Nonprofits rely on third-party vendors for essential services, but these relationships can create risks.
Nonprofits should implement structured vendor risk management to mitigate potential threats.
Effective risk management strengthens vendor relationships and helps nonprofits fulfill their missions.
In today’s interconnected world, nonprofits increasingly rely on third-party vendors and service providers for everything from technology solutions and services to revenue cycle operations and human resources services. A good vendor relationship can be essential to an organization’s success, but it can also expose nonprofit organizations to a variety of risks that could undermine donor trust, damage an organization’s reputation and even jeopardize its financial stability.
Fortunately, nonprofits can take a number of steps to decrease their risks and solidify their relationships with vendors.
Nonprofits depend heavily on donor trust, making them particularly vulnerable to increased reputational risks. Social media has become a great tool for nonprofits to communicate fundraising opportunities and showcase community involvement, but it has also become a means of advertising for vendors looking to support reputable organizations. A vendor’s public statements or social media posts can have a downstream impact on the reputation of a nonprofit if the organizations have conflicting missions and goals. This can inadvertently erode confidence among donors and supporters, and they may be hesitant to provide support. This can affect the funds available to the organization and can ultimately affect the ability of the organization to support its mission.
Vendors that misuse funds or overcharge can lead to increased financial risks and unplanned expenditures. Financial issues can also arise when vendors experience instability, such as bankruptcy, which can disrupt services critical to the nonprofit’s operations and increase operational risks such as downtime and service disruptions. These disruptions can be especially detrimental if a nonprofit relies on the vendor for mission-critical functions, such as maintaining donor databases or volunteer management systems. To offer consistent service to their stakeholders, nonprofits need to ensure the reliability of their vendors.
Perhaps the most chilling risk is cybersecurity. Many nonprofits rely on outsourced and/or managed services to support their information technology and cybersecurity programs. While outsourcing these functions offers a great solution for staffing and resource limitations, it also expands the attack surface for malicious actors, as virtual environments or remote connectivity is needed to provide these services. Vendors that lack robust cybersecurity controls may become conduits to the nonprofit for inadvertent data breaches. Hackers may gain access to the nonprofit’s endowment information through compromised vendor credentials or by exploiting cybersecurity vulnerabilities.
Nonprofits that want to manage risk in their vendor relationships should establish a structured approach. The first step is for the organization to understand who their vendors are. Not all vendors are created equally in terms of risk. Nonprofits should assess each vendor against a set of criteria to establish inherent risk. This may include the following:
Nonprofit leaders should designate roles and responsibilities for specific individuals or teams to manage third-party vendor risks. Assigned duties should account for assessing, monitoring and mitigating vendor risks through all stages of the relationship lifecycle—including planning, due diligence, contracting, ongoing monitoring and termination.
To combat the reputational, financial, operational and cybersecurity risks that these relationships pose, nonprofits should complete a risk assessment that provides a comprehensive evaluation of the vendor’s control environment and potential threats. This may include conducting a background check, asking for references, completing a credit check and ensuring strategic alignment to the nonprofit’s strategies and overall mission. For vendors of high risk or importance, annual or even biannual reviews are advisable.
The following measures are helpful for evaluating cybersecurity risks associated with third-party relationships:
Vendor contracts should include clauses that allow the nonprofit to audit the vendor periodically to verify compliance with regulatory standards and agreed-upon service levels. Contractual language should also address operational downtime and impacts from subcontractors and fourth parties, and provide breach notification language.
Both nonprofits and vendors often view risk management as an unpleasant process, but it can also enhance partnerships. Even if a vendor relationship is healthy, a nonprofit cannot let its guard down.
If the risk assessment reveals vulnerabilities (e.g., cybersecurity gaps), the nonprofit and the vendor can work together on a remediation timeline. This approach fosters mutual accountability, strengthens trust and ultimately benefits both organizations. When both parties are marching toward the same goals, risk management processes become the status quo and part of standard operating protocols.
Nonprofit organizations are often heavily dependent on outsourced services, which can cause a downstream impact and increase reputational, financial, operational and cybersecurity risks. By taking proactive steps to manage vendor risks, nonprofits can mitigate potential disruptions, protect their reputation and make sure that every donor dollar helps advance their missions. Through diligent vendor oversight, nonprofits not only protect their interests but also strengthen the integrity of their relationships, ensure vendor stability and enhance long-term value.
