What is Vendor Risk Management?

Vendor risk management (VRM) is a risk management discipline that focuses on identifying and mitigating vendor risks. VRM provides companies with visibility into the vendors they work with, how they work with them, and which vendors have adequate security controls in place.

 

VRM is a rapidly evolving discipline. Every day, businesses face new vendor-related security, privacy, compliance, and business continuity challenges. With the shift to working from home, digital transformation is increasing reliance on vendors (primarily cloud providers), making VRM a permanent, board-level concern. The goals of a vendor risk management program vary greatly depending on the company's size, jurisdiction, applicable laws, industry, and other factors. Having said that, there are numerous VRM best practices that apply to every business.

 

What is Vendor Risk Management? 

 

Vendor risk management (VRM) is concerned with the management and monitoring of risks posed by third-party vendors and suppliers of information technology (IT) products and services. VRM programs are concerned with preventing business disruption or financial and reputational damage caused by third-party products, IT vendors, and service providers.

 

Vendor risk management programs include a comprehensive plan for identifying and mitigating business risks, legal liabilities, and reputational harm.

 

VRM and third-party risk management are becoming an increasingly important part of any enterprise risk management framework as businesses increase their use of outsourcing. Organizations are delegating more of their business processes to third-party vendors and business partners in order to focus on what they do best. This means they must ensure third-party information security, data security, and cyber security are well managed. Third-party vendor cyber attacks and data breaches must be identified and mitigated.

 

While there are many advantages to outsourcing, if vendors lack strong security controls, your organization is vulnerable to operational, regulatory, financial, and reputational risk. Risks are being identified and mitigated by vendor management.

 

Also Read | Ways to Protect Cyber Attack Vulnerability

 

 

Why is Vendor Risk Management Important? 

 

Companies are increasingly outsourcing critical tasks to vendors, which has both advantages and disadvantages. While working with a third party can help you save money and run more efficiently, it also introduces risks. Recent events, such as the Covid-19 pandemic, the SolarWinds cyberattack, the Colonial Pipeline attack, and other ransomware breaches, have highlighted the importance of vendor-related risks. Regardless of industry, company size, or country, these events have affected millions of businesses and their third parties.

 

We increasingly rely on vendors to take over traditional in-house operations in modern business. Cloud productivity applications, marketing, storage, analytics, payment processing, and cybersecurity have all been effectively remodeled into outsourced services provided by industry experts.

 

That is not surprising. Many of us benefit from working with vendors because we don't have to field or maintain complex or specialized IT staff to handle or maintain niche functions. Furthermore, you can bring much higher levels of specialized expertise to your organization, whether it's for security, machine learning, cloud support, or any other critical business function.

 

Vendors come into contact with critical business operations and information because they fill these necessary niches for our businesses. This is why industries such as healthcare, which follow strict HIPAA regulations, have well-defined rules governing the obligations and requirements of vendors handling patient information.

 

However, this level of detail, security, and procedure should extend beyond the requirements of compliance. Working with vendors, even those with the best operational and logistical support, introduce risk into your business, such as the risk of a breach, inefficiency, or data loss or damage.

 

These dangers manifest themselves in several key areas, including the following:

 

1. Security: You rely on a vendor's security infrastructure. While this is cost-effective when done correctly, it also implies that a security threat to a vendor (or a vendor's client) can have an impact on your operations or data security.

 

2. Compliance: Depending on your industry, you must work with vendors who are in compliance. If they are not compliant or do not maintain compliance, you may face severe penalties, loss of operational capabilities, and a negative impact on your reputation.

 

3. External Infrastructure Reliance: If a vendor on which you rely fails, it can disrupt your entire business. Bugs, errors, or infrastructural issues can have a huge impact on productivity, and fixing the problem is frequently out of your hands.

 

4. Lack of Strategic Agility: Vendors are their own entity, with their own business goals and operational priorities, and they may make decisions that do not align with yours or your customers. If this occurs, your organization may be caught off guard and forced to scramble to fill the void.

 

VRM requires your organization to assess the players in charge of various functions in your business. In contrast to supplier risk management (where you must keep track of products and supply chains), many vendors will either work closely with your company or provide technology that will become an integral part of your business and will necessitate more in-depth analysis to manage.

 

Also Read | 8 Pillars of Risk Management in Cloud Computing

 

Types of Vendor Risks:

 

The following is a list of the various vendor risks that third parties can pose to your business:

 

1. Third-Party Legal Liability:

 

Sharing sensitive information with third parties carries numerous legal risks. For example, if your vendor's security is compromised and you lose your customers' personally identifiable information (PII) such as social security numbers or health care records, the law clearly states that you are liable — not your vendor. Alternatively, if you fail to specify security expectations in your vendor contract, you may be left with no legal recourse if your vendor compromises your data.

