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The Top 5 Essentials for Vendor Risk Management

The Top 5 Essentials for Vendor Risk Management

Working with third-party vendors is often the best option to save your business time and money. But as your company uses more and more third-party services providers or SaaS products to help manage data and operations, that increases your risk exposure and the opportunities for a malicious actor to access data or systems through those third parties. Many high-profile data breaches can be traced back to a supply chain attack. As such, a good Vendor Risk Management program is paramount for data protection and overall business continuity. 

Companies often see the Vendor Risk Management process from both sides: you may receive vendor security questionnaires from potential customers and also have your own process to assess third-party risks. Being prepared and organized ensures your team doesn’t waste time responding to inquiries in your sales pipeline. You will also be able to procure the vendor services you need in a timely manner. To help you understand more about Vendor Risk Management and how it supports your organization, we collected our top 5 frequently asked questions covering the basics you need to know.

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What is Vendor Risk Management?

The main purpose of a Vendor Risk Management program is to reduce and mitigate risks in order to protect an organization from potential damages that could arise in vendor relationships. It is also to ensure that the use of vendors in business functions does not create a negative impact for your business or its customers.

Every organization has its own business continuity and risk management procedures. Vendor Risk Management is simply the management of risk for your vendors (and third or fourth parties that partner with that organization). It is the process of managing the impact of potential harms caused by the business relations with these suppliers. In this process, you fully get to know who your vendors are and what risk they pose to the organization and your customers. You then implement controls to mitigate that risk and ensure continued monitoring of risk throughout the lifecycle of the vendor relationship. 

Why is Vendor Risk Management Important?

Organizations are becoming ever more reliant on the need for outsourcing tasks to third-party suppliers. However, in an ever changing regulatory environment, working with third parties that operate as their own unique entities presents new challenges. There are different types and levels of risks involved with working with these suppliers – including operational, legal, and reputational risks. 

If your organization were a home, the vendors that work with your organization would be like the points of entry into that home. They would be the windows and doors that allow access to all of your important things that you don’t want burglars to have access to. Vendors that work with your organization tend to have access to your organization’s systems or proprietary information and even the personally identifiable information of your customers. For these reasons, mitigating the risk of a potential breach or data leak has to be kept at the forefront of your organization’s continuity strategy in order to keep both your organization and your customers safe from the impact of that potential risk. Furthermore, the more integral that a vendor is to your operation, the more access a vendor usually has and thus the more risk that vendor poses.

Another reason Vendor Risk Management is so important is that while organizational tasks can be outsourced to vendors, accountability for that risk cannot. That liability always falls on the organization above all vendors. You wouldn’t blame a home break-in on your windows and doors, now would you? Instead, you’d do everything you could to fortify those windows and doors in order to keep your home, as a whole, safe.

What is the Most Common Way of Measuring Vendor Risk?

There are numerous ways to measure vendor risk. Some organizations choose to gather data on key performance indicators (KPIs) and key risk indicators (KRIs). One of the most widely used methods for third-party risk assessment is vendor security questionnaires. What Carbide recommends is compiling information gathered from security questionnaires into a comprehensive vendor risk (or performance) scorecard. 

These scorecards allow managers to track a vendor’s performance, clarify important performance criteria, and to communicate expectations clearly to vendors and to your organization. They are also used to help improve vendor relationships by measuring vendor effectiveness through ongoing monitoring over time and to help managers minimize and mitigate risk based on the score and information given in the scorecard. 

KPIs and KRIs are just some of the metrics used in that process. No matter what metrics you decide to use to evaluate your vendor, those determinations will be given a weight or value of impact on the overall organization. A balanced scorecard helps to reduce risk and drive vendor performance.

What is Vendor Due Diligence?

This is the investigation phase that occurs before a company enters into a relationship with a vendor to avoid any potential issues of “buyers remorse.” In vendor due diligence, you learn as much as you possibly can about a vendor before making the purchase or signing a contact. This is the point when you gather key information about the vendor, get to know what risks are associated with the vendor, and evaluate the potential impacts those risks might have on your company. 

One crucial point about conducting due diligence, however, is that it is not only conducted at the beginning of the vendor relationship but periodically throughout. This ensures that mitigation strategies that were put in place at the beginning remain in place throughout the entire vendor relationship lifecycle. How often due diligence is conducted will depend on the nature of that relationship and what service the vendor provides to your organization. 

How Should I Manage Vendor Risk for my Organization?

You can get started today by identifying the tasks necessary to establish your vendor risk management program. Here are some of the main steps you’ll need to take: 

  1. Create a comprehensive inventory of your vendors. 
  2. Develop a policy for managing your vendors.
  3. Perform due diligence, including necessary initial risk assessments. 
  4. Mitigate and remediate risks that are identified during due diligence and risk assessments. 
  5. Prepare for ongoing risk monitoring throughout your vendor relationships. 
  6. Establish mechanisms for effectively responding to incidents that arise from third-party vendor risk and attempt to automate that process as much as possible (such as setting alerts in AWS).

Get Compliant with Carbide

With automated compliance checks, you can quickly evaluate your current information security framework and prioritize the gaps that may put the company at risk of not complying. Carbide can assist you with compliance with various frameworks such as SOC 2HIPAAISO 27001, GDPR, and more.