Vendor risk management deals with vulnerabilities that vendors and third parties bring to your business. But how can you mitigate these risks?
What Is Vendor Risk Management?
Vendor risk management (VRM) is a process of assessing, monitoring, and mitigating risks associated with vendors that are providing services or products to an organization. The goal of VRM is to ensure that the organization is protected from potential losses caused by the unfavorable performance or conduct of the vendor and to maintain an acceptable level of risk. The process requires a comprehensive vetting of vendors and the implementation of policy, procedures, and protocols to ensure compliance with all contractual requirements. The process also involves the performance of regular reviews and audits of the vendor’s performance to ensure they are meeting the organization’s standards.
Why Is Vendor Risk Management Important?
Vendor risk management is important because it helps organizations identify, assess, and address all the risks associated with their vendor relationships. It helps organizations to understand and manage the risks created by third parties (vendors, contractors, and suppliers) in order to reduce any potential disruption to their business operations and processes, as well as to mitigate or avoid any potential financial and reputational damage. Vendor risk management also helps organizations to comply with industry regulations, as well as to protect their customers and other stakeholders.
What Are the Different Types of Vendor Risks?
Vendor risks refer to a range of potential issues that can arise from engaging with them. Some of the most common types of vendor risks include:
- Financial Risks: The risk posed by a vendor’s financial health or ability to complete a project.
- Security Risks: The risk posed by a vendor’s ability to maintain security standards, including data privacy and protection of intellectual property.
- Quality Risks: The risk posed by a vendor’s ability to deliver products or services that meet their obligations.
- Reputational Risks: The risk posed by a vendor’s reputation, including their past performance and public perception.
- Regulatory Risks: The risk posed by a vendor’s ability to comply with relevant laws and regulations.
- Delivery Risks: The risk posed by a vendor’s ability to deliver within agreed timelines and budgets.
- Relationship Risks: The risk posed by a vendor’s ability to maintain a strong partnership with your business.
Why Does a Business Need Vendor Risk Management?
Vendors are a part of doing business. Complex enterprise organizations increasingly spread their offerings and services across multiple industries, and in doing so, require extended capabilities to meet the demands of their collective markets.
Accordingly, the modern digital marketplace has seen the increased reliance on managed service providers that offer software and solutions for security, payment processing, cloud storage—nearly any potential need a business might have.
Alongside these managed service providers (MSPs), internal functions like identity management and authentication, security operations centers, and network management have also been outsourced traditionally to vendors.
With vendors handling more complex and critical functions, it is crucial for businesses hiring vendors to assess the risk they may introduce. These risks can include the following:
- Security Risks: Unsecured vendor technology, or even unintended breaches, can impact the vendor and all of their clients. Recent attacks on service providers demonstrate how interconnected systems open security holes.
- Operational Risks: Dependence on vendors can leave enterprises open to problems with operational reliability. If a vendor’s systems fail, it can leave all of its clients without important services. For example, suppose a retailer relies on a payment processor like Square, and those services go down. In that case, that retailer can find themselves without the capability to sell products.
- Compliance Risks: Several industries, like healthcare and defense contracting, involve rigorous regulations that businesses must comply with. If these businesses work with vendors that aren’t themselves compliant, it can prove disastrous for that business. This means that these businesses must work with vendors to demonstrate and maintain compliance in their systems.
- Reputational Risks: Who a company works with can impact their reputation. Working with a vendor with a less than savory or reliable reputation can likewise damage the reputation of their clients. If a cloud service provider has a legacy of breaches, it won’t instill confidence with customers of businesses using that cloud service.
Therefore, vendor risk management is an organizational effort to assess, understand, and control these risks as it relates to their vendor relationships.
Often, the terms “vendor” and “third party” are used interchangeably in risk management. While there are some industry-specific differences between these terms, generally speaking, they refer to the same type of risk management.
How Does Vendor Risk Management Affect the Initial Vendor Selection Process?
When an organization is considering bringing on a new partner to provide a value-added product or service, the organization must consider and evaluate vendor risk and what steps must it take to manage vendor risk. Vendor risk management affects the initial vendor selection process by enabling organizations to identify and mitigate potential risks associated with the vendor. Organizations can identify potential risks and develop methods for managing them before committing to a vendor and entering into a contract. These risks include the financial stability of the vendor and the security of the products or services they offer. Additionally, organizations can assess the vendor’s reputation, credibility, compliance, and regulatory requirements. By considering these factors in the selection process, organizations can better ensure they are selecting a vendor that meets their needs and is a suitable fit for the organization.
How to Monitor and Manage Vendor Risk
Businesses can effectively monitor and manage vendor risk by consistently assessing and evaluating vendors, taking a proactive approach to secure vendor relationships, and putting in place comprehensive vendor management processes. This can be done by conducting due diligence on the vendor’s qualifications, compliance and security protocols, regularly reviewing contracts, and verifying that any changes or updates meet the desired standards. Additionally, the use of automated technology can help businesses monitor vendor performance and ensure that vendor activity is properly tracked and recorded. Finally, businesses should engage with vendors on a regular basis to share information and feedback on performance and discuss any concerns that may have arisen.
How to Automate Vendor Risk Management
- Establish a vendor risk management process: Establish a policy that outlines the process and procedures for vendor risk management. Make sure it includes which groups and stakeholders are responsible for different aspects of the process.
- Monitor vendors: Monitor vendors regularly for changes in their security posture and other areas that may indicate more risk to your organization.
- Analyze risk: Analyze the risk posed by each vendor. Assess their security posture, compliance requirements, financial stability, and more.
