Businesses are becoming increasingly reliant on third parties for critical systems. As these supply chains expand, the complexity of third-party risk management increases. According to Gartner, the vast majority (84%) reported operational disruption in their services due to a third-party incident. Managing these risks is proving increasingly challenging, as they are high volume, heterogenous, and present varying levels of risk to your organization.

With vendor risk management, however, you’ll take a more proactive role, identifying and analyzing your prospective vendor partners and mitigating your potential risks as much as possible.

What is Vendor Risk Management (VRM)?

Vendor risk management is a strategy designed to limit the number of threats, vulnerabilities, and weaknesses your organization faces from your business relationships with the goal of mitigating risk and the disruption of business operations. A vendor is typically a third-party organization that sells a product, service, or piece of equipment that your business needs to operate.

These third-party risk management programs need to focus on multiple layers of protection. One significant risk is security. 

In addition to posing financial, operational, regulatory and reputational risk, each third-party vendor, upon being connected to your organization, is going to carry some level of cybersecurity risk. If they fail to uphold their end of the deal, or if they’re the victim of a cyberattack, it could impact your organization directly. An effective risk assessment, as part of a greater vendor risk management plan, strives to identify these potential failure points long before they become a problem and fix them.

5 Steps to the Vendor Risk Management Process

Having a properly detailed process for managing vendor risk is crucial, especially if you’re trying to facilitate greater collaboration across teams in your organization. Vendor security risk management is an ongoing process and one you’ll execute with any future vendors you bring into your supply chain. Although the exact steps might vary between organizations, the general ideas are the same.

The typical process looks like this:

1) Analysis

First, vendor inventory is taken. This identifies every vendor and its relationship to your business. Only after this can the company conduct a vendor risk assessment, identifying the inherent risk of the vendor relationship and the level of due diligence to be performed. At this point, the company can evaluate the third party’s security posture and perform a gap analysis.

2) Engagement

The company and third-party collaborate on how to remediate gaps. This may include implementing a security framework relevant to your industry. For example, healthcare organizations must comply with HIPAA; any vendor that deals with European clients must comply with GDPR. Design your third-party risk assessment so it addresses compliance requirements and regulatory requirements for the industry with the goal of strengthening the business relationship with potential vendors.

3) Remediation

The third-party fixes the cyber gaps. This may include establishing different security controls such as multi-factor authentication, limiting privileged access of data to only those who need it, and data encryption. It may also include sending security questionnaires to understand the vendor’s current compliance policies and procedures. In addition, organizations should ensure that the vendor contract includes clauses related to data protection and compliance with your organization’s vendor risk management policies, as well as causes for vendor relationship termination and secure offboarding.

4) Approval

The company approves the vendor relationship or rejects it based on risk tolerance, whether or not it has met compliance with industry regulations and how critical the service provider is for your organization’s business operations. Approved vendors must be documented, along with the reasons for the approval. (If vendors are rejected, this should also be documented, along with the reasons for the rejection).

5) Ongoing Monitoring

Organizations must continuously monitor the third party to detect any cyber gaps along the entire vendor management lifecycle. This is an essential and proactive approach to emerging threats. This includes the offboarding process to ensure that sensitive data shared with the vendor is no longer accessible to the vendor or deleted.

Why Organizations Should Manage Vendor Risks

Companies face risks when they engage in third-party services. If you’re working with vendors handling confidential, sensitive, proprietary, or classified information, they may be especially risky. Third-party vendors who don’t follow best practices can be a big risk even if your own internal security measures are strong. Vendor risk management provides a documented strategy that enables your organization to streamline the process.

Benefits of vendor risk management include:

  • Mitigate third-party risk. An effective vendor risk management program means that your organization can more accurately assess the risk of any new vendor, reducing your organization’s risk exposure over time.
  • Minimize operational disruptions. A clear process for vendor risk management ensures that each component of your organization knows its role in evaluating third-party risk so that no processes are overlooked or skipped. This ongoing, proactive approach to vendor risk helps your organization stay ahead of any breach, attack or security incident, ensuring business continuity.
  • Better ability to meet regulatory compliance. A streamlined process for onboarding vendors that includes due diligence makes it easier to evaluate vendor compliance and decide whether or not to enter into a new business relationship or employee measures to remediate the risk.
  • Greater transparency. Since information on vendor risk is open and available across the organization, executive leadership can work together with your security and business teams to evaluate the potential impact of risk across the entire vendor ecosystem.
  • Increase operational efficiency. Automating the vendor risk management process means faster risk assessments and optimized workflows, allowing for greater collaboration across teams. A good vendor risk management program also ensures that vendors are paid on time and for their products or services.
  • More effective use of time and resources. It’s easier to address potential risks than to deal with them after they occur. A strategic and detailed approach to the vendor risk assessment process also allows your organization to focus on business growth, rather than having to stop in the middle of their current projects to focus on onboarding, compliance, or managing risks.

How Vendor Risk Management Protects You

Vendor security risk management is designed to protect your organization from a number of independent threats, including:

  • Operational impact. A security flaw in your vendor could lead to an unplanned disruption in your business’s operations. Depending on the scale, it could result in anything from a minor annoyance to an organization-wide failure.
  • Financial impact. The financial impact of a data breach can be devastating. For example, the Target data breach from 2013, which was the result of a third party failure, cost the company more than $202 million, not including the damage to the brand.
  • Legal impact. If your industry or business is subject to specific legal requirements, you’ll be responsible for ensuring that all your third-party vendors are also compliant with those requirements. If they fail to remain in compliance, you could be held liable for any damages that result.
  • Reputational impact. If your company is embroiled in any kind of cybersecurity issue or vulnerability, it could negatively impact your brand for years, if not decades to come—even if one of your vendors was the one responsible for it.

