What is Vendor Risk Management (VRM)? Building Successful Partner Relationships

By Kasey Hewitt

Posted on Feb 3, 2021

When an organization works with a third-party vendor, they inherit the third party’s risk profile and assume responsibility in the event that a breach occurs. With more businesses outsourcing daily operations to third-party vendors, being able to effectively monitor and manage vendor risk has become a necessity. 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.

What is vendor risk management?

Vendor risk management is the process of monitoring third-party operations to ensure that they do not create unfavorable business outcomes or disrupt day-to-day proceedings. This is typically done using third-party risk management (TPRM) technology which helps organizations assess, monitor, and manage risk exposure that results from vendor relationships. 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.

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.

What risks might third-party vendors present to your organization?

While there are inherent benefits of working with vendors, it is important to understand the different types of vendor risk and how they can impact your business. Below are some key risk factors that must be considered when working with outside organizations:

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. Non-compliance usually results in substantial fines so it is important to work with vendors to ensure that they understand how to adhere to industry standards and continually monitor compliance. For example, noncompliance with the data protection law GDPR could result in a fine of up to 2% of an organization's worldwide annual revenue from the preceding financial year.

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. Before working with a vendor, you should always research their public reputation and look at the frequency of customer complaints they receive so that you do not unnecessarily inherit reputational liabilities.

Financial risk

Vendor-related financial risk occurs when third-parties do not meet the monetary requirements outlined in the contractual agreements they have with your organization. At the most basic level, financial risk involves the overall financial stability of a vendor. Some aspects of vendor contracts, such as loan obligations, are contingent upon those vendors having strong credit, so it is essential to vet their finances prior to working with them.

Vendors can also introduce financial risk as a result of excessive spending. This can lead to excess debt and impact company growth. In order to limit this risk, you must conduct periodic audits to ensure that vendor spending aligns with the terms outlined in your contract.

Cyber risk

If you work with vendors then it is critical that you monitor their cybersecurity posture as you would your own. If a vendor lacks comprehensive security controls, then they expose your organization to financial, reputational, and compliance risk. For this reason, vendor cyber risk must be continuously monitored and addressed. Tools such as security ratings can help streamline vendor cyber risk management, as they provide visibility into vendor IT infrastructures, further enabling threat prioritization.

How to establish a vendor risk management program

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.

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.

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