Important KPIs for Successful Vendor Management

Every risk management program should include risks posed by your vendors. Beware, however: vendor risk management is a complex process unto itself, requiring ongoing monitoring and measurement.

As you bring new vendors into your organization’s orbit, you will need assurance that those third parties continuously comply with the cybersecurity controls outlined in the service level agreements you’ve established. To measure vendor compliance, you’ll need to establish key performance indicators (KPIs).

What Are Vendor Risk Management Metrics?

Setting up metrics is essential for the success of your vendor risk management (VRM) program. Without such measures, it’s impossible to get an objective sense of the risk exposures that arise from third-party relationships.

Metrics help you assess how well your vendors control their business processes and how quickly vendors detect and resolve issues. Rather than relying on hearsay and intuition, factual data can assure senior management and other stakeholders that, yes, “Vendor X is a provider worth doing business with.”

When onboarding a new vendor, ask to see the metrics and dashboards it uses for operational performance and cybersecurity monitoring. This will give you insight into the vendor’s risk management solutions and its ability to provide the data you need to monitor vendor performance.

What Are the Most Common Vendor Risks?

Before outsourcing your business processes or striking some other deal with vendors, you do need to assess the risks they pose. The six risks listed below are a good place to start.

Cybersecurity

Begin by determining your organization’s tolerance for cybersecurity risk. After acceptable risk levels have been established, evaluate vendors’ security performance — and if a vendor’s cybersecurity is too lax for your tastes, require that vendor to make improvements as necessary.

An information security questionnaire for vendors can help you focus on particular weaknesses or systems within vendors’ network environments. Those questionnaires can ask about how a vendor identifies its security risks, how it manages IT controls, and other issues that might illuminate the potential risk to your own organization.

Compliance

“Compliance risk” means non-compliance with the laws and regulations that your organization is required to follow. Sector-specific legislation will apply differently to each firm, although some general rules apply to many industries.

If your organization must comply with regulations such as the Payment Card Industry Data Security Standard (PCI DSS) or the EU General Data Protection Regulation (GDPR), so must your vendors. Ongoing monitoring of vendor compliance activities assures alignment with your legal requirements because non-compliance with these regulations frequently carries steep fines.

Business Continuity

Vendor business continuity affects your organization’s business continuity, and ultimately your reputation. Due diligence questionnaires can verify that your third parties operate with internal controls to avoid fraud, withstand disruptions, and provide consistent support to your organization throughout the relationship lifecycle.

Financial

When vendors fail to achieve expectations for fiscal performance, third-party financial risk develops. Financially unstable providers can result in an erratic supply chain and high procurement costs, threatening your bottom line.

Operational

When onboarding a new provider, perform a risk assessment of its operational procedures. Inconsistent business processes result in poor quality and present high risks to service level agreements (SLAs). When vendors cannot deliver the promised services, businesses frequently experience disruptions to their business, unable to carry out routine tasks.

Strategic

Vendor business decisions that conflict with your firm’s strategic goals create strategic risks. Strategic risk frequently affects a company’s entire value and can affect compliance and reputational risk. Fostering a healthy relationship with your vendor’s senior management team will help you monitor their strategic risk.

Importance of Vendor Management KPIs

KPIs are essential for measuring and monitoring vendor performance and for conducting vendor performance reviews, which are crucial for a third-party risk management program.

The first place to look for KPIs is within the service-level agreements (SLAs) you and your vendor agree upon. Your SLAs define the metrics to determine the vendors’ conformity with your requirements.

Tying KPIs to SLAs can help you to:

• Track and monitor suppliers’ compliance with contracts
• Know when the vendor is falling short of expectations and in what areas
• Work with vendors to improve performance issues
• Resolve problems to avoid harm to your productivity or services
• Ensure that your business is making the best use of the vendors’ services
• Benchmark multiple vendors’ performance
• Improve your organization’s overall third-party risk management

Vendor management KPIs benefit your overall business objectives as well. For example, they can help with cost reductions, customer satisfaction, and continuous improvement.

Key Performance Indicators (KPIs) vs. Key Risk Indicators (KRIs)

KPIs are trailing indicators, measuring prior performance. KRIs are forward-looking indicators, warning of potential future trouble.

KPIs are metrics based on business outcomes; you are measuring something based on an earlier event. Reviewing revenue, for instance, would be a KPI because you are looking at a figure composed of aggregate historical data.

A KRI can be based on financial performance, such as a liquidity ratio; or on non-financial issues, such as customer satisfaction. KRIs might also be unique to your organization, depending on your business objectives and priorities.

How to Set KPIs for Vendors

Vendor KPIs should be based on your company’s internal risk assessment. The risk assessment can help you decide which third parties in your supply chain place your company most at risk. Then you can rank vendor risk according to:

• Which corporate information your vendors are permitted to access
• Which systems they can access
• How vital each vendor is to your business operations

A vendor would be considered high risk when it has access to systems or networks with sensitive information critical to your business continuity. For example, if you’re storing highly sensitive or protected data in the cloud, your cloud service provider (CSP) would be considered high-risk. Therefore, you need to monitor its security often, if not constantly.

On the other hand, if the information you’re storing on the cloud is publicly available (say, white papers used for marketing purposes), then your CSP would be a low risk; you could monitor its security less frequently.

Criteria for Setting KPIs Include:

• Compliance requirements. If your vendor needs to meet a compliance standard or regulation, check recent security audits to review how well it manages compliance with that standard.
• Staff training. Review the vendor’s training records for insights into how well its personnel understands their responsibilities and the vendor’s cybersecurity culture. If training records are not controlled, the vendor’s team may not be cyber aware — and could increase the risks to your information.
• Cybersecurity incidents. You need to know if a vendor has experienced a data breach or event. Your contract should require the vendor to notify you when an incident happens. (You must also double-check for incidents if the vendor doesn’t disclose them.)
• Security patch management. Review each vendor’s security patch management policies and procedures and its patch management logs to assure that patches are installed and updated promptly.

How to Review KPIs Using Automation

To maintain a robust vendor management program, you must know how well your vendors manage their data environments. Automation can help with the following tasks:

• Vendor reviews. An automated platform can create workflows for requesting and reviewing vendor documentation.
• Review prioritization. A computerized system can issue high-priority notifications reminding you to follow up with high-risk vendors more frequently.
• Communication. An automated solution can collect and store your communications with vendors to provide evidence of your oversight for auditors examining your performance.
• Analysis. Automation software can analyze reports for indications of breaches and recovery time.
• Ongoing monitoring. Automation is the only effective way to continuously monitor your vendors’ security environment, the effectiveness of their controls, and their compliance with regulatory and industry frameworks.

Continuously Monitor Vendor Risk Management Metrics with Reciprocity ZenRisk

Automate vendor risk management with Reciprocity ZenRisk. It is a system-of-record that provides templates for risk assessments, tracks tasks from start to finish, and collects all your vendor-management documentation. As a result, your teams can better manage vendor relationships and discuss issues with vendors.

Reciprocity ZenRisk features streamlined workflows to make due diligence questionnaires a breeze. It reflects the dates on which vendors responded to queries and the status of the task at hand. As a result, compliance managers no longer need to follow up with your (many) third-party contractors.

Advanced features do tedious tasks for you, allowing you to focus on the bigger picture. The result is more efficient and effective vendor risk management.

Contact us today for your free demonstration.