While cooperation between businesses has long been essential for an economy to function and thrive, in the digital age, companies are more interconnected than ever. Additionally, in today’s competitive landscape, companies must concentrate on their core competencies while leveraging third-party vendors’ expertise by outsourcing particular business functions.
However, while this has numerous benefits, including increased efficiency, productivity, and cost-effectiveness, this also increases the amount of vendor risk an organisation is exposed to. Vendor, or third-party, risk is introduced due to suppliers, partners, contractors, and consultants having access to – whether authorised or not – company property, IT infrastructure, systems, applications, and, most critically, data.
Additionally, the information age has ushered in a vast array of digital tools and solutions. As a result, companies have ever-growing digital supply chains composed of software and platform vendors. This, in turn, has led to exponentially more data being recorded, processed, and transferred by vendors, substantially increasing a company’s attack surface.
These factors mean vendor risk is more prevalent than ever, and organisations must better prioritise managing and mitigating vendor risk. With this in mind, let’s explore the core principles of vendor risk management (VRM), its main benefits, and how a VRM framework enhances risk mitigation.
What is vendor risk management (VRM)?
Vendor risk management (VRM), or third-party risk management (TPRM), is the process of identifying, assessing, and managing security risks that accompany working with suppliers, software vendors, and every other company that provides your company with products or services. A VRM program aims to mitigate risk by creating an accurate vendor inventory, identifying the risks each presents, prioritising them by severity, and implementing the required policies and controls.
Meanwhile, a vendor risk management framework is a collection of documented processes, guidelines, and best practices for implementing a VRM program. By providing an organisation with a structured approach for implementing risk mitigation policies and controls, risk management frameworks help reduce supply chain vulnerabilities and strengthen the company’s overall security posture.
Why is vendor risk management important?
To successfully provide your company with products and services, your vendors need varying access to your systems, applications, and data. Depending on the nature of your relationship with a vendor, this may include access to critical systems and sensitive data.
This introduces your company to additional risk in two ways: firstly, it increases the number of people with access to organisational assets, increasing the chance of data or infrastructure being stolen or compromised. Secondly, if a vendor has poor security practices, they put your systems and data, to which it has access, at risk. In essence, their security vulnerabilities become your vulnerabilities, increasing your risk exposure.
Additionally, vendors expose your company to different types of risk, which must all be understood and addressed by your vendor risk mitigation program. These include:
Security risk: this includes unauthorised access, malware infections, and hardware theft
Data risk: this encompasses any way data can be stolen or compromised, including exfiltration, deletion, exposure (intentional or accidental), etc.
Compliance risk: if vendors engage in practices that are non-compliant with your company’s regulatory requirements, you could be liable for any consequences.
Operational risk: this refers to any disruption to your regular business activities, e.g., if a vendor is unable to provide you with a service that delays or prevents you from serving your customers
Insider risk: any risk factors originating inside the company, e.g., a disgruntled employee damaging IT infrastructure.
Financial and reputational risk: if the realisation of any of the above risks results in negative consequences for your customers or other supply chain partners, it could have financial and reputational repercussions for your company. In the case of a data breach, for example, you may be required to pay compensation to affected parties. Similarly, non-compliance with data privacy legislation and regulations, such as GDPR and PCI DSS, can carry financial penalties.
The reputational consequences accompanying the financial ones can be more wide-reaching and linger far longer. Security events erode your customers’ confidence in your ability to secure their data, causing them to take their business elsewhere. Worse, the more severe the security incident and the longer it takes to contain, the more attention it’ll receive.
What are the benefits of a vendor risk management framework?
Now that you’ve furthered your understanding of vendor risk management and why it’s important, let’s examine the main benefits of using a VRM framework.
- Increased risk awareness: by identifying and assessing vendor risk, you gain a greater and more accurate understanding of your company’s risk profile.
- Improved risk management: by being aware of vendor risk factors, you’re now in a position to prioritise and mitigate them, reducing your risk exposure.
- Increased compliance: processes for enforcing compliance standards and identifying compliance gaps make it easier to meet required regulatory requirements.
- Faster incident response: proactively identifying risk factors enables you to develop response and remediation strategies ahead of time, which you can implement when vendor-related incidents occur .
- Enhanced threat intelligence: the insights gained from risk assessments and incident response improves your knowledge of emerging threats and how to defend against them.
- Cost reduction: by accelerating the implementation of your vendor risk management program, frameworks save time and resources, which ultimately reduces costs.
How to create an effective vendor risk management framework
Let’s explore the main steps required to create a vendor risk management framework.
- Define objectives: the initial step is establishing what the framework should achieve and its scope, i.e., types of vendors, level of risk tolerance, etc. This is where you define the framework’s expected outcomes, how you’ll measure its success, and how it fits in with your overarching risk management strategies and organisational objectives.
- Establish risk assessment procedures: this refers to evaluating vendor risk, which includes identifying and cataloguing risk factors before prioritising them according to severity and potential impact. Subsequently, vendors can be grouped according to their risk profile, e.g., low – high, a 1-5 scale, etc., with the appropriate procedures, policies, and controls applied to each group.
