Vendor Risk Management: The Definitive Guide in 2025

As businesses grow more dependent on external partners, the risks associated with third-party vendors have emerged as a serious concern. An effective vendor risk management (VRM) program plays a vital role when it comes to identifying, assessing, and addressing these threats. When vendors fail to meet security standards, they put themselves at risk of potential cybersecurity breaches. Not complying with relevant compliance requirements is also a risk. Both of these can severely damage a company’s reputation and disrupt operations. 

With an established vendor risk management (VRM) process, organizations gain visibility into all aspects of vendor operations, allowing them to mitigate risk in real-time.

In order to build a VRM program, you first need to classify vendor risk based on the potential impact it could have on your business. From there, you can create protocols that actively monitor your vendor ecosystem for vulnerabilities or threats so that you can take action when potential risks arise. This not only helps you limit internal risk but also creates a foundation on which you can build strong vendor relationships that are based on transparency and trust.

Management of these risks is essential if you want to protect the integrity of your organization and maintain smooth operations. This guide offers a comprehensive look into VRM, introducing key steps, strategies, and best practices needed to build a strong and effective vendor risk management framework.

What is Vendor Risk Management (VRM)?

Vendor Risk Management (VRM) is a way to manage the risks associated with third-party vendors who provide products, services, or access to sensitive data. An effective vendor risk management strategy aims to minimize financial risks, operational disruptions, and reputational risks by implementing a systematic vendor risk assessment process. This helps ensure that the security of each third-party relationship aligns with your organization’s risk tolerance and regulatory requirements. Should there be a vendor risk event, VRM programs also include comprehensive plans for risk mitigation to reduce the impact of legal liabilities and reputational damage.

What are Third-Party Vendors?

Third-party vendors are external companies or individuals that provide products, services, or access to an organization’s systems, data, or infrastructure. These vendors can include IT service providers, cloud hosting companies, software suppliers, contractors, consultants, and supply chain partners. 

Many businesses rely on third-party vendors for essential operations, but these vendors can also create cybersecurity risks. This is because they often have access to sensitive information or critical systems. If these vendors are  compromised, it can lead to significant security incidents. 

Vendor relationships pose different types of risks, such as cybersecurity vulnerabilities, operational failures, and regulatory non-compliance. It’s important for organizations to effectively manage and monitor these third-party entities. By practicing vendor risk management, organizations can ensure that vendors meet necessary security and compliance standards, reducing the risks associated with outsourcing critical functions.

What is Vendor Lifecycle Management?

Vendor lifecycle management involves overseeing the entire lifecycle of a vendor relationship, from selection and onboarding to offboarding. A comprehensive vendor risk management program should include a defined process for managing this lifecycle to mitigate risks effectively:

• Selection and Onboarding: Choose the right vendors by checking that they meet your security and compliance requirements.
• Ongoing Monitoring and Evaluation: Keep an eye on vendors’ security posture and compliance regularly while you work with them.
• Termination and Offboarding: End the relationship securely by making sure they can’t access anything and that data is handled properly​.

Why is Vendor Risk Management Important?

Vendor risk management is essential because third-party vendors increasingly have access to sensitive data, systems, and networks. When third-party vendors neglect proper security practices, they become a direct gateway for cyberattacks, putting the entire organization at risk. 

One weak link can cause serious data breaches, financial losses, and regulatory trouble that can hurt your business and its reputation. A good program to manage vendor risk is crucial. It helps you find, understand, and lower these risks. It also makes sure vendors follow security rules and helps you find and stop threats before they cause harm. It keeps your business running, protects your data, and makes sure you follow industry rules.  

What are the Benefits of Vendor Risk Management?

A well-executed vendor risk management strategy enhances the overall security posture by ensuring that all third-party relationships are continuously monitored and that potential risks are mitigated early. This makes it less likely that there will be data breaches and things that stop your organization from working. It helps you follow the rules and comply with regulatory frameworks, such as GDPR, HIPAA, or ISO standards, helping you avoid costly fines and penalties. 

Moreover, it helps businesses and their vendors to be more open and trustworthy, building better relationships and allowing for more effective teamwork. By using a structured approach to evaluate vendor risks, organizations can make better decisions, manage resources more efficiently, and focus attention on high-risk vendors. 

