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Enterprise organizations rely on vendors to perform countless tasks with greater efficiency and lower cost. Vendors also offer specialized services and expertise you might not have in-house. But to choose the right third-party organizations, you need a robust vendor screening program.
Discover why vendor screening is important, what to ask when screening potential vendors, and best practices for managing the risks associated with third-party agreements.
Table of Contents:
- Why Screening Potential Vendors Matters
- 4 Common Types of Vendors
- 4 Potential Risks of Working With Third-Party Vendors
- 5 Questions to Include in Your Vendor Screening Checklist
- 4 Best Practices for Vendor Risk Management Programs
- Build High-Quality Partnerships With Vendor Screening
Why Screening Potential Vendors Matters
Screening vendors can help organizations make better decisions and reduce the risk of working with unqualified or unreliable vendors. Third-party vendors can expose businesses to legal and other risks that need to be considered and managed. Common legal risks include contract disputes, data privacy and security breaches, and lack of compliance with regulations or laws.
The screening process for vendors can include conducting background checks, verifying references, and reviewing financial data. Screening helps organizations determine whether the vendor has the qualifications, experience, safety and security posture, and financial stability to provide the services the organization needs. Additionally, this process helps organizations avoid vendors with a history of poor performance, fraud, or unethical behavior.
4 Common Types of Vendors
In today's interconnected business landscape, organizations often rely on third-party vendors to support their operations. Check out four common types of third-party vendors, as well as the risks and rewards associated with each partnership.
Business Process Outsourcing
Business process outsourcing (BPO) is the practice of hiring third-party service providers for certain business operations, such as customer service, accounting, payroll, supply chain management, or IT services. BPO enables organizations to streamline their workforce and focus on core competencies.
Involving a third-party service provider in business processes gives the vendor access to sensitive information, so you need to be sure the organization is trustworthy, qualified, and secure.
Facility Management
Facility management outsourcing is when an organization hires a company to handle maintenance services at buildings it owns or operates. These firms handle such services as janitorial, building systems, equipment, and groundskeeping.
Outsourcing facility management to a vendor can free up people resources you can redirect to core business operations. Outsourcing can also help organizations save money, as they don't have to employ additional staff or purchase maintenance equipment.
Outsourced facility management brings people onto business properties. You need a vendor that can verify its workers’ identities, track records, and credentials. A janitor in a healthcare facility, for example, could interact with patients and should be subject to standard healthcare background screening requirements.
Recruitment Process Outsourcing
Recruitment process outsourcing (RPO) occurs when companies hire an outside firm to handle some or all recruitment activities. This enables organizations to focus on core competencies while delegating recruitment to a specialized team. The main purpose of RPO is to reduce the time and cost of recruitment while maintaining or increasing recruiting quality.
Allowing a third party to hire people to run your business requires a lot of trust. Verify that vendors are following recruitment best practices, attracting a diverse slate of candidates, and screening people appropriately.
Background Check and Security Programs
Background screening and security program outsourcing is another area where companies often choose to partner with an outside organization. Hiring a vendor gives you access to services including criminal background screening, employee and customer safety efforts, and implementing security measures such as access control systems.
By outsourcing security services, organizations can ensure that their background screenings and security protocols are up to date and compliant with the latest regulations. It’s often easier to find a specialized firm to safeguard the organization and conduct background checks than to keep this in-house.
For these services, look for vendors that are certified with the Professional Background Screening Association and can demonstrate compliance with laws across jurisdictions, including the federal Fair Credit Reporting Act.
4 Potential Risks of Working With Third-Party Vendors
While partnering with third-party vendors can bring numerous benefits, you should be aware of the potential risks. Discover four common risks that businesses should consider when looking to hire vendors or outsource work.
Failure to Meet Industry Standards
All companies must meet applicable laws and regulations. This is especially true for highly regulated industries, which face additional scrutiny in the form of industry-specific standards and rules. Examples of these industries include healthcare, finance, and transportation, where employees’ actions can have profound impacts on people’s lives and well-being.
Working with the wrong vendor can increase risk and liability, especially when vendors don’t follow relevant regulations or lack the proper credentials, quality control, or ethical standards. Failure to meet industry standards can lead to fines, loss of customer trust, and even criminal penalties.
All businesses, and especially those in highly regulated industries, should vet their vendors for understanding of and compliance with regulations and other standards.
Leakage of Sensitive Information
Working with the wrong vendor can jeopardize sensitive documents and information. Vendors with poor cybersecurity practices might fail to protect their networks and data, opening you up to risks from a cyberattack. You could also suffer adverse consequences, including fines, from vendors who don’t comply with industry regulations such as the EU’s General Data Protection Regulation or the U.S. Health Insurance Portability and Accountability Act.
Additionally, poor-quality vendors might not follow data best practices, such as encryption and multi-factor authentication. They might not properly train their employees on accessing, handling, or securing sensitive information.
Data leaks are among the most common risks associated with third-party contracts. According to a recent report, 98% of companies integrate with at least one third-party vendor that's experienced a data breach within the past two years. The average data breach incurs $4.45 million in costs — a figure that’s increased 15% over the past three years, IBM reports.
Reputational Damage
Working with the wrong vendor can put a company's reputation at risk. Substandard products or services, missed deadlines, or poor customer service can each contribute to the public’s negative perception of your business.