- Determine compliance requirements: this first involves understanding the legislation and regulations that apply to your company, e.g., industry and regional and how to achieve compliance. Subsequently, you can determine processes for enforcing compliance requirements with vendors, provisions to place in vendor agreements, and controls for detecting gaps in compliance.
- Develop a vendor onboarding process: how you’ll select and assess new vendors. This involves creating a third-party risk management checklist that details the steps taken to assess a vendor’s current security posture, ability to meet compliance needs, and other required due diligence.
- Create vendor risk mitigation strategies: at this stage, security teams should implement the necessary policies and controls to best mitigate the risks identified during the assessment. This includes determining the mitigation measures vendors must implement, specifying the appropriate performance metrics, and setting forth the contractual provisions to hold vendors accountable.
- Create incident remediation strategies: subsequent to implementing risk mitigation policies and controls, you’ll need incident response plans to minimise the impact of vendor-related security events, like data breaches, when they occur. This includes outlining remediation steps, communication protocols (including when a vendor must inform you of an incident), tools and technologies, roles and responsibilities, etc.
- Establish a vendor risk management committee: your organisation’s VRM committee is responsible for implementing the framework and maintaining your vendor risk management program thereafter. The committee should be composed of representatives from different departments and of varying seniority, including IT, operations, procurement, finance, and legal, as well as board members, to ensure C-suite support.
- Develop a continuous monitoring and review process: implement the required procedures and solutions to enable the continuous monitoring of vendors. This process must allow you to monitor and respond to security events, identify compliance gaps, and assess vendor performance. Subsequently, the insights gained from real-time monitoring will allow you to periodically review and refine your risk management framework.
Ultimately, how you design your vendor risk management framework should be based on your company’s risk profile and tolerance, compliance needs, business processes, the type of vendors you work with, and overall risk management strategy.
Creating a vendor risk management checklist
When preparing to engage with a new vendor, your organisation must perform a certain amount of due diligence to assess a vendor’s suitability and fit within your risk tolerance parameters. A vendor risk management checklist provides a systematic and repeatable way to assess and manage the potential risks of working with additional third parties.
Although your VRM checklist should be tailored to your company’s security and compliance needs, risk profile, vendor inventory, etc., here are some key points to evaluate during the vendor risk assessment process.
Conduct background checks
The first item on any vendor risk management checklist must be performing thorough background checks on a prospective vendor. These checks offer an efficient filter because if the vendor doesn’t clear them, performing security assessments won’t be necessary. These background checks could include:
- Determining they have the correct licenses and appropriate insurance, e.g., liability coverage
- Confirming the vendor is financially solvent
- Obtaining references from the vendor’s other clients
- Reading independent online reviews and testimonials
Perhaps the most integral part of a VRM checklist is the vendor security assessment; so much so, in fact, that VRM checklists are often referred to as vendor risk assessment checklists.
This security assessment will determine:
- The vendor’s current security posture controls
- What must they do to meet your security standards
- Contractual provisions to include to ensure they implement and maintain the required security policies and controls.
One of the most common parts of a vendor assessment is a security questionnaire – which the vendor is responsible for completing themselves. Much like every aspect of the VRM checklist, and risk management framework in general, the questionnaire should be tailored to your security needs. You may also elect to tailor questionnaires to the vendor.
Typical security questionnaires enquire about the vendor’s:
- Overall security practices: the security measures the vendor has in place, such as:
- Access control (password policies, MFA, Zero Trust, etc.)
- Application security
- Security incident history: analysing the vendor’s history of security breaches and their track record of remediation and continuous improvement incident response capabilities: which tools and technologies they employ
- Physical security: what information security measures do they have on their physical premises, e.g., offices, warehouses, data centres, etc.?
- Decommissioning protocols: how they dispose of obsolete hardware (that could contain your data)
- Security awareness training: whether they invest in cybersecurity awareness for their staff
- Vendor risk management program: are they mitigating their own third-party risk?
To accompany the questionnaire, it’s best practice to request particular documentation as evidence from vendors to confirm their claims about their security posture, such as cybersecurity architecture and incident response plans, security policies, and audit reports. RiskXchange makes it easy to upload and store vendor documentation securely within RiskXchange Platform. More importantly, a security questionnaire is only one method of assessing vendor security, with others including:
- Site visits and evaluations
- Conducting your own security audits
- Enlisting a risk management service to work directly with vendors to accurately determine their security posture.
Compliance readiness assessment
Although a vendor’s ability to comply with your company’s regulatory requirements is often determined during their security assessment, a third-party’s compliance readiness could be so vital that it warrants its own consideration. The compliance readiness assessment typically involves:
- Determining which compliance requirements the vendor is subject to and the procedures and controls they have in place to meet them
- Requesting compliance audit certifications, e.g., ISO, NIST, or SOC2
- The measures they’ll have to implement to achieve your compliance standards and the contractual provisions you’ll need to include to ensure they implement and maintain them
Identifying fourth-party vendor risk
Each of your vendors will have their own supply chain network – which means they also have their own vendor risk. Subsequently, this becomes your fourth-party risk, which must also be identified and assessed as part of your vendor risk management framework.
