Understanding the vendor risk management matrix

What is vendor risk management?

Vendor risk management (VRM), or third-party risk management, is the management, monitoring, and evaluation of risks that result from third-party vendors and suppliers of products and services.

What is a vendor risk management matrix?

A vendor risk management matrix is a valuable tool in your vendor risk management framework.

With a vendor risk management and control matrix, your business can calculate a current estimate of risks and probability of occurrence, assign a risk number, and determine any action steps required to mitigate unacceptable vendor risk. Perform a vendor risk matrix evaluation before vendor selection. Update the vendor risk matrix on an ongoing basis.

Why is it important?

A vendor risk management matrix helps businesses get a better understanding of the risk environment, helping them manage risks before they occur. If the pandemic showed us anything, it’s that the magnitude and complexity of business risks continue to grow. Now more than ever, companies must meet the challenges of the present — and the future — by identifying, analyzing, and mitigating risks quickly.

The vendor risk management matrix is a crucial tool in risk management for three reasons:

1. Easy Prioritization of Risks

All risks aren’t equal. A risk matrix allows you to prioritize the most severe risks your company faces. As mentioned previously, having a comprehensive view of today’s modern threat landscape is critical for preventing value losses. All companies must take on some level of risk to succeed, but calculated risks based on a robust risk analysis will help businesses take on risks in a way that helps achieve goals.

While it may be tempting to distribute resources to all potential business risks, some operational risks — such as major reputational damage due to breach of private data, or an excessive increase in operation costs due to natural catastrophe — must be prioritized before others.

By color-coding these risks in a risk assessment matrix, audit, risk, and compliance professionals can find the most pressing threats to the business and plan for them.

2. Targeted Strategy for Managing Risks

Just as all risks aren’t equal, all risks don’t carry the same impact. With its prioritization of the most pressing threats, the risk management matrix enables professionals to craft a targeted strategy for managing high-risk events. Focusing your attention and resources on the highest risks will help your overall business strategy since these risks have the biggest impact and can pose the greatest value losses.

From a project management perspective, for example, a brief bottleneck in the project workflow would create little impact, provided there was enough float built in at the beginning of the project design. A cost risk that significantly escalates the project cost would have a severe impact, however, and requires a targeted management plan.

As any project manager knows, Murphy’s law is inevitable: what can go wrong will go wrong. Appropriately planning for cost risk due to factors like scope creep will ensure that a project is successful. With the help of the risk matrix, planning for Murphy’s law becomes a lot easier.

3. Real-Time View of the Evolving Risk Environment

Traditionally vendor risk assessment was done at the beginning of the year and then left untouched until the following year and or a problem such as a data breach arose. Thomas Wisehart, a Senior Program Leader for IBM OpenPages with Watson said in an interview with iTech that “in recent years there has been a shift in the way risk is being assessed”. “This shift comes from the need to continuously monitor risk on a landscape that is constantly evolving,” said Thomas.

Audit, risk, and compliance professionals know that risks can be developing and recurring. The vendor risk management matrix enables you to find specific types of risk, their probability, and severity, and maintain a real-time view of the evolving risk environment.

Though developing risks are unknowable, businesses can identify areas of vulnerability at the strategic level by strengthening their enterprise risk management processes. By looking at early warning signs or trigger events that show something is wrong, companies can maintain business continuity in an increasingly dynamic and complex risk landscape.

Strategic risk assessment tools like the risk matrix also enable companies to track patterns of risk — threats that are likely to reoccur and therefore require a year-over-year mitigation strategy.

What part of the vendor risk management matrix is the biggest hurdle for risk managers?

ITech asked Thomas what he thought was the most challenging element in the vendor risk management matrix. His response without hesitation was “the evaluation process”.

“The evaluation process is the most challenging part of the vendor risk management matrix for risk managers to overcome. Risk managers who are sending out a lot of surveys to critical third-party vendors can become overwhelmed by the sheer number of responses they have to review once they get them back.” said Thomas

“The best thing risk managers can do to ease this burden is to create a formalized and efficient process for reviewing these third-party responses, to ensure key details do not slip through the cracks,” said Thomas.