Updated on July 29th, 2022
Outsourcing operations to third-party vendors has become a popular business strategy as it allows organizations to save money and increase operational efficiencies. As the role of third-party vendors expands, having vendor management processes in place becomes key to organizational success.
Why is vendor risk management important?
Vendors have access to critical systems and customer data, so it is essential that your organization monitors their cybersecurity risk to limit any potential threats they may pose to your business. Successfully managing third-party vendor risks will help ensure your business stays clear of any reputational, compliance, or operational harm you may face by working with vendors.
Taking a risk-based approach to vendor management requires that organizations have a complete understanding of the different types of vendor risk. Knowing and understanding these risks allow organizations to accurately assess third-party risk and start the vendor tiering process based on the threat they pose to the business. From there, security teams can build out remediation strategies to ensure that all identified threats are addressed.
What are the different types of vendor risks?
The first step to vendor risk management is to understand what kind of risks are posed towards your business. Below are eight different types of vendor risks to be aware of when evaluating third-party vendors.
1. Cybersecurity risk
With cyber threats growing in sophistication and speed, it is more important than ever that you monitor your vendor’s cybersecurity posture. To quantify vendor cybersecurity risk, you first need to identify your organization’s risk threshold. Once you have defined acceptable risk levels, you can then begin to assess third-party-security performance and make adjustments as necessary.
When evaluating performance, you should focus on compromised systems within vendor network environments. While breached systems do not also result in data losses, they do provide insight into how vendors identify and contain attacks.
2. Information security risk
Information security risk refers to ransom, malware, data breaches, and cyber events that occur from third-parties unsecured access to servers and devices. These risks can also come from poor or ineffective cybersecurity controls. Limiting vendor access and controls to sensitive business information and customers' personally identifiable information is critical to ensure your business protects sensitive information at all costs.
3. Compliance risk
Compliance risk is the risk that arises from violations of laws, regulations, and internal processes that your organization must follow to conduct business. The laws that apply to each organization will vary by sector, however, there are some common regulations that span across industries such as GDPR and PCI DSS. Non-compliance with these regulations usually results in substantial fines so it is crucial that you make sure that your vendor’s cybersecurity compliance efforts align with regulatory requirements.
4. Environmental, social, and governance (ESG) risks
Environmental, social, and governance (ESG) risks occur when vendors don’t follow set laws or policies your organization has in place in regard to environmental impact, use of resources, treatment of employees, or other sustainability initiatives. If ESG protocols aren’t properly followed by your third-party vendors, your organization could endure repercussions of human rights violations, compliance risks for poor supply chain management, or other threats to business continuity.
5. Reputational risk
Reputational risk is concerned with the public perception of your company. With regard to third-party vendors, some of the ways they can harm your reputation include:
- Interactions that are not consistent with company standards
- Loss or disclosure of customer information due to negligence or data breach
- Violations of laws and regulations
6. Financial risk
Third-party financial risk arises when vendors are unable to meet the fiscal performance requirements set in place by your organization. For vendors, there are two main forms of financial risk: excessive costs and lost revenue.
If excessive costs are not addressed, they can hinder company growth and lead to excess debt. To limit excessive costs, you need to conduct periodic audits to make sure that vendor spending is in line with the terms outlined in your contract.
Managing lost revenue starts with identifying which vendors directly impact your organization’s revenue-producing activities. An example of this is a third-party system that tracks and records sales activity for your business. Any problems with these vendors and systems can lead to delayed or lost revenue, so it is important to have systems in place to monitor their risk.
7. Operational risk
Operational risk occurs when there is a shutdown of vendor processes. Third-party operations are intertwined with organizational operations so when vendors are unable to provide their services as promised, organizations are usually unable to perform daily activities. To limit operational risk, your organization should create a business continuity plan so that, in the event of a vendor shutdown, you are able to remain operational.
8. Strategic risk
Strategic risks arise when vendors make business decisions that do not align with your organization’s strategic objectives. Strategic risk can influence compliance and reputational risk and is often a determining factor in a company's overall worth. Establishing key performance indicators (KPIs) allows organizations to effectively monitor strategic risk as they provide valuable insight into vendor operations and processes.
How to monitor and manage vendor risk
Once you have identified the type of risk a vendor poses to your business, the next step is to create systems that allow you to monitor and manage the risk.
Below are three processes you can implement to monitor third-party risk at your organization:
Risk assessments and security questionnaires
Third-party risk assessments use vendor questionnaires to help organizations determine the level of risk individual vendors pose to their business. For risk assessments to be effective, organizations must be able to align their evaluation parameters with their risk threshold. Doing so allows you to build informed questionnaires that more accurately assess vendor risk as it relates to your business operations. Using threat intelligence when creating assessments is also recommended as it increases the visibility you have into your third-party ecosystem, helping to prioritize threats.
Due diligence is the process of identifying and remediating third-party cyber risks. It is typically done during the merger and acquisition phase so that the acquirer is aware of any cyber risks they may be inheriting from vendors. To conduct due diligence, organizations can use security data to gain insight into their vendors’ cybersecurity systems and IT infrastructure. It is important that due diligence is conducted on an ongoing basis so that organizations are able to address vendor risks as they emerge.
Continuous risk monitoring is an essential component of third-party vendor risk management programs. By determining the right security metrics to monitor, organizations can improve their ability to identify vendor risk before it becomes problematic. This also helps organizations streamline remediation efforts and create incident response plans specific to individual vendors.
How SecurityScorecard can help manage vendor risk
Monitoring third-party cybersecurity risk is a resource-intensive task that requires continuous visibility into your vendor ecosystem. SecurityScorecard’s Security Ratings help to optimize this process by providing you with valuable insights into your vendors’ security posture. Vendor security is evaluated across ten groups of risk factors and given a letter grade ranging from A-F so that you can easily monitor their risk level. Security Ratings also help you identify where improvements can be made within your vendor ecosystem so that you can stay ahead of threat actors.
With Atlas, organizations can easily manage, complete, and review questionnaires in a centralized platform helping to simplify the risk management process. Atlas also allows organizations to send questionnaires at scale so that they can ensure ongoing due diligence.
With third-party vendors becoming increasingly important to business success, being able to manage their risk is essential. With SecurityScorecard, organizations have access to the tools they need to proactively identify and mitigate vendor risk.