What is Vendor Risk Management (VRM)? The Definitive Guide

Vendor risk management (VRM), a part of vendor management, identifies, analyzes, monitors, and mitigates the risks that third-party vendors might pose to your organization. Such risks could affect your business’s 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 have a vendor risk management program or are starting one. Concerns over information security and data privacy drive this change, but so do laws and compliance obligations. For example, the European Union’s General Data Protection Regulation (GDPR) requires organizations to assess how their third parties manage privacy risks and mandate third-party compliance.

What Is the Importance of Vendor Risk Management?

Recent events such as the COVID-19 pandemic, the SolarWinds cyberattack, the Colonial Pipeline attack, and other ransomware breaches have underlined the threat of vendor-related risks. These events have affected millions of companies and third parties, regardless of industry, company size, or country.

An effective vendor risk management program can reduce the harm of disruptive events and improve a company’s overall security posture.

That said, VRM offers many more benefits than just risk reduction. For example, companies implementing a supplier risk management program can evaluate and onboard new suppliers more efficiently by putting the right tools in the hands of the right people more quickly.

In addition, a vendor risk program can allow organizations to monitor their supplier relationships over time, identify new risks, and measure supplier performance. There are many other reasons why supplier risk management is essential, including the ability to enforce contracts, reduce spending, and track security controls.

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 always the same. All vendors are third parties, but not all third parties are vendors.

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 and sensitive information with.

What Is Vendor Lifecycle Management?

The vendor management lifecycle is a process that enterprises use to manage external suppliers with consistency and transparency. 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 comprises:

• Identification
• Vendor assessment and selection
• Segmentation
• Onboarding
• Vendor performance reviews and relationship management
• Continuous monitoring and risk management
• Offboarding

Technology is an essential component of the vendor management lifecycle since it allows firms to “do more with less” using automation. 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. This assessment encompasses cybersecurity, information technology, data security, and business resiliency controls.

A VRMMM allows businesses to design a plan before launching a program and determine how goals will be set to assure 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 independent monitoring and transparency with stakeholders.
6. Constant revision and refinement. Businesses searching for operational excellence must grasp the most robust performance levels and 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 methods 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. Using a risk management framework and software-as-a-service (SaaS) will provide structure to streamline and automate effective vendor risk management.

Risk assessments are also a vital part of vendor risk management to identify vulnerabilities. You may request evidence of the vendor’s 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.

Legal

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.

Financial

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

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

Cybersecurity

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

Using a good framework for security controls, such as the National Institute of Standards and Technology’s Cybersecurity Framework (NIST CSF), provides structure to help your security team verify that your vendor has mitigation controls in place to protect your data.

Vendor risk management is an ongoing process, including periodic risk assessments and ongoing monitoring throughout the lifecycle of the vendor relationship (and sometimes even after the contract has ended).

Third-party risk management may entail all the above steps, with one caveat: While you can choose your vendors, you cannot always select all 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 must implement a comprehensive vendor risk management program.

From vendor selection to onboarding to termination (and beyond), a vendor risk management program helps 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 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 business lines.

2. Establish a Vendor Due Diligence Questionnaire and Processes

   Vet your vendors before signing contracts with them. Questionnaires and risk assessments are valuable for comparing vendors and assigning security ratings. In addition, they should provide evidence of certifications and penetration testing results. Finally, make site visits when possible.

3. Mind Your Vendor Contracts

   Templates are helpful, 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 (SLAs), issue escalation processes, vendor termination, and security documentation.

4. Conduct Ongoing Vendor Monitoring

   • Review the vendor’s financial statements.
   • Ask to see IT diagrams to know how you’re affected when the vendor has a cyberattack or business disruption.
   • Conduct vendor audits.
   • Periodically request and evaluate vendors’ SOC reports, business continuity plans, 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 knowing 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, including generating and sorting questionnaires, staying on top of compliance requirements, and continuously monitoring third-party vendors.

Which Metrics Should You Use to Evaluate VRM Efficacy?

Establishing metrics is critical to the success of your supplier risk management program. Without metrics, there’s not much upon which to base decisions except instinct. For supplier risk, wrong choices can put your organization in a tough spot.

The most specific metrics that are typically followed are as follows.

• Total number of suppliers
• Suppliers by risk score or risk level
• Status of all vendor risk assessments
• Number of supplier contracts that are expiring or have expired
• Risks grouped by tier (high, medium, low)
• Risks by stage within the risk remediation workflow
• Threats to your parent organization and dangers to your subsidiaries
• Risk history over time

How Can Your Organization Automate VRM?

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.

The use of software to automate vendor risk management can significantly enhance your VRM program. You will identify risks and vulnerabilities more quickly. Operational overhead will be reduced by relieving compliance, security, and procurement personnel from tedious tasks, which lets them focus on more profitable and strategic initiatives.

Streamline Vendor Risk Management with Reciprocity ZenRisk

Using Reciprocity ZenRisk to manage your third-party vendors removes the hassle from vendor risk management. It streamlines workflows to reduce manual intervention and assure consistency.

ZenRisk keeps track of vendors’ compliance with multiple frameworks and drives audits in just a few clicks with 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.