 

2. Risk of Third-Party Reputation:

 

Third-party vendor risk management is heavily reliant on reputation. Ask a lot of questions at the start of the vendor procurement process so you can weed out the companies you don't want to work with. You should also keep an eye on news feeds during the procurement process. After all, you'd want to know if a business associate was sued while you were working with them and how that might affect their performance of their contract with you. Don't forget about the reputational damage that could occur if your customers' sensitive information is stolen as a result of an insecure vendor.

 

3. Financial Risk from a Third-Party:

 

If a vendor has a poor financial record or track record, you'll want to know about it before entering into a business relationship. That is why many businesses conduct credit checks on their vendors. You should also seek references from other organizations that have previously done business with the third party in question. Before entering into a contractual relationship, you will be able to clearly evaluate the vendor's project plan and all of the various things they intend to do.

 

4. Third-Party Cybersecurity Risk:

 

Some of the risks posed by a vendor require periodic updates, while others are only relevant at certain points in a business relationship. If you've established a vendor's creditworthiness at the start of the process, for example, you'll probably feel quite confident about their financial standing throughout the rest of the process. This is an excellent example of how certain aspects of vendor risk management do not necessitate continuous security monitoring.

 

5. Operational Risk:

 

The possibility of a vendor's action causing an operational shutdown creates operational risk. It refers to the possibility of loss as a result of a vendor's ineffective or failed internal processes, people, controls, or systems. When vendors fail to deliver on their promises, businesses are often unable to carry out their daily operations. That is why you must develop a business continuity plan to reduce operational risk and conduct periodic vendor due diligence checks.

 

6. Strategic Risk:

 

This occurs when a vendor makes business decisions that are inconsistent with your company's strategic goals. Compliance and reputational risks can be influenced by strategic risks. They have become especially pressing as a result of rapidly changing business and market trends, as well as technological innovations such as the Internet of Things (IoT) and Big Data. Because key risk indicators (KRIs) provide valuable insight into vendor operations and processes, they enable businesses to effectively monitor strategic risk.

 

Also Read | Types of Financial Risks

 

 

How to Implement Vendor Risk Management Program?

 

It's time to map out each step of the process after determining the need for a comprehensive vendor risk management program guide 

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How to Implement Vendor Risk Management Program 

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Recognize your vendor's risk factors.

 

The first step is to develop a clear picture of the types of risks that a vendor may pose to your organization. During the due diligence stage, gather as much information as possible to help you build a risk profile for each vendor.

 

You can accomplish this by listing all of the vendors you work with and ranking them according to the threat each poses. Consider the level of access they may have to internal data or the ability of your organization to function if the vendor were to go down for an extended period of time.

 

During this stage, you should ask the following questions:

 

• What kind of information is shared with the vendor?

• How are we disseminating that information?

• Who has access to this information?

• How is that information saved?

 

Examine the appropriate security framework for your organization.

 

Following the identification of the risks that vendors pose to your organization, it is time to review the security framework that is most relevant to your business. For example, if your vendor accepts debit or credit card payments, make sure they follow the Payment Card Industry Data Security Standard (PCI DSS). If you work in the healthcare industry, you'll want your vendor to be HIPAA compliant.

 

Create contracts for your suppliers.

 

You'll want to create contracts with your legal team that outlines the specifics of your business relationship and the compliance expectations you have for your vendors.

 

Companies frequently use templates when writing contracts for vendors, but it's critical to tailor the contract's specifics to your vendor and the relationships you both share.

 

Form a vendor risk management team within your organization.

 

Dedicating a team to work with vendors can improve communication and streamline ongoing vendor relationship monitoring. Hiring experienced risk managers or training current employees on vendor risk management practices is frequently required.

 

This team should be in charge of setting up the vendor selection process, which includes creating documentation for selecting future vendors, gathering vendor information, and establishing ongoing reporting processes. A vendor reporting process could include identifying and quickly resolving any vulnerabilities.

 

In Conclusion, Your organization may face significant challenges as a result of the vendor risk management process. Risk assessments and ongoing vendor monitoring can necessitate employees spending countless hours sifting through data.

 

Not only will automating this process saves your organization time, but it will also speed up the process of assessing a vendor's risk profile and onboarding new vendors. And, given that 60% of organizations now work with more than 1,000 third-party vendors, reducing the risk of human error is another appealing benefit of vendor risk management automation