Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Vendor Risk Management — Explained + Best Practices
As taught in the Risk Management in Procurement Course / ★★★★★ 4.9 rating
- Vendor risk management is identifying and reducing the risks that third-party suppliers can introduce.
- Vendor risk management relies on due diligence checks, contract controls, and continuous monitoring to prevent financial, operational, compliance, and cyber issues.
- A mature vendor risk management program embeds vendor oversight into enterprise risk governance, allowing you to act quickly if a supplier falters.
What is Vendor Risk Management?
Vendor risk management (VRM) is the ongoing, end-to-end discipline of identifying, assessing, monitoring, and mitigating the strategic, operational, financial, compliance, and cybersecurity risks that third-party vendors introduce to your organization.
It begins before onboarding, through due diligence screenings and policy alignment, and continues throughout the relationship with periodic risk assessments, performance tracking, contract controls, and real-time alerting.
A mature VRM program weaves these practices into enterprise-wide risk governance, giving companies the visibility and response playbooks needed to prevent data breaches, supply chain disruptions, regulatory penalties, and reputational damage.
Types of Vendor Risk
1. Strategic
Vendor choices (e.g., halting tech upgrades) diverge from your long-term objectives, undermining innovation, cost, or growth plans.
Example:
2. Operational
Failures in the vendor’s people, processes, or systems, such as an MSP outage or poor quality control, disrupt day-to-day operations and service levels.
Example:
ThousandEyes traced the incident to a backend glitch in Confluence’s AWS-hosted web front end, showing how a single MSP failure can stall everyday operations and breach service-level targets.
3. Business-continuity
External shocks (wildfires, civil unrest, pandemics) stop the vendor from working, cascading interruptions to you if continuity/DR plans are weak.
Example:
On 8 August 2023, downed Hawaiian Electric power lines sparked the Lahaina wildfire and wiped out Maui’s grid. The blackout forced more than 800 businesses to close and cost the island about $11 million per day in lost revenue, proof that a single external shock can cripple operations when business continuity and disaster recovery plans are weak.
4. Compliance / regulatory
Breaches of laws, industry rules, or flowed-down contractual policies (HIPAA, GDPR, SOX, etc.) expose you to fines, lawsuits, and remediation costs.
Example:
In March 2023 a cyber-attack on outsourcing giant Capita leaked client data; by May the UK Information Commissioner’s Office confirmed ≈ 90 customer organisations had to self-report GDPR breaches, exposing them (and Capita) to potential fines and remediation costs, showing how a single vendor’s compliance failure can cascade regulatory risk onto every partner.
5. Information-security & privacy
Inadequate cyber or physical controls lead to data breaches, IP theft, or ransomware, threatening confidentiality and trust.
Example:
In May 2023, a zero-day in Progress Software’s MOVEit file-transfer tool let the Cl0p ransomware gang siphon data from more than 2,700 organizations and at least 93 million people, showing how one vendor’s security gap can trigger a cascading, multi-client privacy disaster.
6. Financial / credit
Weak cash flow, excessive debt, or downgrades leave the vendor unable to meet obligations, risking service gaps, price hikes, or bankruptcy.
Example:
On 7 August 2023, less-than-truckload giant Yellow Corp filed for Chapter 11, idling 30,000 workers and stranding customers’ freight; shippers had to scramble for alternative LTL capacity, proof that a vendor’s credit crunch can quickly spawn service gaps, price spikes, and emergency re-routing costs.
7. Reputational
Vendor scandals, fraud, lawsuits, or poor customer service tarnish your brand and can erode customer and investor confidence.
Example:
At Nike’s 10 September 2024 annual meeting, investors filed a workers-rights resolution citing roughly US $2.2 million in unpaid wages at Cambodian and Thai supplier factories; the proxy fight and headlines linking Nike to wage theft prompted warnings that the brand’s labour dispute could erode customer trust and long-term brand equity.
8. Concentration (single-point-of-failure)
Heavy dependence on one supplier, or many clustered in the same region, magnifies disruption if that provider or area goes offline.