Best Practices for Vendor Risk Management

If your organization is going to be successful with your vendor risk management, you’ll need to pay close attention to these areas:

  • Specific goals and directives. What are you hoping to achieve with your vendor risk management strategy? There are several areas of potential vulnerability in your vendors and in your business, but which ones are your biggest concerns or biggest priorities? What steps will you follow to review new vendor candidates? How will your strategies evolve over time?
  • Context-based relationships. Your vendors should be assessed based on their specific business and technological relationship with your company. For example, a vendor that connects to your company’s IT systems should be treated as more of a risk than a vendor that delivers paper.  
  • Continuous monitoring. Since new technologies are constantly being introduced, you will need to make sure you’re monitoring your vendors on a constant basis; even a temporary decline of vigilance can create a blind spot.
  • Engagement.  It’s best to treat vendor risk management as a kind of partnership between you and your vendors. Accordingly, you should strive for engagement; request your vendors to be open and honest about how they’re operating. Let them know what your standards are (and why they’re your standards), so you can both learn and benefit from the arrangement.
  • Legal prioritization. It’s important to fully understand the legal consequences of your actions and the regulatory standards that you must meet in your vendor relationships. For many businesses, regulatory compliance is the top priority for any vendor risk management strategy.

Your Vendor Risk Management Checklist

When developing your vendor risk management process, it is essential to have a basic checklist of questions to ask internally and to your vendors. Please note that this list is only intended as a starting point, and should be customized based on your organization’s risk appetite, the level of risk posed, and according to your type of vendor relationship.

Questions should include:

  • What are the current access controls used by the vendor?
  • Is the vendor invested in data encryption, data security and information systems controls?
  • Does the vendor have an incident response plan in place? Do they have a data recovery plan?
  • Has your organization conducted a thorough examination of the vendor’s financial statements, including additional risks along the supply chain such as their subsidiaries’ risk history?
  • What types of certification does the vendor have that is protecting data? For example, does it have ISO 27001 certification or SOC 2 certification?
  • Has the vendor been in the news recently for bankruptcy, legal battles, or a sudden resignation of the CEO?
  • Is the vendor on a sanctions list or has any of their personnel been listed by law enforcement or on a politically exposed persons (PEP) list?
  • Does the vendor have ongoing cybersecurity awareness training with its executive and managerial leadership?
  • Does the contract include terms of payment, delivery dates, a statement of work, and security requirements for its vendors across the supply chain?
  • Does the vendor deliver its product or goods as scheduled? Does it receive payments from its customers on time?
  • Is the vendor willing to complete a vendor risk checklist or security questionnaire?

How Panorays Helps You Manage Your Third-Party Risk

According to IBM’s Cost of a Data Breach Report 2023, 82% of data breaches involved data stores in the cloud – whether private, public or multiple cloud environments. Almost half of these breaches (39%) occurred in multiple cloud environments, resulting in ever more damage than the average cost of a data breach at $4.75 million. Effective vendor risk management ensures that your vendors are holding up to regulatory scrutiny, especially when it comes to the sharing, storing, and processing of customer data.

Panorays assesses these third-party risks, conducting risk assessments of third, fourth, and n-th party vendors, giving you visibility of your extended supply chain. Its automated questionnaires ensure that third parties strictly adhere to relevant industry regulations such as NIST and GDPR. Its ongoing extended attack surface monitoring alerts you of any changes to your organization’s cyber posture, such as data breaches or unauthorized access.

Want to make sure your vendor risk management is effective? Sign up for a free demo of Panorays today, or contact us to learn more.


What is vendor risk management (VRM)?

Vendor risk management is a strategy that first identifies the financial, reputational, regulatory, and cybersecurity risks that a third party poses to your organization. It then proactively takes the necessary steps to mitigate those risks, according to the level of priority and your company’s risk tolerance. The goal of vendor risk management is to prevent operational disruption to your organization. VRM should be implemented before embarking on a new business relationship with your vendor and continue throughout the vendor lifecycle.

What is an example of vendor risk?

An example of vendor risk is regulatory risk. For example, if your payment processing vendor makes a small change to their infrastructure, it may suddenly fail to meet compliance and impact your organization. This is particularly true if you rely on this vendor for capabilities that help you meet compliance, such as data encryption, firewalls, or data breach detection software. Vendor risks can include more than one category, however. For example, along with regulatory risk, these small infrastructure changes can also pose a cybersecurity risk, as they may expose the organization to known vulnerabilities and a possible cyberattack or security incident. As a result, your organization may face legal and financial risks, as customers may hold you responsible for any damage that ensued from the attack. Your organization may also face penalties or fees for non-compliance.

What is a vendor risk assessment?

A vendor risk assessment evaluates the effectiveness of the security controls a vendor or third party has put in place to determine the residual risk it poses to your organization. After categorizing the risk as high or low risk, an organization can decide whether or not to become a business partner with this vendor. Vendor risk assessments are an essential element of managing third-party risk.

What are the five steps to the vendor risk management process?

The five steps to the vendor risk management process include:
1) Analysis. Vendor inventory is taken to identify all of the business relationships in your business and a vendor risk assessment is conducted.
2) Engagement. Your organization collaborates with the vendor to close any cyber gaps. This might include implementing a relevant security framework, depending on the vendor’s industry.
3) Remediation. Different security controls are put into place to remediate vendor risk.
4) Approval. The vendor relationship is approved, along with documentation of the reasons for the approval.
5) Ongoing monitoring. Vendor risks are continuously monitored along the entire vendor management lifecycle. This includes monitoring the offboarding process to prevent data from coming into the hands of unauthorized users.