An overview of vendor risk management (VRM)

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Picture this: You’re running a successful business and rely on various vendors and third parties to provide essential services. But have you ever considered the potential third-party vendor risk associated with these vendors? This is where Vendor Risk Management (VRM) comes into play. 

VRM is all about identifying and mitigating risks that come with working with vendors, making it absolutely critical for your business’s success. It involves a comprehensive approach to managing vendor relationships throughout the entire lifecycle, from onboarding to offboarding.

Understanding the key components of a VRM program is vital for effective vendor risk management. These components include identifying and implementing a comprehensive VRM strategy, assessing vendor risks, and continuously monitoring vendor performance.

Key takeaways

• VRM is essential for businesses relying on external vendors, involving a comprehensive approach to identify and mitigate risks
• Key components of VRM include risk assessment, strategy implementation, and measuring vendor performance
• To maximize effectiveness of VRM, embrace automation, foster collaboration, and adapt to regulatory changes

Vendor risk management vs third-party risk management

While vendor risk management (VRM) and third-party risk management (TPRM) are often used interchangeably, they have subtle differences. Both VRM and TPRM involve identifying, assessing, and mitigating risks associated with external entities. However, the scope of each can vary.

Vendor risk management can be seen as a subset of third-party risk management. VRM specifically focuses on managing the risks associated with vendors that provide goods and services to an organization. These risks can include compliance, financial, reputational, and cybersecurity risks.

On the other hand, third-party risk management has a broader scope. It encompasses not only vendors but also all third parties that an organization interacts with. This can include partners, affiliates, contractors, and even customers. TPRM aims to manage the risks associated with all these external entities.

In essence, while all vendors are third parties, not all third parties are vendors. Therefore, while VRM is a crucial component of TPRM, it is not the entirety of it. An effective TPRM program will include a robust VRM component but also consider other third parties that pose potential risks to an organization.

The importance of VRM

As companies increasingly rely on third-party vendors to support their business operations, the importance of vendor risk management (VRM) has grown exponentially.

Examples of common vendor relationships that companies often engage with include:

• IT services and software vendors: These vendors provide crucial technology services, such as software development, cloud storage solutions, and IT support.
• Other professional services vendors: Other than IT services, other professional services vendors may offer specialized services such as legal advice, financial consulting, or marketing expertise.
• Supply chain vendors: Suppliers of raw materials or products needed for a company’s operations. They could include manufacturers, distributors, and logistics companies.

While vendors augment your business, adding subject matter expertise and resources you might not otherwise have, this mutually beneficial partnership can also introduce various risks to your organization, such as:

• Compliance risks: Compliance and legal risks are associated with vendors not adhering to industry regulations and standards, which can lead to fines and penalties.
• Reputational risks: When a vendor’s actions or harmful publicity damage your organization’s image and reputation.
• Financial risks: When a vendor’s financial instability affects your organization’s operations, such as delays in product delivery or service interruptions.
• Cybersecurity risks: Potential data breaches or unauthorized access to your organization’s systems due to vulnerabilities in a vendor’s security controls and privacy risks.

A robust VRM program minimizes the consequences of unexpected vulnerabilities and reduces your organization’s overall risk exposure. 

“When companies began extensively outsourcing and globalizing the supply chain in the 1980s and 1990s, they did so without understanding the risks suppliers posed. Lack of supplier attention to quality management could compromise the brand. Lack of physical or cybersecurity at supplier sites could result in a breach of corporate data systems or product corruption. Over time, companies have begun implementing vendor management systems– ranging from basic, paper-based approaches to highly sophisticated software solutions and physical audits – to assess and mitigate vendor risks to the supply chain.”

NIST

The perfect vendor risk management strategy should kick in right from the vendor selection process through due diligence and contract negotiations. It should continue throughout the vendor relationship, including the delivery of the product or service and planning proactively for business continuity.

An ongoing vendor risk management model ensures seamless communication and proactive risk management throughout the vendor lifecycle, which is a crucial aspect of vendor lifecycle management.

Understanding your vendor risk management maturity level

Understanding the maturity level of your VRM program is critical to identifying areas for improvement and aligning your VRM efforts with your organization’s risk appetite and strategic goals. While there are a few different models for measuring maturity levels, this is a helpful place to start:

• Initial (Level 1): At this level, the organization has no formal VRM processes in place. Vendor risk management is reactive and ad hoc, with limited visibility into vendor risks.
• Managed (Level 2): The organization has basic VRM processes in place. Vendor risks are identified and managed, but processes are not standardized or consistently applied across the organization.
• Defined (Level 3): The organization has established and documented VRM processes. Vendor risks are proactively managed, and there is organization-wide awareness of VRM.
• Quantitatively managed (Level 4): The organization’s VRM processes are measured and controlled. Vendor risk data is used to drive decision-making and continuous improvement.
• Optimized (Level 5): At this level, the organization has a fully integrated VRM program. VRM processes are continuously improved based on quantitative feedback, and the organization is able to predict and effectively manage vendor risks.

By assessing your VRM maturity level, you can identify gaps in your current approach, set realistic goals for improvement, and develop a roadmap for advancing your VRM plan.

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How to put together a vendor risk management plan

Establishing a solid VRM plan is crucial for successful vendor risk management. A successful plan has several backbone components that work together to identify, assess, and mitigate risks associated with third-party vendors. They include:

1. Risk identification

This involves identifying potential risks that a vendor might pose to your organization. These risks could be financial, operational, reputational, or related to compliance, cybersecurity, or privacy. 

For instance, a software vendor might pose a cybersecurity risk if their systems aren’t secure, and your data could be compromised.