At the very least, you should know:
- Who your fourth-party vendors are
- The products and services they provide your vendor
- Their security and compliance posture
To acquire this information, you must ask vendors for:
- A list of vendors who have access to your data
- A recent security risk assessment for each vendor (that they should have if they have their own VRM framework)
- Documentation that supports their assessments, i.e., incident response plans, compliance certification, etc.
Create vendor service contracts
At this point, you’ll have accurately assessed if the vendor can meet your required security and compliance levels and can draw up a service contract. Terms to be set out in the contract regarding risk include:
- Identification and allocation of risk: the risk the vendor assumes and its liability
- Service level agreements (SLAs): how you’ll measure their risk mitigation performance and the benchmarks it’ll need to reach your security and compliance needs
- Renewal requirements: conditions under which the vendor relationship will continue
- Termination requirements: conditions under which the vendor relation will cease. From your company’s perspective, this means outlining how long vendors have to improve performance before termination. You must also include conditions for immediate termination, i.e., a security incident. However, this works both ways and needs to detail how the vendor can end the relationship, as well as their obligations, e.g., data disposal.
Vendor risk management framework best practices
To round things off, here are some best practices to guide the development of your vendor risk management framework and overall program.
Maintain an accurate and up-to-date vendor inventory
Implementing a comprehensive vendor inventory system is essential, composed of mechanisms to identify existing vendors and record the appropriate information from new vendors. This involves creating a database, defining a company-wide format for vendor records, and establishing processes for gathering and recording vendor information. Your vendor inventory should also extend to fourth-party vendors, as identified during the security assessment.
An up-to-date and accurate vendor inventory enables better identification and assessment of risk factors; this allows security teams to group vendors by risk severity for more efficient mitigation strategies.
Develop business continuity and disaster recovery plans
As part of your incident response and remediation strategies, developing business continuity and disaster recovery plans for vendor-related security events is crucial. Create disaster recovery strategies for the risk factors with the highest potential impact, as identified during risk assessments.
Similarly, you need to develop contingency plans for when a vendor suffers a security breach that renders them non-operational. This requires:
- An accurate inventory of all the products and services supplied by vendors
- Knowing which are most crucial to your business continuity
- Which vendors can provide a viable alternative
- Establishing how quickly you can replace a vendor in the event of a serious security incident
Utilise vendor risk management software
VRM software, like RiskXchange’s 360-degree VRM platform, helps optimise the implementation of your framework and program by automating various vendor risk management processes. This includes conducting security assessments (automatically creating, issuing, and analysing results from vendor questionnaires), processing supporting documentation, and other due diligence activities. VRM software can also assist in tracking vendor performance, continuous monitoring, and generating stakeholder reports.
Establish a three-tier governance system
In addition to forming a VRM committee, its governance best practice to establish “three lines of defence” comprised of different personnel who own and manage the vendor risk within your organisation.
- The first line of defence consists of those within your company that directly communicate with the vendors: establishing and maintaining vendor relationships, such as operational and procurement personnel. This also includes security and risk management teams that define the security and compliance aspects of vendor contracts and monitor risk mitigation performance.
- The second line of defence oversees and assists the first line in maintaining VRM best practices. Subsequently, it also consists of personnel responsible for developing your company’s VRM framework and conducting vendor security assessments.
- The third line of defence supports the first and second, providing independent evaluations of their effectiveness in managing vendor risk and complying with the appropriate policies and guidelines. The third line also conducts internal audits and assurance activities, while regularly reporting their evaluations to key stakeholders to keep them apprised of the progress of the VRM program.
Ongoing monitoring and improvement
An effective vendor risk management framework must constantly evolve and improve to ensure mitigation against recurring and emerging threats. This is achieved through continuously monitoring vendors for risk factors, measuring the performance of mitigation controls, and analysing incident response logs to identify improvements.
Similarly, being proactive about vendor security and compliance performance is important. Instead of point-in-time assessments at the start of the vendor engagement and at contract renewal, periodically conduct security assessments, e.g., sending questionnaires over the contract period. This can be addressed with a “right to audit” contract provision detailing your ability to request a security assessment, what it will entail, etc.
Accelerate your vendor risk management program with RiskXchange
RiskXchange can help your company efficiently identify, assess, and manage vendor risk and strengthen its entire security posture. We can work directly with your third-party vendors to accurately determine their security practices and suitability for engagement.
Vendor risk management FAQs
What is a vendor risk framework?
A vendor risk framework is a set of procedures, guidelines, and best practices that provide a blueprint for a company to implement their own vendor risk management /(VRM) program. The purpose of a VRM program is to identify and, ultimately, mitigate risks that accompany working with third-party vendors.
What is the role of vendor risk management?
The role of vendor risk management is to provide a company with a structured methodology for proactively reducing third-party risk. In contrast, a lack of vendor risk management procedures leaves an organisation vulnerable to various supply chain attacks.
How do you identify vendor risks?
To identify vendor risks, you must first take a comprehensive inventory of all the vendors within your supply chain network, what they provide your company, and which of your systems and data they can access. From there, you must assess each vendor’s potential vulnerabilities and how the extent of their impact on your company if exploited.