A vendor risk assessment provides visibility to the risks that organizations are exposed to when using third-party vendors’ products or services. Risk assessments are particularly important when a vendor handles a critical business function, accesses sensitive customer data, or interacts with customers.
A company should always perform due diligence questionnaires and conduct vendor and third-party risk assessments when onboarding a new vendor. An organization should also continue to perform periodic risk assessments to assure its third-party vendors keep up with quality expectations and do not introduce unexpected risks to the organization.
Why Do You Need Vendor Risk Management?
The act of identifying, assessing, monitoring, and reducing risks posed by third-party vendors is known as vendor risk management (VRM). These dangers could jeopardize your company’s cybersecurity, regulatory compliance, business continuity, or reputation.
When companies contract with third parties, they can run into a variety of risks. Vendors who handle sensitive, proprietary, or classified information on your behalf are particularly dangerous. Regardless of how robust your internal security measures are, if your third-party providers have weak security practices, they constitute a substantial danger.
A focus only on operational risk factors such as performance, quality standards, and key performance indicators (KPIs) is not enough. Increasingly, the most significant risks coming from external vendors are compliance, financial, and reputational risks, such as data breaches.
For risk mitigation, organizations must have a comprehensive risk management strategy to measure and evaluate suppliers constantly. It is not enough to have subject matter experts responsible for their suppliers. Data breaches can come from anywhere in the organization.
If organization-wide policies are not in place, departments may choose their own metrics and ad hoc requirements, leading to a poor risk management process.
What Are the Benefits of Vendor Risk Management?
VRM helps organizations create and automate their supplier risk management program. It helps standardize onboarding, evaluations, identification and mitigation of risks, and monitoring activities. In addition, a good supplier risk management program will provide benefits such as:
- Better risk management in the future. You’ll have a good picture of where third-party and fourth-party risk stands after all suppliers are in your VRM program and categorized. Vendors should be classified as low, medium, or high risk so the VRM program can focus on medium and high-risk vendors.
- Reduce costs. By standardizing processes, your vendor risk management program will make your vendor management processes more efficient. Risk mitigation will reduce the occurrence of costly unexpected situations.
- Focus on business processes and compliance. Regulators are cracking down on companies that fail to manage third parties appropriately. Regulators classify vendors as an extension of a firm’s ecosystem, and a violation could result in fines for both the company and the vendor.
- Better reporting. Gathering information without a proper VRM application can be challenging. Assure that your VRM program has robust reporting features so you can produce summaries for your board of directors and comprehensive supplier risk reports for management.
- Defensibility. When your organization suffers a data breach, regulators, consumers, and others will often pursue you in court. Even if a third party perpetrated the breach, your organization could be held accountable if you don’t have a VRM program in place that shows you did your due diligence.
When you make the appropriate efforts to track your suppliers and evaluate their level of risk to your firm, you are demonstrating due diligence.
What Are Vendor-Related Risks?
Knowing the risks allows organizations to assess third-party risk accurately and to rank suppliers based on their threat to the enterprise. From there, security teams can develop remediation strategies to assure that all identified threats are addressed.
When a company gives third-party service providers access to its network, it is allowing access to sensitive information, employee, and customer data. Below are five types of vendor risk to keep in mind when assessing third-party vendors.
With the increasing sophistication and speed of cyber threats, it is more important than ever to monitor the cybersecurity posture of your suppliers.
When assessing performance, you should focus on vulnerabilities within vendor network environments. Requirements like vulnerability scans and penetration testing allow you to see how strong your vendor’s cybersecurity is and how much risk the vendor is potentially bringing to your business.
A third party may be exposed to excessive financial risks that could potentially impact your company. Your business could be stuck without a supplier if a key vendor goes bankrupt. Even if the vendor is just going through a rough patch, you could experience higher prices as it tries to meet profitability targets.
At the same time, a vendor’s non-compliance to regulatory requirements could result in financial risks (such as fines or penalties) for your organization.
