Are you struggling to determine tracking metrics for your Vendor risk management (VRM) department? Vendor risk management metrics allow organizations to track departmental performance and align vendor risk initiatives with KPIs and KRIs. The large size of third-party ecosystems, constant changes among suppliers, and scale-related challenges make it hard to manage VRM. And when it comes to third-party risk management reporting, it can take time 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 better look at your vendors’ security posture. These essential 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.

Measuring VRM Program Performance With KPIs

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

Setting vendor KPIs should be based on your company’s internal risk assessment. It would help if you decided which third parties in your supply chain place your company at the 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 can they access?
•  How vital 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 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 of an incident 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 understand 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 test scores, and the vendor’s team needs to be cyber aware, it could increase the risks to your information.

Security Patch Management

Review each vendor’s security patch management policies, procedures, and logs to ensure all patches are installed and updated promptly.

Establishing Vendor 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. Poor choices during a third-party risk management lifecycle can put your company in a tough spot when dealing with vendor risk.

Here are some important metrics that help measure VRM 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 levels, such as per onsite or 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 VRM assessments, don’t waste time conducting evaluations 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 measures 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 VRM team productivity would be the ratio of completed tasks to hours worked. And remember that this ratio is amplified when your team spends time resolving issues instead of compiling sporadic data.

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

Vendor Risk Management Performance Management

Both KPIs and KRIs are part of the company’s performance management. These concepts are similar and sometimes 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 allow organizations to monitor and remove barriers to achieving KPIs. Effective KRIs and KPIs can enhance 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.

Look closely at vendor risk management indicators because they are critical predictors of unfavourable 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. It would help if you didn’t choose too many KRIs because managing them becomes problematic in such a case. It’s better to select only those that offer factual information.

Due to the changing third-party risk landscape, more than simply establishing KRIs within the third-party risk management program may be required. Safeguarding your organization from security, operational, reputational, and other vendor risks requires periodic and regular reviews of these key risk indicators.

Remember that KRIs monitor risks to a company’s strategic plan and particular needs; each business is unique. That’s why KRIs that help one company may not 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 and operational risks—mean time between failure (MTBF), mean time to repair (MTTR), number of system capacity overloads.

Automate Vendor Risk Management Metrics with Start

Vendor risk management metrics (KPIs and KRIs) are an essential way to measure effectiveness, and they should be defined according to the company’s particular needs. They are necessary for organizations’ vendor risk management strategy. The traditional way of monitoring the VRM process with emails and spreadsheets is arduous and requires many resources. That’s why you should consider automation, which 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 manage thousands of partners to gain a comprehensive vendor lifecycle and stay in control.