Vendor risk management (VRM), a part of vendor management, is the process of identifying, analyzing, monitoring, and mitigating the risks that third-party vendors might pose to your organization. Such risks could affect your business’ cybersecurity, regulatory compliance, business continuity, and organizational reputation.

Third-party risk management begins with due diligence before signing a contract, as with any risk management program. It also involves a risk assessment for each contractor, vendor, supplier, and service provider with which your company works.

A growing number of enterprises either have a vendor risk management program or are starting one. Concerns over information security and data privacy are driving this change, but so are laws. The European Union’s General Data Protection Regulation (GDPR) requires organizations to assess how their third parties manage privacy risk and mandate third-party compliance for certification.

What Is the Difference Between a Third Party and a Vendor?

Vendors and third parties play an essential role in any business model, but they aren’t precisely the same thing.

A vendor is an external entity that supplies goods or services to an organization, often in the supply chain. Examples are:

  • Cloud service provider
  • Law firm
  • Accountants and auditors
  • Consultant
  • Software developer
  • Website host
  • Payment processor
  • Raw materials provider

Third-party relationships encompass all the above entities but also include others with whom your organization does business, such as:

  • Business partners
  • Venture capitalists
  • Regulatory agencies
  • Nonprofits receiving your donations
  • Customers

While many companies have a vendor risk management (VRM) program, a third-party risk management (TPRM) program encompasses more potential risks, depending on who you share data with.

What Is Vendor Lifecycle Management?

The vendor management lifecycle is an end-to-end method that enterprises use to manage external suppliers orderly and transparently. Because market circumstances and technology are continually evolving, companies must reevaluate their old vendor management procedures to address new risks.

The vendor management lifecycle usually consists of:

  • Identification
  • Selection
  • Segmentation
  • Onboarding
  • Vendor performance reviews
  • Information management
  • Risk management
  • Relationship management
  • Offboarding

Technology is an essential component of the vendor management lifecycle since it allows firms to “do more with less” by using automation. Therefore, companies should use new technology to simplify vendor lifecycle management, get more out of vendor partnerships, and remain competitive.

Vendor Risk Management Maturity Levels

A vendor risk management maturity model (VRMMM) assesses the maturity of the third-party risk management program at a given organization. It encompasses controls for cybersecurity, information technology, data security, and business resiliency.

A VRMMM enables businesses to design a plan before launching a program and determine how goals will be set to ensure success. Understanding your company’s vendor risk management maturity level is critical to appropriately managing vendor risk and identifying high-risk vendors.

A vendor risk management maturity model has six levels:

  1. Startup. Emerging businesses that are just starting or organizations with no established vendor risk management activities.
  2. Initial vision and ad hoc activity. The organization is considering how to implement third-party risk activities, or third-party risk management operations are carried out on an as-needed basis.
  3. Approved route and ad hoc activity. The board of directors has approved a strategy to arrange activities as part of a complete implementation effort. In the meantime, third-party risk management operations are carried out on an as-needed basis.
  4. Defined and established. A business has thoroughly planned, authorized, and formed risk management activities, but those elements are not fully implemented due to lacking metrics and enforcement.
  5. Implemented and fully operational. A company has fully implemented vendor risk management practices encompassing transparency and independent monitoring
  6. Constant revision and refinement. Businesses in search of operational excellence must have a clear grasp of the most robust performance levels and constantly apply program adjustments to enhance the process

Third-Party Vendor Risk Management: Addressing the Risks

The vendor-risk-management process involves due diligence activities before contracting with a new vendor, using questionnaires to verify the capabilities and processes of the prospective vendor.

This step helps to assure that the vendor under consideration complies with necessary regulations and industry standards, and has a robust information security program. In addition, using a risk management framework and software-as-a-service (SaaS) will provide structure to streamline and automate for effective vendor risk management.

Risk assessments are also a vital part of vendor risk management. For these, you may request evidence of the vendor’s own risk management, information security, and regulatory compliance efforts.

Evidence may include compliance certifications, penetration test reports, financial information, and on-site audits. In addition, with existing third-party relationships, assessing past vendor performance can provide clues to potential risks. Here are some types of risks to look for.


Do your vendors comply with applicable regulations and industry standards? If not, your organization could face legal liabilities. For example, the Health Insurance Portability and Accountability Act (HIPAA) and the Payment Card Industry Data Security Standard (PCI DSS), among others, require vendor compliance.