- Re-assess risk: Re-assess the risk posed by each vendor on a regular basis. This should be done whenever there is significant change in the vendor or their services.
- Create and manage contracts: Ensure contracts are well-crafted with appropriate provisions for security and compliance.
- Automate vendor risk management:Automate the vendor risk management process by using technology such as automated email notifications, dashboards, and workflow processes.
What Is a Vendor Risk Management Maturity Model (VRMMM)?
A vendor risk management maturity model (VRMMM) is a framework that provides organizations with a set of metrics to assess their vendor risk management (VRM) practices. The model can help organizations gain better visibility into their current risk landscape and identify areas of improvement. It also provides a roadmap for organizations to continually refine their VRM capability and become more resilient to vendor-related risks. The VRMMM is composed of five key levels, which are: awareness, proactive, integrated, strategic, and optimized. Each level outlines a set of attributes and practices a company must have in place when managing vendor relationships. Companies can use the model to assess their current capabilities, set goals, and track progress over time.
Commonly, the VRMMM includes several maturity levels to measure capabilities:
- Start-up/No Vendor Management: An organization does not have any vendor risk assessment implemented at this maturity level (typically associated with new businesses).
- Ad Hoc Activity: Vendor risk activities are implemented ad hoc based on different situations without strategies or plans, although the organization might consider some strategies.
- Roadmap and Ad Hoc Activity: Ad hoc activities continue, but their security and vendor management have conceived and approved a vendor management roadmap.
- Defined and Established: Management plans are defined, implemented, and partially underway in an organization but not yet fully implemented.
- Fully Implemented: Vendor management activities are in place and operational, including reporting and compliance integration.
- Continuous Improvement: Organizations monitor vendor risk to optimize strategies and management continuously.
What Are Appropriate Best Practices When Selecting a Vendor?
Even with a VRMMM system in place, organizations must vet potential third-party vendors before entering into relationships with them. Additionally, businesses must continually assess these relationships even after the contract has been signed.
To perform due diligence with vendors and maintain best practices, organizations should consider following these suggestions:
- Develop a Risk Management Program: Before entering into any vendor relationship, have programs in place to define policies, procedures, and business goals around vendor relationships. It is impossible to develop criteria to evaluate vendors without establishing those criteria beforehand.
- Set Up Contract Requirements: Have a standard vendor contract in place that covers risk management requirements, including mandatory reporting, monitoring, and assessments. These requirements can also include regularly reassessing contract terms based on changing system configurations, new infrastructure, or shifting business models.
- Conduct Background Checks: Always evaluate a vendor across all risk categories. This can include studying news stories and industry reporting, consulting with current and previous vendor clients, requesting reports over financials and compliance standards, and conducting coordinated evaluations of employees and technologies.
- Define a Selection Process: Have documentation and language ready for requests for proposals, including policies and metrics to compare potential vendors. These requests for proposals should also include clear outlines of the risk assessment and background checks that these vendors will be expected to undergo.
- Have Breach Response Plans in Place: If working with technology vendors, the potential for a breach is always present. Don’t wait for vendors to solve their problems, but have a breach response and remediation plan in place in case disaster strikes.
- Implement Continuing Audits: Don’t leave security to chance. Vendor management should work with the latest information on hand, conducting regular reporting and audits. Audits can include compliance and technical assessments and automated vulnerability scans. Furthermore, require vendors to provide annual reporting on their systems and provide more regular reports when system technologies and configurations change. An organization can also implement vendor questionnaires completed by the third party to streamline some aspects of risk assessment.
- Assign Skilled Leaders to Vendor Management: Most organizations have dedicated management or executives assigned to areas like finance, marketing, and information security. Create and staff a vendor management executive who can own vendor relationships and the risk assessment process.
Managing Vendor Risk : A Critical Step Toward Compliance
Vendor risk management is a critical step to becoming compliant with industry regulations and best practices. It involves assessing vendors’ abilities, policies, and procedures to ensure that all products and services are secure and compliant with regulations. Vendor risk management can help organizations identify, mitigate, and manage risks associated with vendors, ensuring that their data and systems remain secure and compliant.
Organizations must have a comprehensive risk assessment process to identify and monitor potential risks associated with vendors, both pre- and post-contract. During the pre-contract stage, organizations should identify and assess vendor qualifications, conduct a due diligence review, and assess the impact any potential partnership could have on operations. Documentation of the assessment process and any findings should be kept for review and in case of future disputes.
During the post-contract stage, organizations should conduct onboarding and ongoing monitoring of all vendors, including reviews of compliance with contractual obligations, security, and privacy requirements. Routine assessments of vendor solutions should also be conducted to ensure that they are providing the agreed level of service and still meeting the organization’s risk requirements. Organizations should also have a process in place to address any problems or issues that are identified, such as vendor noncompliance or inadequate security measures.
Organizations should also be sure to review their vendor risk policies and procedures regularly, as they need to be kept up to date with industry developments and changing regulations. Vendor risk management is not just about complying with industry regulations, but also about protecting sensitive data. Through effective risk management, organizations can ensure that their data remains secure and that the vendors they work with are meeting their commitments.
Compliant, Secure Content Management With Kiteworks
Vendor management presents a critical challenge for many organizations. Kiteworks, a provider of third-party cloud-based content and data management, makes these tasks easier to accomplish. With advanced reporting and auditing capabilities, secure third-party collaboration tools, and comprehensive automation and analytics, users of Kiteworks can monitor security and compliance issues with any collaborator or vendor.
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