As more organizations incorporate third-party service providers to increase business performance, vendor risk management (VRM) has become more important. IT suppliers such as cloud service providers and Software-as-a-Service products come with inherent risks that can lead to negative impacts. For example, a Distributed Denial of Services (DDoS) attack can lead to business disruption by shutting down the cloud service.

Most regulatory compliance initiatives need to consider formal vendor risk management policies and programs placing an emphasis on due diligence and subsequent vendor management. The third-party vendor review process follows the same steps as other risk assessments. Organizations need to list all vendors, review business criticality, identify information accessed, determine threats, assign a risk rating, analyze third-party risk, create a risk response, set controls to mitigate risks, and continuously monitor for changes.

However, vendor risk management has an additional planning step. Organizations need to use their risk assessments to define the terms and conditions of service level agreements (SLAs). SLAs are the contracts between the company and its vendor. To ensure vendors align with the established corporate risk tolerances, companies need to define the appropriate controls within the contract. Having the controls defined within the SLA allows the organization to set key performance indicators for maintaining the relationship.