2. Risk assessment

Once risks are identified, they need to be assessed based on their potential impact on the organization. This involves determining the likelihood of the risk occurring and its potential impact. The following section will delve into this topic in greater detail.

For example, if the software vendor’s system is breached, the assessment would determine the potential damage to your organization’s data and reputation.

3. Risk mitigation strategies

Based on the risk assessment, appropriate strategies should be developed to manage and mitigate these risks. This could involve implementing controls, changing vendor processes, or terminating the vendor relationship if the risk is too high. 

In the case of the software vendor, a mitigation strategy could be to require the vendor to improve their security measures or to requiring they meet specific, verifiable security standards like SOC 2 or ISO 27001.

4. Vendor performance monitoring

Your company should regularly monitor the performance of vendors to ensure they are meeting their contractual obligations and not posing any additional risks to the organization. 

For example, regular audits could be conducted on the software vendor to ensure they maintain the agreed-upon security measures.

5. Continuous improvement

A vendor risk management plan should not be static. It should be continuously reviewed and updated based on changes in the business environment, regulatory changes, or changes in the vendor’s business. 

In the case of the software vendor, if they implement a new system or process, the VRM plan would need to be updated to reflect this change.

6. Vendor relationship management

Vendor relationship management involves managing the relationship with the vendor to ensure it remains beneficial for both parties. This includes regular communication, performance reviews, and contract renewals. 

For instance, regular meetings could be held with the software vendor to update and maintain key contacts, discuss performance, address any issues, and plan for the future.

Three techniques for vendor risk assessments

To effectively assess and mitigate vendor risks, you can employ various vendor risk assessment techniques, such as: 

1. Security questionnaires
2. Vendor audits
3. External risk intelligence

These techniques can help you comprehensively understand your vendors’ risk profiles and ensure that they adhere to industry regulations and best practices.

1. Security questionnaires

Security questionnaires are useful for assessing a vendor’s security controls, values, objectives, policies, and practices against industry regulations and best practices. They usually consist of a series of questions designed to evaluate a vendor’s security posture and compliance with industry standards.

Utilizing security questionnaires provides the following benefits:

• Provides insights into a vendor’s security practices
• Ensures alignment with the organization’s requirements
• Helps identify potential risks
• Allows for appropriate measures to mitigate risks
• Ensures the security and privacy of your data.

2. Vendor audits

Vendor audits are another technique for assessing and mitigating vendor risks. They allow you to identify compliance gaps and monitor vendor compliance with established standards and regulations.

The vendor audit process involves gathering information from the vendor, ensuring that they are following the rules, and evaluating their performance. Regular vendor audits ensure adherence to industry regulations and best practices, thus minimizing potential risks and protecting the organization from vendor-related threats.

However, most organizations don’t have time to perform in-depth audits on vendors, so they will leverage the audits performed by independent assessors and auditors (such as the case of obtaining a SOC 2 Type 2 attestation, ISO certifications, HITRUST, and others).

3. External risk intelligence

External risk intelligence can provide you with a comprehensive view of vendor risks by incorporating data from various sources, such as cybersecurity ratings and geopolitical risk assessments. By leveraging external risk intelligence, you can gain a more holistic understanding of your vendors’ risk profiles and ensure that they meet your organization’s standards and requirements.

Incorporating external risk intelligence into your VRM program can help you proactively identify potential risks and take appropriate measures to minimize their impact on your organization. This will help you build a robust VRM program that effectively manages vendor-related risks and ensures the security and privacy of your data.

VRM best practices in 2023 and beyond

As we look ahead, there are several best practices that you can incorporate into your VRM program to ensure its success. These include embracing automation, fostering collaboration, and adapting to regulatory changes.

Implementing these best practices creates a proactive and efficient approach to managing vendor risks. This will help you minimize potential risks, ensure the security and privacy of your data, and maintain compliance with evolving regulations and industry standards.

Embracing automation

Automation is key to streamlining your VRM process and reducing operational overhead. Automating key VRM processes and tasks, such as:

• Vendor onboarding
• Risk analysis
• Due diligence
• Assessments

Taking advantage of automation when it comes to VRM results in time and cost savings while also enhancing the organization’s security by implementing the right product or service. 

Embracing automation enables the organization to:

• Focus on strategic initiatives
• Allocate resources more effectively to manage vendor risks
• Spot potential risks
• Develop strategies to address them
• Stay protected from potential threats

Utilizing VRM software and tools can significantly enhance your VRM efforts by automating processes, providing real-time risk intelligence, and improving overall program efficiency and effectiveness. VRM technology can simplify your vendor risk management program by automating key processes such as vendor onboarding, risk analysis, vendor due diligence, and assessments.

Fostering collaboration

Collaboration is crucial for the success of any VRM program. Fostering collaboration between departments and stakeholders ensures alignment and collective work towards common goals.

A collaborative approach to VRM can help you identify potential risks early on and take appropriate action to mitigate them. This ensures that your organization remains protected from vendor-related threats and maintains compliance with industry regulations and best practices.

Adapting to regulatory changes

Staying up-to-date on regulatory changes and incorporating them into the VRM program enables proactive vendor risk management and ensures data security and privacy. This will help you maintain a robust VRM program that effectively manages vendor-related risks and protects your organization from potential threats.

Measuring the success of your VRM program

Gauging the success of a VRM program requires the establishment of metrics that evaluate its effectiveness, such as compliance rates, risk reduction, and cost savings. Measuring the program’s success helps identify areas of improvement and refine VRM processes for better vendor risk management.

Regularly reassessing your VRM program’s performance will help ensure that your organization remains protected from vendor-related threats and maintains compliance with industry regulations and best practices. This will ultimately contribute to the overall success of your VRM program and safeguard your organization’s operations and reputation.

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