Vendor risk management includes various potential risks that your company may face when doing business with third-party vendors, including financial, operational, reputational and regulatory.

As technology and communications allow businesses to expand their supply chains, the complexity of vendor risk management increases. Your business is likely working with more vendors than ever before, and each of those vendors is going to pose some level of risk to your organization. Do you feel confident that you understand those risks, or that you have them under control?

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

Vendor Risk Management: The Basics

Third-party risk management programs need to focus on multiple layers of protection. One significant risk is security. Vendor security risk management is a strategy designed to limit the number of threats, vulnerabilities, and weaknesses your organization faces due to the vendors in your supply chain. A vendor is typically a third-party organization that sells a product, service, or piece of equipment that your business needs to operate.

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Each 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.

The Cycle of Vendor Risk Management

Vendor security risk management is an ongoing process, and one you’ll execute with every vendor you bring into your supply chain. Typically, the process looks like this:

• Step 1:  Analysis – The company identifies the inherent risk of the relationship and the level of due diligence to be performed. Accordingly, the company evaluates the third party’s security posture and performs a gap analysis.

• Step 2: Engagement – The company and third party collaborate on how to remediate gaps.

• Step 3: Remediation – The third party fixes the cyber gaps.

• Step 4: Approval – The company approves the third party or rejects it based on risk tolerance.

• Step 5: Monitoring – The company continues to monitor the third party to detect any cyber gaps.

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.

Why do you need to manage your 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.

What are the benefits of vendor risk management?

A good vendor risk program will ensure that vendors are paid on time and for their products or services. It’s easier to address potential risks than to deal with them after they occur. Accountability for both the company and vendor is understood.

How does vendor risk management protect my organization?

Vendor security risk management helps organizations protect themselves against a variety of different threats, including operational risk, financial risk, legal risk, and reputational risk.

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 you’re going to be successful with a vendor risk management strategy, 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.

Effective vendor risk management must hold up to regulatory scrutiny. This begins with understanding industry regulations, strategic objectives and acceptable risk levels. Make sure the people in charge of vendor risk management have the complete picture.

Do you need assistance conducting vendor security risk management in your organization? Sign up for a free demo of Panorays today, or contact us to learn more.

This post was originally published on May 10, 2020 and has been updated to include fresh content.