When vendors don’t deliver on their promises, customers can become frustrated and dissatisfied — and they’ll likely blame you rather than the vendor. In some cases, negative experiences with a vendor can become public, further risking your company's reputation.
Loss of Business Continuity
One of the top reasons for contracting with a third party is to increase efficiency, but making the wrong choice can have the opposite effect. According to a Gartner survey, 84% of enterprise risk committee members ranked operational disruptions as the most common outcome of third-party risk management failures.
Working with the wrong vendor can put business continuity at risk in multiple ways. Vendors that lack the necessary resources or expertise might not fulfill their contract or create extra work for the company. Vendors that lack security and privacy protections could open the company up to data breaches or other security outcomes that put the company’s operations at risk.
5 Questions to Include in Your Vendor Screening Checklist
Before contracting with vendors, assess them for risk exposure and their suitability for your business. Do this by questioning vendors directly, reviewing their track record and reputation, and working with a background screening partner.
The following are five questions that can inform your vendor screening checklist.
1. Is the Vendor Appropriately Licensed and Certified?
Trustworthy, reliable, and qualified vendors have secured the proper licensing and certifications for the services you need. Ask vendors to provide evidence of their credentials, both at the organizational and employee level. This helps to protect your company from potential legal or financial risks that arise from working with an unlicensed vendor.
2. What Is the Vendor’s Reputation?
A vendor's public reputation can provide valuable information about their quality of work, communication skills, and reliability. You can also see what customer complaints commonly arise and how they handle them. Looking at review sites or talking with other customers or trusted industry peers can help you understand the vendor’s reputation.
3. Are There Potential Conflicts of Interest?
Asking this question helps your company proactively identify potential conflicts of interest and make an informed decision about whether those conflicts preclude a working relationship. Potential conflicts of interest include the vendor’s relationships with competitors or having financial ties to your company. Look, too, at a vendor’s existing relationships with suppliers or customers that could affect their ability to provide unbiased advice and services.
4. How Will the Vendor Keep Sensitive Data Secure?
By asking this question, companies can gain confidence that the vendor is knowledgeable about security measures and can explain how they follow industry best practices. This question can help identify weaknesses in the vendor's security systems and processes that create undue risk
Look into the vendor’s background to see whether it has relevant certifications and whether it’s been involved in cyberattacks or data breaches.
5. How Does the Vendor Approach Quality Control?
Quality control is about providing the best possible products and services on a consistent basis. By asking this question, businesses gain insight into the vendor's processes and how they measure quality.
Here, too, looking at the vendor’s reputation and background can help you verify the vendor’s claims and make the right decision for your business.
4 Best Practices for Vendor Risk Management Programs
Every company hiring vendors needs a comprehensive vendor risk management program. Yet, only 40% of respondents surveyed by PwC understand third-party risks related to cybersecurity and privacy, for example. Many companies fail to regularly audit their vendors or consider downstream risks, such as their vendors’ supply chains and partners.
Here are best practices to strengthen your vendor risk management strategy.
Conduct Vendor Risk Assessments
A vendor risk assessment evaluates the risks posed by a third-party vendor and how those risks might affect the company's operations. Such an assessment should include a review of the vendor’s policies, procedures, and processes for protecting the company’s data and systems. Additionally, the company should inquire about the vendor's security and compliance certifications and potential vulnerabilities.
Outline Third-Party Roles in Business Operations
Vendor contracts should detail the services to be provided, the payment terms, and other important details. The contract should be clearly written and understood by both parties to ensure that all expectations are met.
When crafting a vendor contract, include details about the vendor’s services and products, the payment terms, and the length of the agreement. Additionally, the contract should include agreements about the expected quality of services or products, the conditions for terminating the contract, and other key details. Make sure the contract addresses how disputes will be handled and how potential legal issues such as liability and warranties will be addressed.
Continually Monitor Third-Party Compliance
Vendor due diligence is crucial before signing a contract, but monitoring for compliance should continue on an ongoing basis. Companies should adopt repeatable processes that ensure reviews happen periodically. These reviews could include conducting periodic audits, reviewing reports and data, and conducting interviews with the vendor’s staff.
Maintain Healthy Vendor Relationships
Keeping lines of communication open between you and your vendors is essential for a successful relationship. By conversing regularly, you can make sure they understand your goals, expectations, and needs — and that they are meeting them.
Understand that not every vendor works the same way or in the same way as your company. Within reason, be willing to work with them to find the best processes and results. Being flexible and accommodating can encourage a positive relationship that acknowledges both parties’ needs and shared goals.
Uphold your end of vendor agreements, just as you expect them to follow through. Keeping your word helps your reputation and makes vendors more willing to work with you and deliver their best performance.
Build High-Quality Partnerships With Vendor Screening
Vendors can be a powerful asset for your company, but partnering with unqualified or unreliable vendors can have far-reaching consequences that affect your bottom line, reputation, and even your ability to be a going concern.
A trusted background screening partner can streamline the process of verifying third-party credentials and vetting vendors for key risks. By leveraging Cisive’s vendor screening expertise and resources, you can create a more robust and reliable vendor selection process in an ever-evolving business landscape.
Schedule a meeting with one of our vendor screening experts to discover how to manage risks and hold your vendor partners to a higher standard.
