Vendor Risk Management | TalentDesk

Contents

1. Why Vendor Risk Management Is the Foundation of Third-Party Strategy

2. The Major Categories of Vendor Risk You Need to Track

3. Building a Vendor Risk Assessment Framework

4. Designing Effective Risk Mitigation Strategies

5. Continuous Risk Monitoring and Early Warning Signals

6. How TalentDesk Enables Risk Visibility and Control

The most common mistake organizations make when it comes to Vendor Risk Management (VRM)? They only start thinking about it when they actually face an issue. At that point, the actions taken are more to do with damage control rather than risk management!

The ideal VRM strategy involves identifying, predicting and controlling the risks that come with working with talent vendors – before they actually happen. (Learn more about what vendor management entails here: Vendor Management Overview)

Why Vendor Risk Management Is the Foundation of Third-Party Strategy

When working with vendors and talent suppliers, effective VRM goes a long way in enabling business growth while limiting your organization’s exposure to risks. 

Depending on your industry, geography and workforce strategy, external workers like freelancers and contractors may make up a big part of your workforce – and your talent vendors are the entities you turn to, to access this talent. So any risk around the way these vendors function can impact your business output too. Think interrupted operations, legal risks, exposure of sensitive customer data or even co-employment issues. (For more on what a Vendor Management System is, see: What Is a VMS?)

Even if you don’t face an immediate fallout, non-compliance by the vendor company can open you up to the possibility of fines and penalties later. In the UK for example, a recent legislative update is making end clients jointly responsible for PAYE if the umbrella company involved fails to account for these payments!

Of course, such risks increase with the greater number of vendors you work with, but you may face risk exposure even with one vendor. One incident is all it takes!

That’s why proactive risk governance should be an integral part of your third-party strategy. This lets you put the right processes in place to prevent vendor-related risks from coming to pass, enabling you to grow your business securely and sustainably.

(Explore how vendor management works in practice: Vendor Management – How It Works)

The Major Categories of Vendor Risk You Need to Track

These are the risk indicators you should track before onboarding a staffing agency or a managed services provider, as a part of your third-party risk management process.

Building a Vendor Risk Assessment Framework

Step 1

The first step to creating a great risk assessment framework is to compile a good vendor due diligence checklist. When evaluating a vendor, 

• Ask for their business registrations and licences to ensure that they are operating legally.
• Review their public financial records to ascertain if they are fiscally stable.
• Ask for cybersecurity insurances to ensure that they have a formal process to manage security risks – and to cover you in case there are any breaches.
• Evaluate their talent assets to understand if they actually have the resources to meet the obligations set out in your contract.

Questionnaires, credit checks, background verification and onsite evaluation can help you conduct these due diligence steps effectively.

(Read about contract management considerations here: Contract Management in Vendor Relationships)

Step 2

Set out the vendor risk scoring models that you will use to gauge your contingent workforce supplier risks. There are two approaches you might take.

1. The qualitative approach
   This is by far, the quicker approach and can give you an accessible view of the risks involved. For example, some teams assess vendor risks on a numbered scale of 1-5. Others prefer the more visual approach of a color scale – assessing risks based on whether they are green, orange or red.
   
   While it is quick and easy, qualitative risk scoring can be subjective. For example – a manager may perceive a certain vendor risk to be ‘orange’ when it may actually be a ‘red’ level risk. It also doesn’t give you enough data to make informed decisions. A critical vendor may be categorized as ‘high-risk’, but the qualitative approach doesn’t tell you to what extent it impacts business operations.
   
   
2. The quantitative approach
   This is the more objective, data-driven alternative that calculates risks using actual numerical or monetary values.
   
   There are many quantitative risk evaluation models that you can use, based on what industry you are in or what function your vendors fulfil. As a quick example, you may calculate the Annual Loss Expectancy (ALO) of a vendor. Here,
   
   

While such models are really precise and objective, quantitative analysis is more time-consuming and resource intensive. It may be too cumbersome to carry out every time you need a quick view of the risks involved. Also, you need sufficient data to actually conduct a quantitative evaluation and have it generate accurate results.

A smart way to evaluate risks is to integrate both approaches to your scoring strategy.

Step 3

Categorize your talent vendors into low, medium and high-risk tiers. Not every vendor operates at the same level of criticality for your businesses so they may not pose the same risk, even under similar circumstances.

Once you have these frameworks, you can chart out your VRM strategy more efficiently. For example, a vendor can be classified as low risk if they record a score of mostly 1s. For these vendors, basic due diligence and an annual risk audit may be sufficient. 

But you may want to step up the assessments for high risk vendors recording mostly 4s and 5s. Think more frequent audits, a sharper due diligence process and perhaps more quantitative evaluations.

