A Guide On Vendor Risk Management

When businesses engage third party vendors; they expose themselves to many risks like compliance risk, operational risk, reputational risk, etc. Vendors who handle confidential, sensitive, proprietary, or classified information on your behalf can't guarantee the safety of your data.

If your third-party providers implement bad security practices, they can lead to significant risks regardless of how robust your internal security procedures are. Organizations must have a comprehensive risk management strategy to minimize risks, which means vendors must be regularly measured and evaluated.

A vendor is an external entity that provides services to an organization. Some of the examples of vendors are cloud service providers, consultants, payment processors, raw material suppliers, etc.

Types of Vendor Risks

The types of vendor risks are listed below:

• Financial Risk - This risk is directly related to the third party's financial state and incapacity to meet contractual obligations and offer products and services to your organization. Organizations with poor financial performance may have difficulties paying off debt or providing shareholders with value.
• Compliance Risk - This refers to the risk that occurs when a third-party vendor violates a rule or regulation. If compliance criteria isn't achieved, your company may face enforcement actions, large fines, and a negative impact on its reputation.
• Environmental Social Governance Risk - Customers, shareholders, and regulators are increasingly scrutinizing corporate practices. Thus, neglecting to account for environmental, diversity, and social justice responsibility can result in reputational and financial risk. These risks are associated with reputation or brand, legal, technological, compliance issues, and product or service quality.
• Information Security Risk - It takes place due to flaws in the third-party vendor security model. Missing or inefficient security measures are the most frequent cause of cyberattacks and data breaches. Major financial institutions, small banks, healthcare providers, credit unions, energy utilities, producers, and retailers are vulnerable to information security risks.
• Business Continuity Risk - An external event that interferes with your third-party vendor's capacity to conduct business may impact your organization. This is why it is sometimes considered a subset of operational risk. It happens when a vendor fails to test business continuity measurements, lacks sufficient disaster recovery plans, and is unprepared for technology outages and failures.

Vendors often have access to sensitive or confidential information of the organizations they service. Inadequate security measures or data breaches on the vendor's end can result in the compromise of valuable data, resulting in financial losses, reputational harm, regulatory noncompliance, and potential legal consequences. Organizations can analyze their vendors' security practices, ensure compliance with relevant regulations, and enforce contractual duties related data protection by using vendor risk management.

Vendor risk management (VRM) process detects, analyzes, monitors, and mitigates risks posed by third-party vendors to your organization. Such threats may impact your company's cybersecurity, regulatory compliance, business continuity, and organizational reputation. It ensures that the use of service providers and IT vendors does not have a negative effect on your business performance.

Vendor Risk Management Maturity Model (VRMMM)

A company's VRM maturity can be classified into several tiers based on the process, technology, and governance strategy. The VRMMM levels are - startup, initial vision, route approval, defined plans, implementation, and improvement.

It's important to note that the specific maturity model used by an organization may have different stage names or variations, but the general concept of progressing from ad hoc to optimized vendor risk management practices remains consistent. The model provides a roadmap for organizations to assess their current state, identify gaps, and implement improvements in their vendor risk management program.

Vendor Risk Management Steps

The following are the general steps in vendor risk management:

• Vendor Identification - Identify all vendors and suppliers with whom your organization works, including software providers, service providers, contractors, and outsourcing partners.
• Risk Categorization - Classify vendors based on the level of risk they pose to your organization. This classification can be based on characteristics such as the criticality of their services, the volume of data they manage, and their access to sensitive systems.
• Due Diligence - Before engaging with a potential vendor, conduct a comprehensive evaluation of them. This includes an examination of their financial health, reputation, industry certifications, legal and regulatory compliance, and security practices.
• Risk Assessment - Evaluate the potential hazards connected with each vendor. This evaluation should take into account considerations including data security, privacy, regulatory compliance, operational resilience, and business continuity.
• Risk Mitigation - Create methods and controls to mitigate recognized risks. This may include establishing contractual terms and service level agreements (SLAs) that satisfy security and compliance needs, conducting audits or assessments of vendor controls, and implementing ongoing monitoring.
• Contractual Agreements - Create detailed contracts or agreements that clearly explain both parties' roles, obligations, and liabilities. Include provisions for data protection, confidentiality, security incident response, breach reporting, and the ability to audit the vendor's procedures.
• Ongoing Monitoring - Regularly monitor vendor performance and compliance with contractual criteria. This can include periodic assessments, security reviews, vulnerability scans, and on-site audits. Consider creating a vendor performance scorecard or dashboard to track and report on critical data.
• Termination - Establish procedures for ending vendor contracts and, if necessary, migrating services to alternate suppliers. Ensure that data is appropriately transferred or disposed of securely, and that any remaining hazards are adequately managed.

How Does Scrut Help?

Scrut offers a streamlined vendor risk assessment for your organization in a single window. It lets you know how vendors are doing and whether their security posture fits your organization.

• Upload a security questionnaire: Users can upload their security questionnaire or use one of the pre-built templates with Scrut's vendor risk management solution.

• Assess your vendors' compliance and information security posture: It delivers quick insights into your vendors' compliance and information security posture. From a single dashboard, users can send security surveys and identify deviations.

• Invite vendors: You can invite your vendors to fill out the security audit questionnaires on the site. It assists you in comparing suppliers to select the lowest-risk business partner or develop a risk security strategy suited to vendor risk categories.

• Share review data: You can exchange supplier review data for compliance and audit needs. All vendor security certifications, software vendor audits, and documents are kept in one location. It enables you to communicate responses from vendors with customers and auditors. This provides organisations with a full overview of all their vendors, their respective risks, and mitigation measures.

Many organizations use the Scrut platform to help them build their vendor risk management program, automate governance, and monitor security measures.

You can use Scrut to automate due diligence and monitoring procedures so that you don't miss out on key oversight operations. The platform offers a centralized location for detecting, assessing, and tracking vendor risks. It reduces the time it takes to review your vendors' security posture by 70% and determines whether they are in line with your compliance rules. Click here to schedule a Scrut demo.