In a study RiskRecon recently conducted, it was found that most companies' vendors pass the company's screening. Even so, almost a third of respondents believe that some of their vendors could pose a potential risk to their company in terms of a data breach.

A company must have a thorough and robust vendor risk management program. Read on to find out what vendor risk management is and how best to implement a vendor assessment to mitigate risk relating to third-party breaches.

What Is Vendor Risk Management and Why Is It Important?

Most companies will inevitably use third-party vendors as service providers or IT suppliers. These third-parties could include anything from the company that provides accounting software to no one offering delivery services.

These providers and suppliers often have access to the company's data. As a result, the company needs to implement vendor risk management programs to ensure that the information shared with these third-parties is safe and secure.

Vendor risk management refers to the processes and procedures a company puts in place to ensure that using third-parties, also called vendors, does not pose an unacceptable risk to the data these third-parties have access to.

Because a third-party vendor has access to a company's sensitive information, there is a risk that a data breach, cybersecurity incident, or any supply chain security threats at the third-party could affect the company they are associated with.

This incident could disrupt a company's business, cost them money, and cause significant reputational damage.

What Are the Benefits Of A Formalized Vendor Risk Management Program?

There are numerous benefits to having a formalized vendor risk management program.

Having a formalized vendor risk management program reduces costs and the time required to manage vendors. It does this by consolidating the information required to manage each specific vendor. Any qualified employee will have access to this plan and know how to manage the vendor.

When a company's vendors are classified according to risk, third-party risk management employees can allocate time and resources accordingly. This way, the main focus could be on medium and high-risk vendors. Unacceptably high risk can be identified, and a vendor could be asked to make adjustments. They can be dropped if the vendor does not make the necessary changes.

Because a company is responsible for its vendors' compliance with applicable laws and regulations, it should track whether this is the case. A formalized vendor management program will make it easy for a company to evaluate whether its vendors consistently and continually stay compliant.

A robust vendor management program simplifies the reporting process. For example, companies can quickly establish which vendors have a higher risk. They would also be able to pick up on any changes in a vendor's risk profile quicker.

If a data breach or cybersecurity incident occurs at a third-party vendor, the primary organization can show that it has done its due diligence if a formalized vendor management program is in place. This can be used to motivate customers, regulators, and lawyers that a company has done all it can to mitigate risks posed by third-party vendors.

What Are the Types Of Risk Management?

Risk management encompasses several types of risk that a company needs to consider when working with a third-party vendor. These could negatively impact the primary business.

Compliance or Regulatory Risk

A third-party vendor that a business works with needs to comply with the regulations stipulated for the primary business' industry. This includes governmental regulations. Financial and medical companies should be especially vigilant when monitoring whether a third-party vendor is adhering to regulatory requirements. The possibility that a third-party vendor could break a rule or regulation that the primary business must follow is referred to as a complaint or regulatory risk.

Cybersecurity or Information Security Risk

Any business is at cyber risk of a data breach or cybersecurity incident. When a business works with a vendor, that risk is multiplied as the company now assumes the vendor's risk. Cybersecurity or information security risks include any potential attack to obtain information, hold a system or company hostage, or change crucial information.

Reputational Risk

Working with a third-party vendor could influence a company's reputation. Businesses are also judged by the company they keep. Being connected to a third-party vendor means a business is affected by how the vendor is perceived. For example, the primary company's reputation will suffer if a vendor provides poor customer service. Similarly, if the vendor has a data breach that affects the primary company's data, the primary company's business operations, revenue, and reputation could be negatively impacted.

Environmental, Social, and Governance (ESG) Risk

How a vendor's business impacts the environment and community. How they treat their employees will reflect on the primary business. Things like a vendor's carbon footprint, social responsibility programs, and worker safety standards are all things that could affect a primary business' reputation and potentially its revenue.

Transaction Risk

Transaction risk is the potential situation where a vendor cannot provide the agreed-upon products or services. If a vendor cannot deliver, this could negatively affect the primary business.

Operational Risk

Operational risks refer to situations where the vendor's business operations are interrupted. These interruptions will likely get passed on to the primary business. As a result, they could cause disruptions in its workflow, impacting its service levels and potentially its income.

Geographical Risk

Geographical risk comes into play when the vendor is based in a different country from the primary business. In these cases, all international standards and laws must be adhered to. Having one or more vendors in a particular location could make a primary company vulnerable to business disruptions due to natural disasters, political unrest, and even pandemic outbreaks.

Financial Risk

A financial risk exists anytime a connection with a vendor could impact a company's finances. A company's finances could be impacted by many situations. For example, a third-party vendor could provide goods or services that are not up to standard; they might face supply issues or provide poor customer service. All of this will affect the primary company's finances.

