Learning Center January 8, 2024

8 Types of Vendor Risks That Are Important to Monitor in 2024

by Jeff Aldorisio
by Jeff Aldorisio

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. Effective vendor management processes ensure not only cost efficiency but also the quality and reliability of the services provided. This approach involves careful selection, ongoing management, and periodic evaluation of vendor performance. In an increasingly interconnected business environment, robust vendor management processes are essential for maintaining competitive advantage and operational excellence.

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. This includes a thorough assessment of third party vendor risk, which is a critical step in safeguarding an organization’s data and operational integrity.

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. This proactive management is vital in mitigating risks, and involves continuous monitoring and revisiting of vendor relationships to adapt to any changes in the threat landscape. Additionally, implementing effective remediation strategies is key to resolving vulnerabilities and preventing potential security breaches that could arise from third-party associations.

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. Here 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. This assessment is a critical part of maintaining a robust cybersecurity posture, as it allows for a proactive approach in managing potential vulnerabilities.

When evaluating performance, you should focus on compromised systems within vendor network environments. While breached systems do not always result in data losses, they do provide insight into how vendors identify and contain attacks. Additionally, understanding the frequency, nature, and severity of these compromises can inform your decisions on whether to continue, alter, or terminate vendor relationships.

It’s essential to regularly update your evaluation criteria to align with evolving cyber threats, ensuring that your organization’s cybersecurity measures are in step with current challenges. This ongoing process helps in creating a dynamic and resilient cybersecurity posture that effectively manages risks associated with third-party vendors.

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. This includes implementing stringent measures to safeguard personally identifiable information, which is often a prime target for cybercriminals.

In order to effectively manage information security risk, it’s vital to conduct regular audits of the cybersecurity practices of third-party vendors. This helps in identifying any potential vulnerabilities that might expose sensitive data, including personally identifiable information, to unauthorized access or breaches. Additionally, ensuring that vendors adhere to industry-standard security protocols and comply with data protection regulations is key in mitigating information security risks. By taking these proactive steps, businesses can significantly reduce the likelihood of information security incidents and protect their reputation and customer trust.

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. This alignment includes not only understanding and adhering to specific regulations like GDPR, which governs data protection and privacy in the European Union, and PCI DSS, which sets standards for secure card transactions, but also ensuring ongoing compliance through regular audits and assessments.

In addition to these well-known regulations, organizations should also be aware of industry-specific compliance requirements that may apply to their operations. Ensuring that vendors are aware of and comply with these regulations is a vital part of managing compliance risk. It’s important to regularly review and update the vendor’s cybersecurity compliance strategies to reflect changes in the regulatory landscape. Doing so helps in preventing legal and financial repercussions and in maintaining the integrity and trust of the organization in the eyes of customers and stakeholders.

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. These risks extend beyond legal compliance, encompassing the ethical and reputational aspects that are increasingly valued by consumers and stakeholders.

Failure to manage ESG risks effectively can lead to a negative public perception and potential loss of business, especially as awareness and demand for responsible business practices grow. It is therefore crucial for organizations to conduct thorough due diligence on their vendors’ ESG practices and ensure alignment with their own ESG goals and standards. Additionally, engaging in regular dialogue and training with vendors about the importance of ESG criteria can help mitigate these risks and foster a more sustainable and ethical supply chain.

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

These risks can have far-reaching consequences, as the reputation of a company is a critical asset that takes years to build but can be damaged in moments. It’s essential to conduct thorough due diligence and continuous monitoring of third-party vendors to ensure their actions align with your company’s values and standards.

Having robust incident response plans in place is crucial for quickly addressing any issues that may arise, thereby limiting potential damage to your company’s reputation. In an age where information spreads rapidly online, maintaining a positive reputation requires vigilance and proactive management of the behavior and practices of both the organization and its associated vendors.

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.

Excessive costs can significantly impact an organization’s financial health, potentially leading to reduced profitability or increased operational costs. 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.

Regularly assessing the performance and reliability of these vendors is critical in minimizing financial risk. In addition, having contingency plans and alternative vendors in place can mitigate the impact of any disruptions on your business’s financial stability. These steps are essential to maintain a robust financial risk management strategy and protect the company’s revenue streams.

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. This business continuity plan should include strategies for quickly adapting to disruptions, alternative solutions for critical services, and clear communication channels to manage the situation effectively.

It’s essential to identify key vendors and assess the potential impact of their failure on your operations. By understanding these dependencies, you can develop targeted strategies to mitigate risks. Regular testing and updating of the business continuity plan is crucial to ensure its effectiveness in a real-world scenario. Additionally, maintaining strong relationships with vendors and understanding their own contingency plans can help in aligning strategies for mutual benefit, thus reducing the likelihood and impact of operational disruptions. These measures are vital in safeguarding the smooth functioning of organizational processes and maintaining operational stability.

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. KPIs serve as quantifiable metrics that can be used to assess whether a vendor’s actions and results are in harmony with the strategic goals and values of the organization.

Moreover, regular reviews and updates to these KPIs are crucial to ensure they remain relevant and aligned with the evolving strategic objectives of the company. It’s also important to maintain open communication with vendors about these KPIs and the strategic direction of the organization. This helps ensure that vendors are aware of their role in the company’s strategy and can make informed decisions that support these goals. Effective management of strategic risk involves not only monitoring current vendor performance but also anticipating how changes in vendor strategies might impact future business outcomes.

How can businesses 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.

The thoroughness and relevance of these vendor questionnaires are crucial in painting an accurate picture of potential risks. They should cover a range of areas, including cybersecurity, compliance, operational stability, and financial health. Third-party risk assessments and vendor questionnaires should be dynamic tools, regularly updated to reflect the evolving nature of risks and the business environment. This proactive approach helps in early identification and mitigation of risks, ensuring that they are managed before they escalate into serious issues. In addition, engaging in regular communication with vendors about the findings of these assessments can foster a collaborative approach to risk management, which is beneficial for both parties.

Due diligence

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.

This process involves a comprehensive review of the vendor’s policies, procedures, and past incidents to evaluate their cybersecurity posture. Utilizing security data, such as past breach reports, security audits, and compliance certifications, is critical in assessing the level of risk a vendor may pose.

Due diligence is not a one-time activity but a continuous process that should be integrated into the organization’s overall risk management strategy. Regular updates and reassessments are necessary to keep pace with the evolving cyber threat landscape. By doing so, organizations can proactively identify vulnerabilities and implement measures to mitigate potential cyber risks associated with their vendors.

Continuous monitoring

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. Continuous risk monitoring allows for real-time awareness of vendor activities and any potential security incidents, ensuring that risks are identified and addressed promptly.

The process of continuous monitoring should involve regular evaluations of vendor performance against established security metrics, as well as keeping track of any changes in the vendor’s operations that might affect their risk profile. This proactive approach enables organizations to adjust their risk management strategies in response to evolving threats and vulnerabilities. Additionally, continuous monitoring provides valuable insights into the effectiveness of current security measures and the need for any adjustments. By integrating continuous risk monitoring into their vendor management programs, organizations can maintain a robust defense against potential security breaches and ensure ongoing compliance with regulatory requirements.

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.

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