Your Blueprint for Comprehensive Vendor Risk Management

Vendor partnerships and outsourced products and services are hallmarks of a modern business. 

These partnerships empower organizations to close knowledge gaps, reduce resource expenditure, and optimize operations. However, collaborating with vendors can also be extremely risky. 

Although many businesses downplay the severity of vendor risks, incidents like the recent CrowdStrike outage highlight just how critical they can be to a company’s long-term success and continuity. 

When an organization outsources critical services and products to a third party, it ties its security and operational systems to that vendor or service provider. This dependency can introduce new risks, especially if the third party violates the organization’s security or business continuity standards. 

So, what’s the solution? How can organizations continue to gain the benefits of third-party partnerships without compromising their security? 

Mastering vendor risk management (VRM) is the most effective way for an organization to mitigate the risks associated with its third-party partnerships. Let’s explore how. 

Source: UpGuard

Cybersecurity risks alone can carry devastating consequences. Reports have found that in 2024, the average cost of a data breach is $4.88 million, a 10% increase over last year, and 29% of all data breaches stemmed from a third-party attack vector. 

Despite these alarming statistics, a surprising 54% of businesses admit they do not thoroughly assess their vendors before onboarding or granting them access to their internal infrastructure.

If your organization intends to work with third parties safely, this needs to change.

Implementing an efficient VRM program can decrease the likelihood of cyber attacks, data breaches, operational disruptions, and other security incidents while rewarding your organization with additional benefits. 

Benefits of an effective vendor risk management system

An effective VRM system does more than just mitigate risks — it enables businesses to make informed decisions, identify potential issues early, and ensure smooth operations.

VRM can help organizations: 

• Reduce cybersecurity risk by providing a formal system to identify and mitigate issues.
• Reduce compliance risk by evaluating vendors against relevant frameworks and regulations.
• Streamline decision-making with accurate risk data and up-to-date vendor information.
• Strengthen vendor relationships and collaboration with calibrated risk remediation workflows.
• Improve visibility across the organization’s third and fourth-party networks.

Vendor or third-party risk management programs are formalized systems that enable organizations to implement critical risk management procedures throughout all stages of the vendor lifecycle. 

The most effective VRM programs incorporate a wide variety of components and tools. This helps accurately and holistically assess vendor risks and security posture throughout procurement, onboarding, and the duration of a vendor relationship.

Components of a VRM program

While each VRM program is unique, most impactful programs utilize the following components: 

• Security ratings: Dynamic quantifications of an organization’s current security posture and overall cyber hygiene.  

• Security questionnaires: Lists of questions organizations use to identify specific cybersecurity vulnerabilities among its third-party vendors.

• Vendor risk assessments: Systematic examinations of a vendor’s security posture, often including questionnaires and other tools.

• Incident response plans: Formal sets of instructions that help an organization respond to a cybersecurity incident.
• Continuous security monitoring: An ongoing monitoring system that identifies vendor risks and vulnerabilities throughout the vendor lifecycle.

Source: UpGuard

If you’re interested in starting with your own VRM, the first step is to assess your current situation and identify third-party risk management goals. 

Step 1: Evaluating your security and identifying goals

Every organization’s VRM journey is unique. Start by asking yourself where your organization’s vendor risk management system currently stands.

These questions can help: 

• Does your organization currently evaluate its vendors in any way? 
• Does your organization evaluate vendor security posture before onboarding? 
• Does your organization conduct risk assessments throughout the vendor lifecycle?
• Does your organization monitor for new security issues and vulnerabilities? 
• Does your organization have a dedicated security team?
• Does your organization’s security team have experience with VRM? 

Some organizations may have basic management procedures they can improve upon to construct a comprehensive VRM program. In contrast, others may need to start from scratch by hiring appropriate personnel or becoming familiar with essential VRM strategies and vocabulary. 

Step 2: Aligning strategies with the VRM lifecycle

Most successful vendor risk management programs operate using a three-stage approach called the VRM lifecycle. This lifecycle enables security teams to organize critical VRM tasks into three phases: onboarding, risk management, and continuous monitoring. 

Source: UpGuard

While “vendor onboarding” is often used to describe the first phase, this stage also includes tasks that take place before onboarding, such as during procurement.

Here’s an outline of each stage and its critical components: 

Onboarding 

The onboarding phase of the VRM lifecycle encompasses activities and tools security teams use to conduct a preliminary evaluation of a vendor’s security posture, compliance status, and overall stability. 

• Activities completed: Vendor due diligence, preliminary risk assessments, vendor classification, and vendor tiering
• Tools used: Security ratings, trust pages, preliminary risk assessments, risk matrices, and service level agreements (SLAs)

Risk management 

Risk management is the second phase of the VRM lifecycle. It further evaluates vendor-associated risks and develops mitigation strategies to prevent these risks from affecting the organization’s cyber hygiene. 

• Activities completed: Periodic security audits, risk mitigation plans, establishing vendor collaboration strategies, incident response plans, and business continuity planning
• Tools used: Security questionnaires, risk assessments, security and vulnerability monitoring tools, mitigation and remediation workflows

Continuous monitoring 

The final phase of the VRM lifecycle continues throughout the remainder of the vendor lifecycle. Security teams continuously oversee the vendor’s security posture, compliance status, and performance to identify novel risks and address security issues promptly. 