Periodic audits and assessments help you verify the financial health of your vendors and monitor the financial risks exposure for your organization.
Reputational risk refers to the public perception of your company. Unethical interactions, loss or disclosure of customer information due to negligence or data breaches, or violation of laws and regulations can result in reputational damage.
A damaged reputation for one of your vendors could damage your company’s reputation too if your relationship with them comes to light.
When suppliers cannot deliver their services as promised, that can harm your day-to-day activities. To limit operational risk, your organization should create a business continuity plan so that you can continue to operate in the event of supplier disruption or closure.
Violations of laws, regulations, and internal processes that your company must follow to conduct business pose a compliance risk. The rules that apply to each organization will vary by industry, but regulations such as GDPR, PCI DSS, and HIPAA generally require that risk management policies extend to a company’s external vendors, subcontractors, and consultants.
Legal or regulatory non-compliance (especially if you work in government, financial services, or defense contracting) can result in significant fines. As a result, it’s critical to assure your vendor’s cybersecurity compliance efforts are aligned with regulatory requirements.
What Is the Vendor Risk Assessment Process?
Vendor risk assessment (VRA) is the process of detecting and evaluating any risks or hazards connected with a vendor’s operations and products, as well as their potential influence on your organization.
The vendor risk assessment is essential because it allows an organization to articulate the risks posed by its third-party vendor relationships. A third-party’s risk is also the organization’s risk. Third-party vendors are often associated with financial, cybersecurity, information security, operational, reputational, and compliance risks.
A third-party VRM program is an organization-wide plan outlining the types of behaviors and access agreed upon between an organization and its third-party service providers. For example, a third-party risk management plan should include details about the testing and requirements necessary to maximize the third-party vendor’s ability to do its job.
The vendor risk assessment helps organizations vet their third-party vendors and enables them to continue to prove due diligence on those service providers.
To craft successful vendor assessments, management should:
- Compare the list of third-party vendors from their accounts payable departments to their vendor lists, to assure they haven’t omitted any third-party vendors.
- Once you have the lists from accounts payable, sort the third-party service providers into different groups based on the types of vendors they are: cloud storage providers, marketing agencies, and so forth.
- Assess third-party vendor relationships at the service or product level. To understand all the risks third-party service providers present, it’s critical to complete a risk assessment on every service and product each vendor offers.
- Determine the due diligence requirements for the high-risk and critical third-party vendors. For example, if a third-party service provider is high risk, consider more frequent and in-depth monitoring.
- Stay current with governmental and industry regulations and implement new guidance for third-party vendor risk assessments as needed.
- Update senior executives and other stakeholders on any significant changes to the third-party risk assessments.
What Is Vendor Risk Management Software?
Vendor risk management (VRM) software helps organizations create and automate their vendor risk management program. Vendor and third-party risk management software can collect and manage vendor risk data to protect companies from data breaches or non-compliance in real-time.
For example, supply chain professionals use software to manage due diligence questionnaires. The software will distribute, collect, analyze, and store the results, providing notifications for red flags. Compliance officers use third-party risk management software to manage requirements for government regulations, such as GDPR or HIPAA.
With ZenGRC risk management software, you can automate supplier risk management, so you and your team can focus on other, more critical tasks. Freed from the tyranny of spreadsheets, your business will rise above the risks.
ZenGRC provides a single source of truth that assures your organization is always compliant and audit-ready. Policies and procedures are revision-controlled and easy to find in the document repository. Workflow management features offer easy tracking, automated reminders, and audit trails. Insightful reporting and dashboards provide visibility to gaps and high-risk areas.
Using ZenGRC to manage your suppliers takes the hassle and worry out of risk management. Its continuous monitoring capabilities assure that you are always on top of the compliance hygiene of your third parties. In addition, it provides templates and streamlines workflows, so you don’t have to do it all yourself.
Why not call a Reciprocity expert today for your free consultation?