What Is Vendor Onboarding and Why Is It Important?
Digital Vendor Onboarding
Vetting business partners and suppliers through vendor onboarding protects companies and their customers.
Vendors extend the capabilities of a business and support its reputation and revenue, whether by reselling a vendor’s products or using its services. But without third-party due diligence on vendors, organizations face supply chain, fraud and compliance risks.
Organizations also can run the risk of a vendor using the relationship for criminal activity. When businesses work with unscrupulous vendors that launder money, sell counterfeit goods or use child labor, they can face legal repercussions.
Vendors also pose a risk when they have access to a company’s systems and data. If a vendor has weak security or privacy procedures, cybercrime or data leaks can compromise the entire supply chain.
It’s essential that businesses understand the risks, enact policies and procedures to know who they are doing business with, and conduct ongoing vendor monitoring.
What Is Third-Party Risk Management?
Third-party risk management helps organizations understand the risk a third party poses and the measures that can control it. The third-party management life cycle includes screening, assessment, risk mitigation, monitoring and offboarding.
Is the vendor a legitimate business? Confirming a business actually exists and is what it claims to be is fundamental to managing third-party risk. Organizations can use that information for watchlist screening, adverse media monitoring and other checks for business problems.
There is always risk when dealing with third parties. Understanding how they operate and how that measures up to the organization’s security requirements helps determine the level of scrutiny.
Not all vendors pose the same risks. Assessments focus on how a third party integrates with the business, the vendor’s security environment and the expectations of customers, partners and regulators.
Vendor Risk Mitigation
A risk-based approach to vetting vendors helps businesses adjust risk controls and due diligence based on individual circumstances.
Risk scores can guide businesses in determining how carefully they monitor accounts or activities. Ongoing monitoring also helps businesses flag accounts or transactions for deeper review.
When businesses encounter new threats or change their risk tolerance, the risk-assessment process likely will change too. Internal reassessments can help ensure vendor vetting is aligned with the business’ strategy.
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Common Risks When Onboarding Vendors
The modern risk matrix is complicated, quickly evolving and involves multiple areas of business operations.
Cybersecurity and Information Security Risks
Protecting internal systems, networks and data is core to business operations. Businesses can face significant losses when payment information, trade secrets, operational plans or other critical systems are compromised.
Cybercriminals can leverage vendor access to internal systems or data using viruses, malware or other attacks. They also can gain access through fake orders or fraudulent communications that appear to come from legitimate accounts.
Strict controls and access management help, but if a vendor has weak security practices, cybercriminals may already have entry points. Ongoing monitoring and awareness of supply chain vulnerabilities can help companies avoid damaging breaches.
Who are the vendor’s suppliers, partners and customers, and what risks do they pose? What are the vendor’s compliance procedures? What vetting processes and monitoring does the vendor perform?
A supply chain is only as strong as the weakest link. Due diligence requires confirming that third parties also have strong due diligence.
Environmental, Social and Governance Risks
Ethical lapses by a vendor can reflect poorly on an organization. Doing business with a third party whose standards and practices don’t align with the organization can damage employee, investor and public relations.
Holding vendors to a code of conduct that reflects company values helps ensure third parties are accountable.
Reputational, Operational and Financial Risks
Intertwined supply chains and far-flung organizations create agile business opportunities but also allow for risks to spread faster and wider. A small event can quickly gain traction on social media, a system weakness can be broadcast on the dark web, or a website crash can affect entire business lines.
Policies to limit damage and robust response procedures that vendors understand and implement go a long way toward avoiding reputational, operational and financial impairment.
Managing Risk When Onboarding Vendors
The first step in third-party due diligence is identification and verification. Is the vendor what it claims to be? That step involves gathering business information such as registration number, business name, status, address, managing directors and incorporation date.
It’s not enough to gather the information. Verifying its accuracy helps establish legitimacy. Generally, that involves checking official records through a government register or public file to ensure the information matches.
Other due diligence questions help assess the vendor’s activities, reputation and business sustainability:
- What kind of business is it?
- What is the vendor’s contact information?
- What services does it provide?
- How long has it been in business?
- What is the CEO’s track record with the current vendor and past businesses?
- Is the vendor adequately insured?
- Does the vendor have data-protection safeguards?
- What is the vendor’s reputation?
- Where does it operate?
- How will the laws governing the vendor affect the organization?
- Does it follow sound business practices?
Enhanced due diligence might be necessary to resolve unanswered questions or if the relationship involves sharing sensitive business or personally identifiable information.
Checks and assessments at the outset and at critical moments during the relationship help ensure risk mitigation.
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Vendor Onboarding Best Practices
Vendor onboarding isn’t just about managing risk. It creates a solid working relationship that benefits both parties.
The initial onboarding experience can make or break a relationship, especially with small vendors. They might not have the time or expertise to handle complex onboarding, and the risk level might not require it.
Customize the Onboarding Experience
Adjusting vendor onboarding based on risk level syncs with the risk-based approach. Creating different onboarding workflows for different types of vendors helps accelerate onboarding in low-risk scenarios.
Automated workflows can require more or less information based on specific vendor details. The key is to provide the right onboarding experience for the risk level.
Clear Vendor Communications
Communicating with the vendor and providing documentation and guidelines throughout the relationship helps establish trust. Background information, training materials, case studies and other content helps build vendor onboarding best practices.
Self-Help Tools and Services
Enabling vendors to grow benefits both parties. Automated processes for orders, invoices, payments and other business activities provides transparency and decreases support requirements. Advanced analytics offer insights on the health of the business and areas for growth.
Setting up the vendor with the right tools helps get them get started without any questions about how the account is performing.
Timely and Professional Support
Ensuring the vendor can get questions answered and problems solved reduces friction and enhances the working relationship.
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Balancing Security and Speed in Vendor Onboarding
While there are many steps to vendor onboarding, the initial verification is especially important.
Business verification sets the tone for the relationship. Slow and overly complex experiences can start the relationship off on the wrong foot.
Business verification is also the first opportunity to stop fraudulent vendors from gaining access to an organization’s systems. At the core of risk mitigation is preventing problems before they occur.
Intelligent, automated and agile business verification accounts for a risk-based approach by varying onboarding based on circumstances. It adjusts to different use cases, markets and vendors to help protect an organization and its supply chain.
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