• Activities completed: Continuous security monitoring, performance reviews, contract management, feedback loops, vendor offboarding
• Tools used: Security ratings, risk assessments, security questionnaires, SLAs, security and vulnerability monitoring tools, mitigation and remediation workflows

The second and third phases of the VRM lifecycle work hand in hand. For example, if a security team identifies a new risk during continuous monitoring, personnel should complete the necessary risk management activities to ensure they achieve mitigation. 

It’s also important to think of the VRM lifecycle as an ongoing process. After the organization offboards a vendor and replaces it with another, the process starts again.

Step 3: Draft a VRM policy

Holistic VRM is an all-encompassing process that requires the support of various departments and teams. To guide these teams and appropriately define roles and responsibilities, VRM programs rely on detailed documentation.

Your organization’s VRM policy should serve as a roadmap to maintain healthy cyber hygiene as you enter new vendor relationships and expand your digital supply chain.

Some organizations, particularly those farther along in their VRM journey, might be able to draft their VRM policy in one sitting. Other organizations will likely need to revisit their VRM policy periodically as they establish other VRM procedures and determine thresholds for vendor performance and acceptable risk exposure. 

Step 4: Establish vendor standards and risk appetite

Every organization conducting business with third-party vendors and service providers exposes itself to some risk. However, some partnerships are riskier than others. 

An organization’s risk appetite refers to the level of risk it is willing to take to achieve its strategic objectives. On the other hand, risk tolerance is the degree to which the organization allows this level to deviate at any given time. The extent of risk you take depends on your organization’s policies. Your security team will be able to manage these risks as long as you calibrate your VRM program to handle them. 

Outsourcing from cyber-conscious vendors will decrease your organization’s level of risk while working with vendors with weak security practices will increase it. 

There are two primary approaches to developing a risk rating scale: 

• Quantitative method: It visualizes risk appetite as a numerical value for financial loss.
• Qualitative method: It measures risk using critical levels (critical, high, moderate, and low). 

Step 5: Perform vendor due diligence

Due diligence is a cornerstone of effective vendor risk management. Efficient vendor due diligence processes use various tools to evaluate a vendor’s security posture. 

Here’s an overview of the standard tools security teams use during vendor due diligence: 

• Security ratings: Usually represented as a numerical score, security ratings are an objective, data-driven representation of a vendor’s security posture. They provide a high-level overview of an organization’s cyber hygiene.   
• Security questionnaires: Security teams use security questionnaires to identify specific security or compliance. These calibrated questions target answers related to specific vulnerabilities, software, or regulations. 
• Risk assessments: Organizations use risk assessments to determine vendor criticality and prioritize remediation efforts. These comprehensive assessments often include multiple security questionnaires and other tools to further evaluate a vendor’s security posture. 

Apart from this, your security team should request relevant documentation from your vendors. Business continuity plans, incident response plans, and overall information security policies are examples of documentation that can reveal a vendor’s security and preparedness level. 

Step 6: Conduct periodic risk assessments

Your organization must conduct additional risk assessments to ensure a vendor’s security posture has not changed. 

The exact timeline you follow to evaluate vendors will depend upon the vendor’s level of criticality. If a vendor has access to your sensitive data, you should assess their security more frequently. 

Other times, it may become necessary to send a security questionnaire after a significant cyber incident or disruption occurs. For example, your organization may not have been affected by the 2024 CrowdStrike incident, but what if your critical vendors were? What if they disabled CrowdStrike altogether rather than following the remediation instructions? 

Your vendors could be exposing your organization to increased risk without your knowledge.

Step 7: Establish reporting standards and stakeholder support

Finally, to make your VRM program successful, your VRM program must include a clear reporting structure to keep leadership informed. Effective VRM reporting will foster stakeholder engagement and drive data-driven decision-making. 

Important metrics to report include:

• Average vendor security rating
• Number of vendors monitored
• Distribution of vendor ratings across criticality levels
• Most and least improved vendors

Use clear, digestible templates to make sure your reports are easy to understand for stakeholders and leadership. 

• Lack of resources: Many organizations struggle to install a comprehensive VRM program because they lack the resources (either physical or financial) to complete due diligence or conduct ongoing risk assessments. This challenge is even greater for organizations supporting large vendor ecosystems, where conducting thorough due diligence and ongoing risk assessments can be overwhelming. 
• Lack of speed: Some organizations can perform VRM procedures effectively but struggle with delays in procurement and onboarding due to slow processes. 
• Lack of consistency: Maintaining a high level of diligence across an entire vendor network or digital supply chain can be tough. As deadlines approach, personnel may rush tasks, leading to inconsistencies. 
• Lack of expertise: Many organizations lack VRM knowledge or expertise, especially those without a dedicated security team or procurement and onboarding programs. 
• Lack of engagement: A VRM program will only go as far as an organization’s executive team allows. Senior stakeholders and their support are vital to the program’s success and the organization’s risk management culture. 

If your organization encounters any of these challenges, don’t get discouraged. Every organization’s vendor network is different, and there are some strategies you can implement to tackle these challenges. 

Stay ahead of emerging cybersecurity threats to strengthen your vendor risk management. Our guide will help you navigate the dual nature of AI in cybersecurity!

Edited by Monishka Agrawal