Third-party vendor management consists of all the processes necessary for a company to monitor and manage the interactions with its third-party vendors. Some companies rely heavily on third-party vendors for help getting products to market faster, as well as to run business operations or provide other critical services.
Third-party relationships, however, also introduce a number of risks to an organization, including regulatory, reputational, information security, cybersecurity, and financial risks. In particular, if a vendor has access to your corporate network, that vendor can access sensitive corporate, employee, and customer data. That poses cybersecurity risk to your business.
To manage such risks, companies need to develop strong vendor management practices and implement vendor risk management (VRM) systems.
A vendor risk management plan should capture all the behaviors, access, and rules that an organization and its third-party vendors agree upon. The plan should include details about testing and assurance required to prove that the third-party service provider can do its job. The vendor risk management plan should also include a checklist of all the steps a third-party vendor must follow to keep its risks at some satisfactorily low level.
Why Should I Invest in Third-Party Vendor Management?
Third-party vendor management is a comprehensive approach to managing the relationships and activities your business has with its external partners. While VRM requires an upfront investment of time and resources, the long-term benefits in risk mitigation, cost savings, efficiency, and strategic growth make it a worthwhile endeavor for businesses of all sizes.
Below are some of the biggest advantages of effective third-party vendor management:
- Risk mitigation. Third-party vendors may introduce a business to various risks, such as data breaches, supply chain disruptions, and regulatory compliance issues. Effective vendor management helps to identify, assess, and mitigate these risks, assuring that your business is adequately prepared to address potential challenges.
- Cost efficiency. Proper vendor management enables businesses to negotiate better pricing and terms with vendors, leading to greater cost savings. VRM also fine-tunes procurement processes, lowering the risks of overpayments, double billing, and other financial issues.
- Enhanced focus on core competencies. Outsourcing certain functions to third-party vendors allows a business to focus its internal resources and expertise on its core competencies and strategic objectives instead of getting bogged down in peripheral activities.
- Regulatory compliance. Many industries have strict regulations and compliance requirements. Effective vendor management assures that vendors meet these standards and follow applicable rules, reducing the risk of legal and regulatory issues to you.
- Improved performance monitoring. Vendor management provides mechanisms for tracking and evaluating vendor performance. This helps you to hold vendors accountable to their promises and agreed-upon service levels.
- Reputation management. The actions of third-party vendors can affect a business’s reputation. By carefully selecting and managing vendors, a business can maintain a positive image and avoid negative associations.
- Disaster recovery and business continuity. Vendor management includes assessing the vendors’ disaster recovery and business continuity capabilities. This assures that the vendor can still support your operations in the event of a crisis.
Best Practices for Third-Party Vendor Management
The following are best practices to guide your third-party vendor management process:
1. Prioritize vendors
Risk levels vary from one vendor to the next, so you must prioritize vendors by putting those with the most risk first. You can do this by establishing a risk rating formula. For example, Risk = Likelihood of Data Breach x Impact of Data Breach/Cost. Perform those calculations on your vendors, then group them into categories such as high, medium, or low based on the results.
2. Implement access control
A 2021 survey found that 54 percent of respondents didn’t have a proper third-party access list, and 64 percent didn’t identify parties with sensitive data access. This is a serious misstep, since giving your vendors too much access to your systems is a common cause of breaches. While controlling all access is challenging, consider using identity and access management (IAM) and a zero-trust approach for authorized access.
3. Continuously monitor and assess vendors
Traditional risk management is costly and point-in-time. Security ratings provide ongoing quantitative security measurements akin to credit ratings. They offer real-time, non-intrusive insights into vendor security posture, allowing continuous risk assessment across the portfolio.
4. Automate third-party vendor management
Wherever possible, automate third-party risk management processes. Automate vendor risk management tasks like data collection, risk assessment, continuous monitoring, compliance, and vendor onboarding. This streamlines risk management, assures consistency, and reduces errors.
5. Review insurance coverage
Do you trust your third parties to have enough insurance for potential disasters or data breaches? Typically, third-party agreements mandate specific insurance levels. If a third party lacks the necessary coverage and an incident happens, your organization could face avoidable risks.
Periodically re-evaluate your insurance needs after signing the contract with the third party. Changes in technology, delivery, or manufacturing locations may render your existing coverage insufficient.
6. Plan for worst-case scenarios
Not all vendors will meet your standards, which makes business continuity, disaster recovery, and incident response planning vital. Plan for contingencies, including the removal of non-compliant vendors. Business continuity planning also reduces customer disruptions due to third-party failures, whether from misconfigurations or natural disasters affecting third-party data centers.
The Third-Party Vendor Management Lifecycle
The third-party risk management lifecycle, also called third-party relationship management, outlines the steps in a typical relationship with a third-party vendor. Here’s a brief overview of the main stages:
Stage 1: Third-party identification
- Identify current and potential third-party vendors.
- Use existing data sources, integrate with technologies such as configuration management databases (CMDBs), or conduct assessments/interviews.
- Collect initial information about the third party to assess inherent risks.
Stage 2: Evaluation and selection
- Evaluate vendors using factors unique to your business needs.
- Choose the vendor based on requests for proposal (RFPs) and suitability.
Stage 3: Risk assessment
- Assess vendor risks using standards such as ISO 27001, SIG Lite, NIST 800-53, HITRUST, and other standards.
- Understand the risks associated with the vendor’s services.
Stage 4: Risk mitigation
- Identify and flag risks, then assess whether those risks align with your risk tolerance.
- Implement controls to reduce risks to an acceptable level.
- Continuously monitor risks for changes.
Stage 5: Contracting and procurement
- Review vendor contracts for key provisions and clauses related to risk management.
- Assure that contract terms such as scope, payment, confidentiality, and liability are addressed.
Stage 6: Reporting and record keeping
- Maintain compliance by keeping detailed records.
- Use third-party risk management software for auditable record keeping.
- Create reports on program aspects for improvement.
Stage 7: Ongoing monitoring
- Continuously monitor vendor relationships.
- Adapt to changes in regulations, news, breaches, or vendor usage.
- Monitor factors such as mergers, process changes, and financial viability.
Stage 8: Vendor offboarding
- Develop an offboarding checklist for vendors.
- Assure that all necessary measures are taken for security and compliance.
- Maintain a detailed evidence trail for regulatory purposes.
What to Look for in Third-Party Risk Management Software
When choosing third-party risk management software, look for the following features:
- Risk assessment automation. Look for tools that automate the time-consuming tasks of scoping assessments, distributing questionnaires, and collecting responses. Automated assessment scoping helps focus on critical risks and reduces vendor management fatigue.
- Configurable reporting. Strong reporting capabilities are essential for proving compliance with regulations and industry standards. Configurable reporting allows you to generate role-specific reports and dashboards quickly, demonstrating the effectiveness of your risk management plan.
- Continuous monitoring. Your third-party risk management software should monitor vendor performance and risk changes in real time. This will allow you to stay alert to any shifts in their risk status, assuring quick responses to emerging issues. It should also send notifications of any new risks.
- Integrated compliance tools. Embedded compliance tools assure alignment with internal policies and external regulations to reduce supplier risk. This makes them especially valuable for heavily regulated sectors such as finance and government.
RiskOptics Third-Party Risk Management Solutions
Third-party vendor risk management requires active and consistent management to limit a company’s third-party risk exposure. The RiskOptics ROAR Platform helps you see, understand, and manage I.T. and cyber risks. It automates compliance and shows how it affects your main goals. This real-time view lets you explain the impact to key stakeholders and make smart choices to protect the organization and its data, as well as earn trust.
Get a demo to learn more about ROAR.