Example:
On 3 April 2024 a magnitude-7.4 quake rocked Taiwan, forcing TSMC to evacuate fabs and pause production; because the island produces ≈ 90 % of the world’s leading-edge chips, the brief shutdown instantly rattled electronics and auto makers worldwide, proof that over-reliance on a single geographic hub turns one tremor into a global supply-chain shock.
9. Geopolitical
Political instability, sanctions, or weak legal protections in the vendor’s location jeopardize supply, enforceability, and compliance.
Example:
In November 2024, the U.S. Commerce Department ordered TSMC to stop shipping 7 nm-class AI chips to Chinese clients after one of its parts surfaced in a Huawei processor; the sudden export-control move pushed customers to audit China-exposed tech stacks and hunt alternative fabs, underscoring how fast-moving geopolitical actions can choke critical supply lines overnight.
10. Sustainability
Environmental violations, unfair labor practices, or poor governance at the vendor conflict with your CSR goals and can trigger regulatory or reputational fallout.
Example:
On 14 January 2025, the U.S. Department of Homeland Security added 37 Xinjiang-linked firms covering textiles, solar-grade polysilicon, and mining to the Uyghur Forced Labor Prevention Act Entity List, and U.S. Customs began blocking their shipments the next day.
Brands sourcing cotton tees or solar modules through these suppliers saw orders seized at the port and had to scramble for compliant alternatives, proof that sustainability lapses (forced-labour claims, poor governance) can trigger instant import bans and ripple up the supply chain, jeopardising CSR targets and delivery schedules.
The Difference between Vendor and Supplier Risk Management
10 Best Practices for a Successful Vendor Risk Management
1. Build and keep a single, tiered vendor inventory
Start by reconciling AP records with business-unit lists so no third party is missed. Classify each vendor by criticality and inherent risk (low/moderate/high) to right-size the effort you invest later.
Example of how to build and keep a vendor inventory:
Feed AP, contract management, and ERP records into a single repository, deduplicate names, then run a lightweight scoring model (e.g., annual spend × data-type handled × service criticality) to assign tiers 1-3. Review tiers whenever spend or scope changes and lock inventory updates behind role-based access so no shadow vendors creep in.
2. Set policy, governance & ownership up front
A written VRM policy defines vetting criteria, assessment frequency, risk-acceptance thresholds, and escalation paths. Many firms formalise this through a cross-functional VRM committee that meets at least quarterly.
Example of how to set policy, governance, and accountability:
Draft a VRM policy that spells out due diligence depth, assessment cadence, escalation paths, and risk-acceptance limits; get it ratified by a cross-functional TPRM committee chaired by the risk office. Schedule quarterly meetings to review exceptions and report to the board so accountability stays visible.
3. Automate onboarding, risk scoring, and evidence collection
Replace spreadsheets with workflow or VRM software that can pull credit data, send security questionnaires, and auto-score responses; this cuts cycle time and eliminates manual errors.
Example of how to automate onboarding and risk scoring:
Adopt a VRM platform that can auto-pull security ratings and credit feeds, push dynamic questionnaires, and calculate inherent-risk scores the moment a requestor nominates a vendor. Tie the tool to e-signature and document portals so policies, SOC reports, and pen-test letters flow in without email ping-pong.
4. Use standardized due diligence toolkits before you sign
Map questionnaires to recognized frameworks (e.g., NIST CSF, SOC 2, ISO 27001) and collect supporting documents (financials, SOC reports, penetration-test summaries) before the contract, or at renewal.
Example of how to use standardized attention tools:
Map each risk domain to a recognised framework—NIST CSF for cyber, ISO 27001 for ISMS, SOC 2 for controls—and issue pre-filled questionnaires plus evidence checklists (financials, insurance, pen-test summaries). Require closure of all critical gaps or an approved risk exception before purchase-order release.
5. Continuously monitor, not just once a year
Combine inside-out assessments with outside-in feeds: security ratings, breach intelligence, financial health alerts, geopolitical trackers, ESG datasets. Trigger reassessments when a threshold is crossed.
