Posted on May 20, 2020
Outsourcing has become commonplace in the business world as it allows organizations to increase functional efficiency and focus on core business objectives. That said, working with third-party vendors can expose organizations to a variety of risks if they are not properly managed. While businesses assess these risks during the onboarding process, the focus on due diligence usually drops off once a vendor has been integrated into business operations.
Without ongoing due diligence monitoring, organizations will likely be unaware of the third-party risks that could lead to significant financial and reputational losses for their business. To limit risk, companies must have processes in place that allow them to continuously evaluate vendor security. This will help maintain third-party due diligence beyond the onboarding process and ensure that your organization is protected against any vendor liabilities.
Below are several key practices organizations can adopt to effectively maintain third-party due diligence.
Having a large third-party vendor base can reduce the visibility organizations have into their operations. It is important that organizations have systems in place to centralize third-party information and protect critical information from getting misplaced. Consolidating business details, contacts, past assessment results, and third-party roles and responsibilities will improve information accessibility as well as inform the discussions you have with vendors about their risk mitigation practices.
Each vendor you work with poses a specific type of risk to your organization. Classifying third-party risk is a necessity as it helps you identify what actions need to be taken to remediate individual risk cases.
The most common types of vendor risk are as follows:
Strategic risk arises when vendors fail to make business decisions that align with your organization’s strategic goals. Strategic risk is often a major determining factor in a company's worth and should be constantly evaluated throughout the vendor due diligence process.
Reputational risk is concerned with how vendor actions impact the public perception of your organization. Some examples include violations of laws and regulations, customer complaints, and security breaches that result in the disclosure of confidential information.
Operational risk is the chance of losses that come as a result of failed internal processes, system malfunctions, or external factors. When evaluating operational risk, be sure to ask about your vendor’s business continuity and disaster recovery plans.
Compliance risk arises when vendor actions are not consistent with governmental or internal laws, regulations, or ethical standards. Some examples of regulations that vendors should be compliant with are GDPR, PCI DSS, and Sarbanes-Oxley.
Transactional risk is the risk associated with the delivery of a product or service. Your organization is exposed to transaction risk when vendors fail to meet the expectations of customers. This can be due to human error, fraud, or technological failure.
Identifying the threats that pose the greatest risk to your organization is crucial when monitoring third-party due diligence. One way to do this is by creating risk appetite and risk tolerance statements. Risk appetite is the measure of risk your organization is willing to accept in order to meet your business objectives. Conversely, risk tolerance statements measure how much risk your organization can take on before becoming unsustainable. Having these two measurements will allow you to prioritize vendor risk based on your strategic goals, saving time and money in the due diligence process.
One of the most important aspects of third-party due diligence is creating a system to monitor vendor security posture. This can be done through the use of third-party risk assessments, which are designed to identify the level of risk individual vendors pose to an organization. You should create a set of clearly defined vendor risk management procedures that can be applied across departments within your organization to optimize this process. This helps to streamline the assessment process and allows you to conduct more comprehensive evaluations.
As this process is resource-intensive, organizations should automate assessments wherever possible. Using technology allows companies to standardize evaluations and improve third-party management flexibility. This translates to improved data-driven decision making and enables consistency across reports.
Organizations need to monitor how effectively and accurately their due diligence programs assess vendor risk to maintain due diligence. By using your risk appetite and tolerance statements as a baseline for acceptable risk, you can create success metrics to use when auditing your due diligence processes. Weighing performance against these metrics will show how well your organization is managing risk as well as help you identify where improvements can be made.
It is recommended that you audit your processes annually to maximize the insights gained from your programs. It is also important to monitor the actions that are taken once risk has been identified to ensure that third-parties properly address any liabilities.
Without the right tools, it can be difficult for organizations to gain the visibility they need to monitor vendor due diligence. SecurityScorecards’s Security Ratings provide insights into vendor security posture, helping organizations identify potential risks to their business. Vendors are assessed across ten groups of security risk factors and given a letter grade ranging from A-F so that you can easily understand their risk level. Security Ratings also highlight areas that can be improved within your vendor ecosystem, allowing you to quickly identify and remediate potential threats.
As more organizations work with third-party vendors to drive business, having access to a centralized security platform ensures that you can maintain financial and reputational stability without sacrificing operational efficiency.
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