How could a vendor cause your organization to lose money? Examples include supply chain disruptions, insolvency, a lack of operational resilience, and other types of financial risk exposure.


Reputational risk may follow whenever vendor risk causes an organization to suffer financial hardship, data breaches, business disruption, or loss of certification.


Cybersecurity risk is one of the biggest concerns with third parties. Security breaches of your vendor’s systems can result in damage to your own information technology systems and disruptions in business processes.

Using a good framework for security controls, such as the National Institute of Standards and Technology’s cybersecurity framework (NIST CSF), can help your security team verify that your data is always safe and secure. Vendor risk management continues with monitoring and oversight throughout the lifecycle of the vendor relationship and even after the contract has ended.

Third-party risk management may entail all the above steps, but with one caveat: While you choose your vendors, you cannot always select your third-party relationships, such as with customers and regulatory agencies. As a result, you don’t have as much control over the risk incurred by non-vendor third parties.

To manage the risks posed by third-party vendors, contractors, and service providers, your organization can implement a comprehensive vendor risk management program.

From vendor selection to onboarding to termination (and beyond) a vendor risk management program helps you to identify the risks your third-party relationships pose to your enterprise. Then you can work directly with vendors to remedy those risks and continuously monitor for changes in your vendors’ risk posture that could affect your business.

How to Develop a Vendor Risk Management Strategy

A successful vendor risk management program involves careful planning by a dedicated team, continual oversight, and commitment to the process at every stage. Here are the steps to take:

  1. Draw Up a Formal Policy and Procedural Documents

    These are essential to your program’s success. The policy should explain how vendor risk will be managed. Procedure documents should detail roles and responsibilities, including senior management and your business lines.

  2. Establish a Vendor Selection Due Diligence Questionnaire and Process

    Vet your vendors before signing contracts with them. Questionnaires and risk assessments are valuable to compare vendors and assign security ratings. They should provide evidence of certifications and penetration testing results. Always make site visits when necessary.

  3. Mind Your Vendor Contracts

    Templates are beneficial but should be amended for each vendor based on roles, responsibilities, and compliance requirements. Set contract standards to establish uniform processes for review, approval, monitoring, and contract storage. Your contracts should also address service level agreements (SLA), issue escalation, vendor termination, and security documentation.

  4. Conduct Ongoing Vendor Monitoring

    • Review the vendor’s financial statements
    • Ask to see IT diagrams so you know how you’re affected if the vendor has a cyberattack or business disruption
    • Conduct vendor audits
    • Periodically request and evaluate vendors’ SOC reports, business continuity and disaster recovery plans, and security documentation
    • Annually perform vendor risk assessments, performance assessments, and information security assessments
  5. Perform Internal Audits

    Internal audits are crucial for assuring that you manage vendor relationships adequately and consistently. Then, when external auditors test your compliance, you’ll be in a better position to work with the auditors and feel secure in the knowledge that your organization’s systems and data are protected.

  6. Automate

    Cut costs and time using quality governance, risk, and compliance (GRC) software. Automation can perform many tasks listed here, including generating and sorting questionnaires, staying on top of compliance requirements, and continuously monitoring third-party vendors.

Manage Vendor Risks with ZenRisk

Once you’ve onboarded a vendor, the task of keeping tabs on its security is only just beginning. You’ll need to send self-assessment questionnaires, obtain penetration testing results, continually update your vendor data, and more. And you need to be on top of changes in real-time. Otherwise your own organization’s security and compliance could suffer.

Using Reciprocity ZenRisk to manage your third-party vendors takes the hassle and the worry of vendor risk management. Its continuous monitoring features assure you’re always on top of your third parties’ compliance hygiene. It streamlines workflows so you don’t have to do everything yourself. It will even send out questionnaires and tally the results as they come in.

Zen keeps track of vendors’ compliance with multiple frameworks and provides complete audits in a few clicks via its internal audit feature. In addition, its user-friendly dashboards show you at a glance who among your third parties is compliant and who isn’t.

With ZenRisk automating your vendor risk management, you and your team can focus on other, more critical tasks. Liberated from the tyranny of spreadsheets, your business will rise above the risks.

Contact a Reciprocity expert today to schedule a demo.