Strategic Risk

Strategic risks are any risks that can negatively affect a company's strategy implementation. It is not the same as operational risk. Strategic risk relates to how well a company can obtain its long-term goals. On the other hand, operational risks focus more on the systems, processes, and products that affect short-term and daily activities.

Contract or Legal Risk

There is a contract or legal risk that a vendor does not uphold their responsibilities as stipulated in the contract. There is always the risk that a third-party vendor could breach a contract and negatively affect the primary business.

Subsequential Risk

Third-party vendors likely use their third-party vendors. These third-party vendors of a company's third-party vendors (called fourth-party vendors) also come with certain risks. It would be prudent to evaluate these risks as much as possible.

Technical Risk

Technical risk refers to the technical processes, systems, and infrastructure that a third-party vendor has. This includes their IT and data management systems.

Resource Risk

Resource risk considers whether a third-party vendor has the resources available to perform the duties and offer the required services and products.

How Do You Assess the Risk of a Vendor?

It is crucial that you assess the risk exposure of every vendor before onboarding them – and that the risk factor is continuously evaluated throughout the working relationship. There are a few steps to take when assessing vendor risk.

Step 1: Consider the Types of Vendor Risk

It is crucial to remember each type of vendor risk when evaluating whether to work or continue to work with a third-party vendor. You might not always mitigate each risk completely. In these cases, you must decide whether the existing risk is acceptable.

Step 2: Determine your Company's Risk Criteria

All risks may not be equally important to each company. Companies must decide which risks are most important and focus their resources on evaluating them. It may be helpful to use a scale or system to label risks ranging from very high to negligible risks.

Step 3: Evaluate Third-Party Vendor Products or Services

It is not enough to only assess a potential third-party vendor as a company as a whole. It is vital that each product and service that may be used is assessed individually. The company might be relatively low risk level, while the specific service or product your business requires could be high risk or subpar.

Step 4: Ask Experts

Evaluating risks requires more than just a superficial investigation. It could benefit a company to employ a subject matter expert to evaluate each different type of risk that the company might be taking on when onboarding a third-party vendor. It may be required to employ the assistance of more than one expert to evaluate the risk relating to their field of expertise.

Step 5: Consistently Assess Vendors

Every third-party vendor, regardless of their role, should have a vendor assessment. That includes everyone from the cleaning company to the accounting software firm. You don't necessarily need to do a full formal vendor risk assessment. Still, it would be best if you considered that anyone who has access to your data, physical files, or physical space brings with them a potential risk.

Step 6: Categorize Vendors Based on their Risk Profile

Once you have evaluated a vendor, give them a risk score based on the amount of risk you take while collaborating with them. Firstly, this will help you decide whether working with this particular vendor is worth the risk. It will also serve as a guide for your risk management plan and processes.

After assigning a vendor a risk score or determining the level of risk, you need to consider how important their products or services are to your business. Sometimes it may be required to onboard a vendor with higher risk if their services or products are vital to your business and there are no other reasonable options.

The last thing you will need to do is decide how much and what types of due diligence each risk level of vendors will require. Vendors with a higher risk will require a more thorough investigation than those with a lower risk.

For example, a company whose employees restock the vending machines in a company's recreational area will require less screening than a firm that handles personally identifiable information like an IT software firm.

Step 7: Create a Robust Risk Management Plan

Each vendor should have an effective vendor risk management plan specifically created around the particular vendor's risks. Working with a vendor often comes with multiple risks.

The risk management plan should include processes and procedures that should be followed regarding each potential risk working with the vendor brings. This will enable a company to respond quickly in the case of an incident.

It should also include specific scenarios and who will be responsible for specific tasks in the event of an incident. Ideally, each player's name, role, and contact information (or line of communication) should be included.

A good supplier risk management plan should stipulate how frequently the vendor and its processes will be monitored, when to conduct in-depth due diligence, and any contractual agreements based on how the third-party vendor will manage its risks. This could involve agreements on how the vendor will use and store data or evaluate and manage any fourth-party vendors.

Key role players from various departments should collaborate to create a thorough risk management plan. These field experts best provide insight into how to prevent and handle risks specific to their department.

Step 8: Maintain Compliance with Regulations

A business should continuously ensure that it stays updated with laws and regulations applicable to its industry and general, universal laws and regulations. The organization should ensure that its vendors comply with all applicable laws and regulations for business continuity. 

These may include data privacy laws, employment and labor laws, tax laws and regulations, and environmental regulations.

In some instances, companies will need to adhere to international laws and regulations in addition to local, state, and federal ones. Often international laws don't only apply to businesses operating in a specific geographic area but also to businesses whose customers reside in that area.

For example, an American company that provides services or products to clients in a country that is part of the European Union must adhere to the guidelines set out by the General Data Protection Regulation (GDPR).