Finally, it helps businesses quickly respond to incidents involving third-party vendors, minimizing downtime and reducing the financial and reputational impact of security breaches.

Types of Vendor Risks

Understanding the different types of risks associated with third-party vendors is essential for an effective vendor risk management framework. Vendor risks typically include:

• Cybersecurity Risks: These occur when security breaches happen due to vulnerabilities. For example, if third-party vendors have weak security practices, your organization could be at risk of cyberattacks and data breaches.
• Compliance risk: Compliance risk is the risk that arises from violations of the laws, regulations, and internal processes that an organization must follow in order to conduct business. From a vendor standpoint, this risk exists when the actions or services of a third party do not align with governing regulations.
• Operational Risks: These come from disruptions that affect your service provider’s ability to meet contracts, which can impact  business continuity.
• Financial Risks: If vendors have poor financial stability, they may be unable to meet their obligations, which can affect your operations. This is especially crucial for high-risk vendors in your supply chain.
• Regulatory Risks: Vendors must follow various compliance requirements, such as GDPR or HIPAA. If they don’t comply, your organization could face fines or reputational damage.
• Reputational risk: Reputational risk can arise when a negative public opinion of your company is created as a result of a third party’s product or actions. This could stem from dissatisfied customers, incorrect services, faulty products, data breaches, or legal violations.

What to Include in an Effective Vendor Risk Management Strategy?

An effective vendor risk management strategy includes thorough vendor risk assessments and ongoing monitoring of third-party vendor risk profiles. To build a successful program, you should consider the following elements:

Vendor Risk Assessment Process 

Before engaging with vendors, it’s important to assess their potential risks. This includes evaluating financial, operational, and regulatory risks. Use vendor risk assessment questionnaires to gather information about security practices, compliance requirements, and operational resilience.

Continuous Monitoring 

It’s important to keep an up-to-date view of each vendor’s risk level by continuously monitoring any changes in their security posture, risk score, and financial stability. This helps ensure that their risk aligns with your organization’s risk appetite.

Incident Response and Business Continuity Planning 

Create a plan to quickly respond to potential security issues involving third-party vendors. This plan should outline the steps for reducing negative impacts, evaluating remaining risk, and ensuring business operations continue smoothly.

Vendor Inventory Management 

Remember to keep an updated list of all third-party relationships. By managing a detailed inventory of vendors, organizations can quickly identify high-risk vendors and focus resources on those that pose the most significant risk exposure.

Regulatory Compliance 

Making sure that vendors follow the rules is a key part of any VRM program. This involves doing regular checks to confirm that vendors are meeting the necessary rules and  standards.

Best Practices for Vendor Risk Management

A good vendor risk management framework includes best practices to reduce risks from third-party vendors effectively:

Prioritize Vendor Risk Assessments Based on Risk Levels

Assess vendors based on the level of risk they pose to your organization. High-risk vendors with access to sensitive data or critical systems should undergo more frequent assessments and more thorough evaluations of their security posture.

Implement Ongoing Monitoring for All Vendors

Continuous monitoring of vendor’s security practices and operational risk helps organizations quickly identify and address potential risks as they arise. SecurityScorecard’s continuous monitoring tools allow companies to keep track of each third-party vendor’s security and operational risk​.

Align VRM with Risk Tolerance and Risk Appetite 

Organizations need to clearly define their willingness to take risks and ability to handle them to make sure the program for managing vendor risks is in line with the overall business objectives . This alignment will help in making better decisions about which risks are acceptable in specific vendor relationships.

Develop and Maintain Vendor Risk Management Plan 

Remember to include a clear vendor risk management plan. This plan should outline how to assess and handle vendor responses to incidents and compliance audits, defining roles and responsibilities in the process.

Leverage Risk Assessment Questionnaires

Using standardized vendor risk assessment questionnaires, collect consistent information about each vendor’s security practices, financial stability, and compliance with regulatory requirements. These questionnaires help manage third-party risk in a systematic way​.

