Page Moved

This page has moved. You are being redirected to Vendor Risk Management Metrics You Should Be Tracking

Vendor Risk Management Metrics You Should Be Tracking

Vendor Risk Management Metrics You Should Be Tracking

Third-party risk management is one of the most challenging areas to quantify and manage. The large size of third-party ecosystems, constant changes among suppliers, and scale-related challenges make it hard to manage TPRM. And when it comes to third-party risk management reporting, it can be difficult even to figure out where to start.

That's why you need meaningful vendor risk management metrics that can help you clearly define a consolidated set of key performance indicators (KPIs) and key risk indicators (KRIs) that will allow you to get a better look at your vendors' security posture. These important metrics will help you monitor where your company stands now and what you need to reach your goals if you are looking to improve the efficiency of your vendor management program.

Vendor Risk Assessment Criteria for KPIs

While the KRIs are used to indicate potential risks, KPIs provide a high-level overview of VRM program performance. And while these metrics may not adequately offer early warning signals of developing vendor risk, they are essential to analyze trends and monitor performance.

Setting KPIs for vendors should be based on your company's internal risk assessment. You need to decide which third parties in your supply chain place your company at most risk. Then you can rank vendor risk considering the following aspects:

  • What business information are your vendors permitted to access?
  • Which systems within your organization they can access?
  • How important is each vendor to your business operations?

Now, let's look at vendor risk assessment criteria for setting KPIs. They include:

Compliance requirements. Your vendor may need to meet particular compliance standards or third-party risk management regulations. In this case, you should check recent security audits or Systems and Organizational Controls for Service Organizations (SOC) reports to understand how well they manage their compliance.

Cybersecurity incidents. You need to know whether a vendor has experienced a data breach or data event. You should require the vendor to notify you when an incident happens in your contract. Besides, you must also double-check for incidents if the vendor doesn't disclose them.

Staff training. You need to review the vendor's training records to get insights into how well its employees understand their responsibilities. It is also essential to learn about the vendor's IT risk management and cybersecurity culture overall. If the employees have low scores on tests, and the vendor's team is not cyber aware, it could increase the risks to your information.

Security patch management. Review each vendor's security patch management policies and procedures and its patch management logs to ensure that all patches are installed and updated in a timely manner.

Download our free vendor risk management checklists to ensure you don't miss any criteria when doing your due diligence.

Vendor Risk management checklist template pdf book

Establishing Third-party Risk Management Metrics

Establishing vendor risk management metrics is critical to the success of your vendor risk management program. Without third-party risk management metrics, you cannot truly make a process efficient because there is no reliable data, and you will base your decisions on gut instinct. And when it comes to dealing with vendor risk, poor decisions during a third-party riskmanagement lifecycle can put your company in a tough spot.

Here are some important metrics that help measure vendor risk management process inefficiencies and track improvements:

Resource Efficiency is the measurement of resources (not just people) involved in a process. This metric can be measured for any task to optimize costs. And you can measure it at both the micro and macro level, such as per onsite or per vendor. You can use two formulas that work well for this metric: the ratio of time to completed assessments; or the ratio of total costs to the time needed to complete the assessments.

Process Efficiency is the measurement of value-added activities compared to the total time to complete the task or assessment. In many vendor risk management assessments, there can be a lot of time used to complete the assessments that don't add value. It's possible to reduce this wasted time if you adhere to an issues and escalations process. The formula for measuring process efficiency is the ratio of value-add time to the total time needed to complete the assessments.

Throughput is the output of a process for a unit of time. This metric can be used to measure bottlenecks because the steps with the lowest values have the lowest throughput and are bottlenecks. An example formula to calculate throughput would be the ratio of completed tasks to time.

Team Productivity is the output of a process for each hour worked. This metric is not intended to focus on a particular employee, but instead, it can show how process improvements are cutting down the overall time to complete specific tasks. The formula to measure vendor risk management team productivity would be the ratio of completed tasks to hours worked. And remember that this ratio is amplified when your team spends time on resolving issues instead of compiling sporadic data.

START enables your team to manage all vendors' data in one platform and instantly generate reports.

As a result, START helps increase your team's productivity, making the vendor risk management process more efficient and effective.

When it comes to business process efficiency, you can use the following KPIs:

  • Number of staff involved
  • Volume of tasks per staff member
  • Percentage of assessments where completion falls within +/- X% of the estimated completion
  • Average time to complete assessment
  • Average process or task age
  • Cycle time from start to delivery
  • Average cycle time from request to delivery

Third-party Key Risk Management Indicators

Both KPIs and KRIs are part of the company's performance management. These concepts are similar, and sometimes, they are confused as the same thing, but they are two completely different metrics. KPIs help track and improve the company's productivity and effectiveness, and KRIs help organizations monitor and remove barriers to achieving KPIs. Effective KRIs and KPIs can improve the decision-making of vendor risk management teams and help them create practical action plans against the root causes of risks. That reduces the company's overall risk exposure.

Let's take a closer look at third-party key risk management indicators because they are critical predictors of unfavorable events that can adversely impact organizations. They allow companies to monitor changes in the levels of risk exposure and help determine the early warning signs that enable organizations to identify different types of vendor risk, prevent crises, and mitigate them in time.

You should select KRIs that are measurable, meaningful, and predictive. You shouldn't choose too many KRIs because, in such a case, managing them becomes problematic. It's better to select only those that offer factual information.

Due to the changing third-party risk landscape, simply establishing KRIs within the third-party risk management program may not be enough. Safeguarding your organization from security, operational, reputational, and other vendor risks requires periodic and regular reviews of these key risk indicators.

Keep in mind that key risk indicators monitor risks to a company's strategic plan and the company's particular needs, and each business is unique. That's why KRIs that help one company may not necessarily be appropriate for another.

Still, KRIs can be divided into three main categories:

  • Operational indicators that identify a set of risks arising from day-to-day activities
  • People indicators that help evaluate the satisfaction of employees and customers, the retention of talent within the organization, etc.
  • Financial metrics that help calculate market risk, competition, or regulatory changes.

Some KPIs can be used across a wide range of businesses, for example:

  • Financial metrics that can be KRIs—invoices paid on time, days payable outstanding, value at risk
  • KRIs related to risk management of operations—a percentage of delayed projects in progress, number of regulator's notifications
  • KRIs to track technical operational risks—mean time between failure (MTBF), mean time to repair (MTTR), number of system capacity overloads

Final Thought

Vendor risk management metrics (KPIs and KRIs) are an important way to measure effectiveness, and they should be defined according to the company's particular needs. They are essential for the vendor risk management strategy of organizations. The traditional way of monitoring the VRM process with emails and spreadsheets is very arduous and requires a lot of resources. That's why you should consider automation that plays a crucial role in analyzing and reporting KRIs and makes this process efficient.

Tools like START can reduce the workload of vendor risk management teams. You can use START even if you have to manage thousands of partners to gain a comprehensive vendor lifecycle and stay in control.