In a threat landscape where organizations outsource vital business processes that leave data security in the hands of third-party information technology, vendor risk management is increasingly important.
A 2022 KPMG study found that 73% of survey respondents experienced at least one significant disruption caused by a third party over the past three years.
A vendor risk management program in place provides your organization with an accessible, consistent, and scalable framework for monitoring and managing vendor risk exposure.
It also allows organizations to proactively identify and remediate potential risks and ensure business continuity in the event of a cyber attack.
This article details how to implement an effective vendor risk management program using risk management best practices.
What is Vendor Risk Management (VRM)?
The main risks vendors bring to an organization include:
- Cybersecurity risk
- Operational risk
- Legal, regulatory, and compliance risk
- Reputational risk
- Financial risk
What Is A Vendor Risk Management Program?
An effective third-party risk management program should cover all stages of the vendor lifecycle, including vendor risk assessments, vendor onboarding, and vendor offboarding, and outline an incident response plan.
A VRM program should also include frameworks to ensure vendors meet internal and regulatory compliance requirements.
Why is a Vendor Risk Management Program Important?
VRM programs are important because they enable organizations to identify, manage, and mitigate cybersecurity risks across the entire vendor ecosystem, including third and fourth-party risks.
Many regulations such as PCI DSS, HIPAA, NIST SP 800-171, and ISO 27001 extend their compliance requirements to an organization's third-party vendors. Non-compliant vendors can cause direct legal, financial, and reputational damage to an organization – even an organization that adheres to the strictest regulatory compliance standards.
Similarly, organizations are exclusively accountable for compromising sensitive information, even if the cybersecurity incident occurred in the hands of a vendor.
How to Create an Effective Vendor Risk Management Program
Organizations can establish robust vendor risk management programs by following the steps below.
Step 1. Write Vendor Risk Management Documentation
Organizations must develop the appropriate vendor risk management documentation for inclusion in the information security policy.
If there is no existing VRM documentation to work with, compliance teams can begin with a broad outline to act as a scaffold policy. Once the processes and procedures are better defined, the team can add further details.
The finalized documents should specify the roles and responsibilities of stakeholders in the daily operations of vendor risk management within the context of information security and the organization as a whole.
VRM documentation requires constant revision to keep up with new and updated regulatory requirements, security posture maturity, and changes to vendor inventory.
Step 2. Establish Vendor Selection Standards
When your organization onboards a new vendor, you’re likely granting them access to a significant amount of sensitive data.
While your security controls may comply with all internal and external requirements, this is not necessarily the case for your vendors. A vendor itself may be compliant with regulatory requirements internally, but this doesn’t necessarily extend to its customers.
It’s crucial to ensure your security team has an effective process for vetting third parties before forming new vendor relationships and trusting them to secure your data.
Following the Request for Proposal (RFP) and submission review, the selection process relies heavily on performing vendor due diligence.
Step 3. Perform Vendor Due Diligence
Vendor due diligence is a crucial element of the vendor selection process that involves screening potential vendors before onboarding. Performing due diligence should validate any claims the vendor has made regarding its security posture, certifications, and level of compliance.
Adequate due diligence should be performed during all stages of the vendor lifecycle through ongoing monitoring to manage third-party compliance efficiently.
Vendor due diligence practices often include:
- Sending risk assessment questionnaires at least annually.
- Requesting relevant documentation, e.g., SOC reports, business continuity plans, incident response plans, and information security policies.
- Using vendor tiering to evaluate high-risk vendors regularly.
- Assessing security posture through security ratings and continuous monitoring of the attack surface.
Step 4. Audit Your Vendors Regularly
Regular auditing following due diligence processes allows organizations to identify compliance gaps and vulnerabilities. Audits should involve detailed reporting of an organization’s vendor relationships, including the use of security questionnaires to assess ongoing compliance.
Organizations can streamline their auditing workflows by implementing a single source of truth to log significant vendor events, such as signing contractual agreements, risk identification, and remediation requests.
Step 5. Define Reporting Expectations
Executive teams require periodic reporting to understand the importance of vendor risk management in the broader organizational context and drive effective information security decision-making.
Reporting should be digestible to all stakeholders and contain consistent cybersecurity metrics, summarizing essential aspects of your critical vendors’ risk portfolios.
A complete vendor risk management platform can automate the entire risk management process. This consolidation enables concise executive reporting of important vendor metrics, such as:
- Average vendor security rating
- The number of monitored vendors over time
- Distribution of vendor ratings
- Most and least improved vendors
- Fourth-party risk
- Vendor geo-location
Vendor Risk Management Program Best Practices
The following best practices help organizations optimize their vendor risk management programs.
1. Identify Your Supply Chain Attack Surface
An effective VRM program should account for your third-party vendors and your fourth-party vendors.
With Gartner reporting over 60% of organizations as having 1000+ third parties, gaining and maintaining visibility across the supply chain attack surface quickly becomes complex.
Creating a vendor inventory provides a robust foundation for your organization’s VRM program, allowing you to identify all attack vectors, including your fourth parties.
Manually creating a vendor inventory is a time-consuming process requiring complicated spreadsheets and constant revision. Identifying fourth parties through manual methods is also difficult as organizations mainly rely on third-party reporting, which may not be up-to-date or accurate.
An automated vendor risk management solution provides a centralized platform for tracking third-party vendors and enables the automatic discovery of fourth-party vendors.
Organizations can also leverage VRM automation to categorize vendors based on important factors, such as their level of risk. This categorization allows security teams to prioritize their remediation efforts throughout the vendor lifecycle – from procurement to offboarding.
2. Prioritize Your High-Risk Vendors
Given the hundreds to thousands of third parties that most organizations manage, allocating the same attention to each vendor is impossible. Each vendor poses unique risks to your organization, of differing importance and urgency.
Each risk tier has a unique due diligence process and other tier-specific requirements, meaning your information security team will need to categorize each vendor individually.
Managing such a large number of vendors requires prioritizing high risk over lower risk vendors. However, it is still essential to regularly assess all vendors against the same standardized checks to ensure no potential cyber threats remain undiscovered.
Creating a vendor tiering system based on the level of risk enables security teams to prioritize their vendors appropriately and efficiently distribute and scale their VRM efforts.
3. Assess Third-Party Regulatory Compliance
Regulatory compliance and certification with recognized frameworks provide greater assurance that an organization is implementing strong cybersecurity measures. Regardless of where a data breach occurs in the supply chain, an organization always remains fully responsible for protecting its sensitive data.
Organizations must sustain thorough VRM practices throughout the entire vendor lifecycle and regularly assess compliance via security questionnaires. This practice is critical in heavily regulated industries, like finance and healthcare.
4. Practice Continuous Monitoring
Establishing a vendor risk management program is not a “set-and-forget” endeavor.
With new vulnerabilities emerging daily, security teams must quickly identify any third-party risks and request immediate remediation. Maintaining constant visibility into vendor performance across an ever-growing attack surface is near impossible without the help of automation.
A complete attack surface monitoring tool allows organizations to continuously monitor and manage third and fourth-party risks by identifying and reporting cyber risks throughout the supply chain in real time.