hired him, giving them bad information and perhaps leading to unwise operational decisions being made.
Supplier and vendor risks usually occur because of key relationship mismanagement faults. Inconsistent cataloging, sloppy recording of communications and details, the challenges of doing business across time zones and business units, lack of security and inconsistent testing are all pitfalls that can lead to risks becoming meaningful threats to a company, KRAA Security notes.
To that end, it’s crucial to perform risk assessments on these outside organizations to mitigate any potential threats. Prevention is key, and in that respect, due diligence can be leveraged as a means to nip these non-productive relationships in the bud.
Risk assessment needs to be considered as a continuous process when dealing with third-party vendors, not something performed once and then forgotten about. In that regard, a well-documented vendor risk management model can help ensure key issues are being addressed.
“[Companies] that outsource a service or product must adopt appropriate controls, policies and procedures, and oversight to mitigate outsourcing risks effectively,” the Consumer Compliance Outlook report notes. “Institutions should focus on five key areas for effective risk mitigation: vendor selection, vendor contract, vendor management and monitoring, human resource management and contingency planning.”
Companies can also employ an unbiased, objective template to evaluate these relationships. A numerical scale can help objectively evaluate various criteria and link different elements together. This is paramount to successful analysis of these outsourcing initiatives and determining whether they are meeting goals while minimizing risks.