(For guidance on selecting vendors, see: Vendor Selection Best Practices)

Designing Effective Risk Mitigation Strategies

Identifying vendor risks is just half the work. You also want adequate control measures to reduce those risks when using recruitment agencies and talent vendors. This includes:

• Contractual safeguards and access limitations.
  The vendor contract you sign should not just cover the work to be done – it should also outline the risk management responsibilities involved. It should clearly establish that the vendor will be the sole employer of all their talent, highlighting their responsibilities around handling payroll, tax filing and compliance for the workers they provide.
  
  Similarly, set out the expected access control policies to be followed too. Specify who from the vendor team will have access to sensitive data and systems, and outline what their responsibilities will be. You can restrict them from sharing access without approvals, and enforce steps like multi factor authentication and data encryption where needed.
  
  
• Diversifying vendor portfolios for contingency planning.
  Your vendor risk assessment framework should alert you to the hazard of over-reliance on a single vendor when it comes to a business-critical function. Diversifying your vendor portfolio is a great way to minimize this vulnerability. That way, even if the primary vendor handling this important function is suddenly unable to fulfil their obligations, you can fall back on other vendors to step in and offer necessary support.
  
  
• Implementing internal controls and approval workflows.
  Not every vendor needs access to every network or system! Have internal protocols around how your network will be segmented, and establish formal workflows around who can invite vendors to core networks. Granting access only on a need-basis can go a long way in limiting data breaches!
  
  
• Escalation plans and incident response frameworks.
  Despite every precaution, you cannot guarantee complete security. That’s why you also need a formal framework in case an unexpected risk takes place.
  
  Set out incident reporting expectations in vendor contracts – outlining how quickly they need to report risk factors and how detailed their report should be. Have a formal escalation and incident response strategy that highlights the immediate next steps, as well as long-term plans to prevent similar incidents from taking place again.
  
  For more serious eventualities, the contract should also set out who will be liable for risks and breaches, and to what extent.

Continuous Risk Monitoring and Early Warning Signals

Continuous vendor risk monitoring is crucial in detecting early warning signs of non-compliance or unethical practices. Even if you have complete trust in your vendors’ intentions and processes, ongoing risk evaluations are still necessary. Here’s why:

• The compliance landscape is always evolving, and new updates may impact your vendors’ obligations.
• Changing financial factors (either at your end or at the vendors’) may affect how viable the engagement is. 
• Evolving cybersecurity threats may require you to introduce new policies that your vendors would need to follow.
• Changing geopolitical factors may impact the risk profile of your existing vendors.

Automating risk data collection and scoring enables you to carry out continuous monitoring – with minimum manual interventions. What does this look like in today’s world?

Think vendor platforms that automate contracting and onboarding, ensuring every last compliance protocol has been checked off the list and triggering alerts when any NDA or paperwork is found to be missing.

With AI security tools becoming more sophisticated, it is also getting easier to detect unusual activity or unauthorized access. You can have immediate alerts notifying you of incidents like having the same ID logging in from two different geographic locations!

You can also automate vendor compliance tracking that monitors whether certifications are submitted, licenses are up-to-date – or if certain new documents need to be submitted by the external workforce.

Adding in an extra layer of vigilance (both digital as well as human-powered), can let you detect early warning signals. These are a few red flags to watch out for:

• Lack of transparency: A vendor unwilling to share how they handle security or what ethical hiring practices and compliance protocols they follow tells you something’s fishy!
  
  
• Financial instability: Sudden mass layoffs or low revenue declarations by a vendor company raise questions around their ability to remain solvent and continue uninterrupted operations.
  
  
• Frequent breaches: Repeated incidents of a similar kind tell you that a vendor is not serious about their security processes, and are not taking any steps to change that!
  
  
• Recurring SLA failures: Repeated shortfalls indicate that a vendor does not have the capabilities or infrastructure to meet your needs.

Ongoing monitoring lets you make informed decisions during contract renewal. If a vendor exhibits poor risk performance, it may be safer to exit the contract.

How TalentDesk Enables Risk Visibility and Control

The TalentDesk platform is designed to help you address many of the vendor management risk factors that commonly arise due to lack of visibility and control.

Our centralized risk dashboards offer you full visibility about each vendor. It lets you track inconsistencies in performance, spot compliance gaps, and record spend fluctuations – enabling you to investigate incidents early on and identify potential risks.

The continuous due diligence tracking features enable you to automate compliance processes. If, for instance, there is a change in the regulatory landscape that impacts your compliance obligations, the TalentDesk system alerts you to it immediately. 

Our complete integration with your procurement workflows give you a comprehensive view of all your vendors. You can also expect real-time alerts that highlight lapsed certificates, notify you about upcoming invoice dates and flag any missing documents or contracts that are up for renewal – across your entire vendor database.

This makes it easy to compare risks, identify issues and make objective decisions – making Vendor Risk Management a breeze!