Example of how to continuously monitor:
Wire the inventory to outside-in services that track breach chatter, patch cadence, sanctions lists, ESG scores, and credit alerts; set risk-score thresholds that auto-open a reassessment ticket. Combine those signals with quarterly “inside-out” attestations to keep both perspectives fresh.
6. Embed controls in contracts and SLAs
Convert risk findings into clear obligations—minimum security controls, RPO/RTO levels, right-to-audit clauses, data-return & destruction requirements—and track them like any other KPI.
Example of how to build controls into contracts and SLAs:
Translate assessment findings into clauses—minimum control baselines, 24-hour breach notification, RPO/RTO targets, right-to-audit, secure-data-destruction on exit—and attach measurable KPIs with penalty triggers. Track each clause in the VRM system alongside commercial SLAs for easy compliance checks.
7. Plan for disruption and develop remediation playbooks
Align vendor BCP/DR capabilities with your own, test them, and document step-by-step actions for cyber incidents, service outages, or financial distress; rehearse the plan annually.
Example of how to develop a disruption plan and recovery plans:
Align the vendor’s BCP/DR figures with your own RTO/RPO, capture escalation contacts, and rehearse joint cyber- and service-outage drills at least annually. Keep template communications, workaround steps, and decision trees in a shared runbook so teams can act within minutes, not days.
8. Watch fourth-party, concentration & geopolitical exposure
Map where your vendors—and their suppliers—operate; diversify where single points of failure or high-risk regions appear.
Example of how to watch out for the fourth party:
Use geo-mapping dashboards to visualise where critical vendors—and their key subcontractors—host data or facilities; flag single points of failure or high-risk regions and build an alternate list before trouble hits. Incorporate country-risk indices to drive automatic diversification rules.
9. Report to executives and the board with metrics that matter
Track residual-risk trends, assessment completion rates, SLA breaches, and remediation status; use dashboards and board-ready summaries to keep leadership engaged.
Example of how to report to executives and the board of directors:
Roll residual-risk scores, SLA breaches, open remediation items, and tier-1 incident counts into a live dashboard, but surface only trend lines and red-flag vendors in the board pack. Pair the numbers with a concise narrative of major movements to keep discussions strategic, not technical.
10. Close the loop at off-boarding
When a relationship ends, verify data erasure, disable all system access, and require written attestation. Audit for stragglers.
Example of how to close the loop:
Trigger an exit checklist that revokes all credentials, confirms data return or certified destruction, and captures a final attestation letter. Run a post-termination scan of firewalls, IAM, and file-sharing logs to be sure no orphaned connections remain, then mark the vendor inactive in the inventory.
Conclusion
Robust vendor risk management is no longer a compliance check-box but an enterprise-wide capability that protects revenue, reputation, and resilience. By maintaining an accurate, tiered vendor inventory, formalizing governance, and automating due diligence and monitoring, organizations gain real-time visibility into strategic, operational, financial, cyber, and sustainable threats, long before they disrupt the business.
Embedding clear risk clauses in contracts, rehearsing joint recovery playbooks, and closing the loop at off-boarding ensure that controls remain effective across the vendor lifecycle. In short, a mature vendor risk management process turns third-party relationships from hidden liabilities into sources of sustained competitive advantage.
Frequentlyasked questions
What is Vendor Risk Management?
Vendor Risk Management is the continuous process of identifying, assessing, and mitigating the strategic, operational, financial, compliance, cybersecurity, and ESG risks that third-party service providers can introduce across the entire vendor lifecycle, from pre-contract due diligence through ongoing monitoring to off-boarding.
What is one best practice for successful Vendor Risk Management, and how is it applied?
Continuous monitoring, because you connect your vendor list to live breach, credit, and sanctions feeds, and configure auto-alerts so any risk-score drop opens an immediate reassessment.
What is the main difference between Supplier and Vendor risk management?
Vendor risk management focuses on service-oriented providers and emphasises data security, regulatory compliance, and service quality, whereas supplier risk management targets the upstream supply chain for raw materials or components, prioritising continuity of supply, capacity, price volatility, and product quality.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