How to Address a Vendor Breach

In the event of a security incident involving a third-party vendor, it’s important to respond quickly and work together effectively:

1. Activate the Incident Response Plan: Your plan should include steps for communicating with the affected vendor, assessing the potential impact on your organization, and reducing immediate risks.
2. Evaluate the Residual Risk and Potential Impact: After the incident, evaluate the remaining risk and potential impact on your organization. Understanding these factors will help decide if extra controls or a reevaluation of the vendor relationship is necessary.
3. Collaborate with Vendors on Remediation: Work directly with the vendor to solve the problem and ensure that security practices are improved to avoid similar incidents. This may involve asking for evidence of compliance with industry security standards and additional vendor assessments​.

Effective fixing of the issue and clear communication can prevent further exposure and strengthen the long-term security of your organization.

Building a Proactive Vendor Risk Management Process

Once you determine which type(s) of risk a vendor poses to your organization, the next step is to implement a system that allows you to monitor and address the risk. Below are four steps you can follow to establish a VRM program at your organization:

1. Identify and rank your organization’s specific risk factors

The first step in building a VRM system is to identify which risks pose the greatest threat to your organization. This will help you prioritize risk remediation and ensure that third-party assessments are aligned with your organization’s risk profile. To rank risk factors, think about how each of the vendor risks outlined above impacts your organization’s ability to function.

You should also take the types of systems and data access your third parties have into account when ranking risk. From there, you can assign risk levels to specific vendors based on your risk criteria. This is another area of VRM where Security Ratings can be of use. Insights gained into individual vendor programs expedite the risk identification process and allow you to more accurately rank vendors.

2. Assign assessment types to your vendors

After you have ranked your vendors, the next step is to determine which type of assessment to administer. Vendor risk assessments are typically conducted using vendor questionnaires designed to help organizations identify potential vulnerabilities that could result in a breach. Question-based evaluations can be sent at scale, however, it can be difficult to verify responses. For this reason, vendor questionnaires should primarily be used when evaluating low-risk vendors.

You can also conduct an on-site assessment to evaluate risk protocols in person. That said, on-site assessments are costly and require multiple employees to conduct, so it is recommended that these only be administered to high-risk vendors.

3. Establish an internal VRM team

Creating a VRM team to communicate with third parties and track vendor risk reports helps to streamline the risk management process and improve the accuracy of responses. Establishing a VRM team requires hiring trained risk managers or transitioning employees into a TPRM position.

It should be noted that VRM is resource-intensive so it is important to consider employee workloads to avoid burnout or human error. This is the most intensive step in creating a vendor risk management program, however, having an established team will make all aspects of VRM simpler and more efficient.

4. Establish communication and reporting processes with third-parties

Collaboration with third parties is key to ongoing risk monitoring. Your VRM team should set up processes that allow for continuous communication around identified risks, risk reports, and threat response efforts.

The methods you employ will vary depending on a vendor’s risk level, as you will likely want to communicate with high-risk vendors more frequently. You should also establish a reporting process with vendors so that you have up-to-date insight into vulnerabilities and the steps they are taking to address them.

Why are mutually beneficial vendor relationships important to business success?

A key component of quality management within enterprise organizations is the development and maintenance of mutually beneficial vendor relationships. If your company relies on vendors to keep operations running smoothly, then it is important that you understand their business processes and include them in strategy meetings. This will ensure that vendor goals align with those of your business and will remove any barriers to collaboration. Additionally, strong vendor relationships help improve customer relationships as third parties are better able to deliver products or services that reflect your brand.

How SecurityScorecard helps enhance VRM programs

To build an effective third-party risk management program, organizations need visibility into their vendor IT infrastructures. SecurityScorecard’s third-party risk management solutions simplify this process by providing you with valuable insights into vendor security risk. Third-party security programs are evaluated across 10 risk factor groups, enabling continuous visibility into the cyber health of your vendor ecosystem. This allows organizations to quickly identify and resolve threats before they become an issue.

With Atlas, organizations can easily send and track multiple questionnaires in a centralized platform, helping to streamline the risk management process. Atlas also leverages machine learning to align questionnaire responses with SecurityScorecard Ratings so that you can verify the accuracy of vendor responses.

As third parties become increasingly involved in business operations, being able to manage the risk they pose to your organization is imperative. With SecurityScorecard, you can take a proactive approach to VRM and enable successful, valuable vendor partnerships.