An organization is responsible for its compliance with all related laws and regulations. It is also responsible for ensuring that its third-party vendors (and its fourth-party vendors) adhere to the requirements, as the primary company could be held accountable for a vendor's compliance breach.

Therefore, a company must ensure its vendors stay compliant and move on from vendors that don't make the necessary changes to stay compliant.

Step 9: Conduct Regular Assessments

An organization must regularly assess its vendors to establish whether they still meet their needs. It also needs to evaluate whether the vendor's processes still meet the required standards and comply with the latest laws and regulations.

Usually, vendors don't drastically change their processes and procedures. This could happen, however, if the vendor merges with or is acquired by another organization. It could also begin to use a fourth-party vendor that does not adhere to the laws and regulations that the primary company needs to follow.

A vendor may change their product or service offering using a different manufacturer or service provider.  In these cases, the primary business needs to decide whether the risk involved in continued collaboration is worth the benefits.

Vendors with higher risk scores may need to be evaluated more regularly, like monthly or bi-annually. Conversely, vendors with a lower risk could be assessed annually.

How To Manage Vendor Risk

You need to establish a vendor risk management plan or program. The first step in establishing third-party risk management program is creating documentation that stipulates your organization's best practices. These documents will be help you manage vendors and understand the risks that working with them pose to the company.

The next step in managing vendor risk is implementing a well-defined vendor selection process. Because any vendor a company works with brings with them an inherent risk, a thorough vendor vetting process should be followed when onboarding a new vendor.

Contracts should be drawn up and tailored to each vendor relationship. This will ensure that each party is clear on the requirements of an ongoing partnership.

A company needs to continuously evaluate its relationships with its third-party vendors and conduct due diligence to ensure its third-party vendors stay compliant with any laws, regulations, or contractual responsibilities.

An internal vendor risk management audit process should be defined and conducted regularly. This audit will identify any weak points in a company's risk management program and establish whether any changes need to be made to mitigate potential risks.

Lastly, a strong reporting process should be put in place. This will allow key stakeholders to be consistently updated with the status of a company's risk management program.

What Are the Best Practices for Implementing a Vendor Risk Management Program?

Have a Contract

It is essential to have a contract between the company and any third-party vendors. This contract should stipulate each party's role, what data they will have access to, and the processes put in place to keep all information secure and safe from malicious attacks.

Continuous Monitoring and Evaluation

Just because a third-party vendor has implemented and proved that it practices the processes and procedures required to keep information secure does not mean that it consistently and continuously does so. It is up to a business to monitor its vendors' performance and to ensure that they adhere to all agreements concerning data security stipulated in the contract.

Adhere to Regulatory Compliance Guidelines

Vendors might not always be required to adhere to specific regulatory compliance guidelines because their primary function does not occur in a regulated industry. However, suppose a company is required to adhere to certain regulatory compliance guidelines. In that case, it is up to that company to ensure that a third-party vendor complies.

For example, a company that provides IT services to a financial institution might not be required to follow specific guidelines in its capacity while the financial institution is. In this case, the financial institution must ensure that the IT company sticks to the stipulated guidelines.

It cannot merely be accepted that a third-party vendor is following regulatory compliance guidelines. Each business needs to monitor its vendors' compliance continuously.

Access to Information

Giving vendors access to all company data is impractical, unnecessary, and risky. Different vendors will require access to different kinds of information. More than that, different individuals representing a vendor company might require access to different information.

A business needs to constantly monitor what information is available to vendors and representatives of each vendor.

Common Mistakes of Vendor Risk Management Programs and How to Mitigate Them

A vendor risk management program should be crucial to a company's business practices. Companies with third-party risk management programs may make some of these common mistakes.

They could fail to recognize certain risks that vendors pose. This is why vetting potential vendors thoroughly is of utmost importance.

It might be tempting to rush through the vetting process of a vendor that is already well established. However, even large and well-known companies are vulnerable to breaches or cyber security attacks. Be careful not to do your due diligence because you think a company has all its security programs and processes in place. Always double-check and ensure that a company's programs and processes are up to standard and meet your company's requirements.

Evaluating a third-party vendor at the start of a partnership is not enough. Vendors must be continually assessed to establish risk and confirm that an ongoing partnership is beneficial.

Vendors should be categorized according to the risk they pose. Even so, all vendors with seemingly low risk should be included in a company's vendor risk management program.

Companies are advised to include a third-party risk management program and the potential financial cost of a breach or cyber security attack in their budget. This will not only allow a company to protect itself better but also to be prepared in the case of an incident.

Vendor risk management should be a central part of any business's processes and procedures. It ensures that third-party vendors meet the company's safety standards and processes and helps a company mitigate potential data breaches or cybersecurity attacks that could target third-party vendors.

RiskRecon, a Mastercard company, could help identify and mitigate third-party vendor risks. Contact us for a free demo today.