Build Your Vendor Risk Management Framework Now: Because ‘Too Late’ Hurts

There are very few names with as much authority in the financial sector as Bank of America. Ironically, though, this colossus was in a precarious position. In November 2023, cybercriminals made 57,000 BofA customers’ data public.

The cause? It was a breach of Infosys McCamish Systems, the vendor, rather than an attack on their systems. They are among the several Service providers used by BofA.. 

Your security is only as strong as your weakest link, which may lie beyond your company’s direct control. This sobering reality highlights the risks of third-party vulnerabilities. Businesses are inadvertently increasing their risk when they outsource services more frequently in an effort to save expenses and increase productivity.

Enter vendor risk management, which operates on the fundamental principle of “trust but verify.” Let’s examine how to implement an airtight vendor risk management framework. 

TL;DR 

A vendor risk management program is a comprehensive approach to identifying, assessing, and mitigating risks associated with third-party vendors.

Vendor risk assessment often overlooks the potential for “fourth-party risk” – the risk posed not by your direct vendors, but by their vendors. This cascading effect can create unexpected vulnerabilities in your supply chain.

Third-Party Risk Management (TPRM) Program is a structured framework to assess and mitigate vendor risks, implemented through leadership support, vendor classification, due diligence, continuous monitoring, clear policies, employee training, and regular reviews.

What is a vendor risk management framework?

A vendor risk management framework, also called third-party risk management, is a comprehensive approach organizations use to identify, assess, and mitigate risks associated with third-party vendors and service providers. 

At its core, VRM is about weaving a safety net of processes, policies, and technologies designed to catch risks before they snowball into a full-blown crisis. 

A structured vendor risk management framework offers benefits far beyond regulatory requirements. 

Why a vendor risk management framework is the best ally for your business 

A VRM architecture protects your organization from the possibility of unforeseen disruptions, monetary losses, or compliance violations resulting from third-party relationships. It carefully screens potential vendors and monitors their performance. 

A vendor risk management program can improve operational efficiency by standardizing vendor selection, onboarding, and management procedures. This structured method of obtaining insights into vendor risk profiles and performance can also help you make smarter decisions regarding partnerships and budget allocation. 

Efficient vendor risk management enhances organizational resilience. Organizations can better anticipate risks within the vendor ecosystem and respond faster to changes in the business environment. 

Implementing a strong vendor risk management framework 

Without a comprehensive vendor risk management framework, your organization is exposed to several threats, from data breaches and operational disruptions to reputational damages and regulatory penalties. 

Follow these five steps to implement a strong vendor risk management framework.

Step 1: Leadership buy-in and policies 

Create a business proposition that clearly illustrates the risks of either not having a VRM framework or having an inadequate one. Use examples of vendor-related incidents or risks and potential associated costs. Also, ensure that the question of how a VRM framework will circumvent this issue is thoroughly explained. 

Here are some types of vendor risks you can highlight:

1. Financial risks
2. Operational risks
3. Security breaches
4. Compliance risks 
5. Cybersecurity risks
6. Reputational Risk
7. Strategic Risk
8. Cyber risk.
9. Natural disasters 
10. Inherent risk
11. Geopolitical risks
12. Fourth party risks
13. Security risks 

Acknowledge all the risk categories to ensure you have covered all your bases.

Your documentation should also reflect the goal of implementing the VRM framework. Ensure that your goals align with your business strategies and risk appetite. 

Secure buy-in from the leadership, and that includes:

• Internal stakeholders
• External stakeholders
• Senior executives
• Board members
• IT head
• Infosec managers
• Legal team
• Procurement team

Once you have the leadership buy-in, form a cross-functional VRM team from different departments, such as IT, legal, admin, finance, and compliance. Clearly define all the rules and their responsibilities here and ensure that clear communication lines are established. 

Parallelly, also work on creating SOPs that will serve as a foundation to translate high-level policies into actionable steps. Detail out the following processes:

1. Vendor onboarding
2. Risk assessments 
3. Due diligence
4. Contract reviews
5. Performance monitoring
6. Offboarding 

Specify the tools and templates you will use for each process to ensure standardization. 

Step 2: Identify and classify vendors 

This process forms the basis for all subsequent risk management activities and ensures no third-party relationships fall through the cracks. Create an inventory of your external vendors. 

While daunting, you must do this and not miss out on any. You can delegate this amongst departments to compile a list. 

Pro tip: Don’t overlook smaller vendors or those with infrequent engagements – they can sometimes pose unexpected risks. 

Categorize your vendors based on criticality and risk level:

1. Start by developing a scouring matrix that considers the vendor’s criticality to your business operations and the level of risk posed by them. 
2. Assess each vendor against your defined criteria. 
3. Assign scores for each. 

The requirements for categorization can be as follows:

1. Impact on core business functions
2. Difficulty replacing the said vendor 
3. The volume of business conducted by the vendor 
4. Strategic importance, if any 
5. Type of data accessed – personal, financial, or proprietary 
6. The volume of data handled 
7. Data processing activity 
8. Level of access to the internal systems 
9. Potential impact of a security breach 
10. Relevance to regulatory requirements
11. Potential effects on compliance status 
12. Annual vendor spend
13. Visibility of the vendor to the public
14. Potential reputational damage from vendor actions 

Once you have categorized vendors, conduct a vendor risk assessment. 

Step 3: Conduct a third-party risk assessment

A vendor risk assessment entails identifying and evaluating any threats, risks, or vulnerabilities associated with a vendor’s operations and their impact on your business. 

Start by creating a consistent, repeatable process for assessing vendor risks. This ensures that all vendors are evaluated using the same method, allowing for comparisons and trend analysis. 

The method you choose should:

1. Align with the best practices of the industries like ISO, NIST, etc. 
2. Cover all the risk domains that are relevant to you, from infosec to operational and legal.
3. Be scalable as your business grows.
4. State the frequency of vendor risk assessments. 

For example, if you design a risk scoring system, each risk element is assigned a number between 1 and 5, with explicit explanations for each score. One possible way to calculate the total risk score is to take the weighted average of these separate values, where the weights are determined by how important each issue is to your company.

Develop questions to gather necessary information about the vendors. These should be tailored to your vendor types and risk levels, ensuring consistency across the core questions. 

Areas you might want to focus on:

1. Infosec – Data protection, incident response plans, security certifications 
2. Financial stability – Recent statements, credit scores and rating, bankruptcy history
3. Operational resilience – Business continuity plans, recovery procedures, capacity management 
4. Compliance – Compliance requirements, audit results 

Begin the assessment process with high-priority vendors. This assessment typically includes vendor reviews, sending out questionnaires, follow-up interviews, on-site inspections, and third-party data incorporation. 

A more straightforward way to do all of this is to automate vendor risk management. Sprinto is one such GRC tool that offers vendor risk management. It provides you with a comprehensive platform that streamlines the entire process of vendor lifecycle management. 

Sprinto monitors your vendor ecosystem to ensure continued compliance and adjusts it as the business environment does. 

Sprinto integrates with various systems like Google Workspace to automatically catalog your vendors, addressing the challenges of maintaining a complete vendor inventory, hence avoiding any silos. It customizes risk scoring based on vendor type, the nature of the relationship, and data access level. This helps maintain objectivity while assessing the vendors. 

Although it should be remembered that while Sprinto can significantly facilitate the process of VRM, it should be implemented as part of your broader, well-defined VRM strategy.