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.

Step 4: Implement vendor due diligence process 

Vendor due diligence is a comprehensive process of investigating and evaluating a vendor’s 

suitability for a business relationship. It goes beyond surface-level assessments to gain deeper insights into a vendor’s operation, stability, and potential risks. 

There are certain aspects you would want to look at when evaluating a vendor:

1. Financial aspect: You must evaluate your vendor’s economic health by reviewing their statements, credit ratings, and market positions. 
2. Operational assessment: Examine the vendor’s processes, infrastructure, and overall operational capabilities to assess its ability to meet your organization’s needs.
3. Verify compliance: Ensure the vendor complies with all applicable laws, rules, compliance requirements, and industry standards. You might need to examine certifications, audit reports, and regulatory filings.
4. Security and data protection: Examine the vendor’s privacy policies, data protection procedures, and information security practices, particularly if they will be handling sensitive data.
5. Reputation and ethics: Look into the vendor’s ethical standards, market standing, and prior legal troubles or disputes.
6. Disaster recovery and business continuity: Examine the vendor’s strategies for maintaining service continuity during interruptions.

To implement an effective due diligence process, follow these steps:

1. Develop a standard checklist that is tailored to your business’s risk profile.
2. Create clear roles and responsibilities for everyone involved and delegate when necessary.
3. Evaluate your due diligence criteria and ensure they are done periodically to accommodate the changing business environment. 
4. Implement a system for documenting and storing all the reports and results about vendor due diligence. 

Step 5: Contract management and continuous monitoring 

Effective contract management involves regularly reviewing vendor agreements, identifying potential risks or gaps, and updating contracts to include necessary security controls and clearly defined responsibilities. 

Ensure the contract review and approval process is communicated to the stakeholders to avoid redundancies or delays. Once this is done, implement continuous monitoring tools that automate the entire process or parts of it. Ensure that these tools integrate with your current tech stack to avoid any silos. 

Establish KPIs to measure the performance of your vendors and track potential risk factors. 

The frequency and schedules of your vendor reviews will be based on the vendor’s risk profile. The higher the risk, the more frequent the review and vice versa. 

Besides the process itself, here are a few things you’d want to remember 

1. Provide training and assistance to your staff involved in the vendor onboarding and offboarding process. Ensure that they have all the assistance they need. 
2. Establish a straightforward communication procedure for vendor-associated risks, failures, and other issues. 
3. Ensure that you are conducting audits regularly. If you think bias could be involved, you can hire an outside consultant to give you a more apt judgment. 
4. Because of the evolving nature of businesses, continuously update your VRM framework. 
5. Lastly, foster a risk-aware culture. 

Now that we have a fair idea of how a vendor risk management framework is implemented, it is important to understand its benefits. 

Benefits to implementing a VRM framework

Vendor risk management, or third-party risk management, fosters a transformation. With a practical vendor risk management framework, your organization’s approach to third-party relationships changes from reactive to proactive. It positions your company so that it can anticipate and mitigate risks before they materialize. 

Rather than scrambling for a guide on addressing vendor-related issues when they arise, you can systematically assess and mitigate risks across the entire ecosystem. This approach also helps you strategically approach processes related to vendor management, like selection, contract negotiation, or relationship management.

It gives the security teams a structured method for evaluating and monitoring the security posture of your vendors, ensuring that sensitive data aligns with the organization’s security standards. This gives them visibility into vendor security practices and helps them identify any vulnerabilities in the supply chain. 

Since a majority of data breaches are linked to third-party access, the importance of a well-executed third-party risk management framework cannot be overstated. Such breaches are considerably less likely when a VRM framework is implemented properly, as it guarantees ongoing monitoring, frequent evaluations, and prompt remediation of found vulnerabilities.

This preserves customers’ faith and the company’s reputation and protects critical data. 

Financially speaking, VRM provides long-term cost advantages. Although the framework’s initial installation could cost money, it saves money because of fewer incidents, better vendor selection, and a stronger negotiating position.  

The benefits don’t mean implementing the VRM framework has no challenges. It does, but we can circumvent them to create a stronger, more resilient version of your organization. 

Challenges 

Your challenges vary significantly based on your industry segment, risk appetite, and organization size. Your security posture and internal resources play a defining role in how you overcome these hurdles. 

We have mapped out three common challenges you might face and their solutions. 

Challenge 1: Lack of Visibility into the third-party ecosystem 

Because businesses are growing, operations often lead to a sprawling network of third-party relationships spanning various departments. This complexity creates a blind spot, hindering understanding of vendor engagements, associated risks, and organizational impact. 

Areas of concern could be:

1. Decentralized vendor management
2. Unauthorized relationships with vendors
3. Outdated information on vendors
4. Limited access or insight into fourth-party relationships 

Solution: third party discovery and mapping process 

1. Start by creating a single source of repository for all vendor information. Include as many details as possible, from contract terms and access levels to system integrations and risk ratings.
2. Create a visual map of your relationships and dependencies with the vendor. Identify any point of failures or critical paths and ensure that they are all documented. 
3. Implement a standardized vendor onboarding process and perform all the mandatory risk assessments and security reviews before integrating them into the tech stack. 
4. Schedule periodic reviews for your third-party ecosystem. 
5. Leverage technological solutions wherever you can. 

Challenge 2: Limited resources for vendor management 

Limited resources is a problem in itself, but it is exacerbated by issues like:

• Growing specialization and complexity among vendors
• Increasing legal mandates for vendor supervision 
• Restricted financial resources for vendor management groups
• conflicting organizational priorities

Solution: Prioritize based on your risk appetite 

1. When you have a tiered classification for your vendors, it becomes easy to focus your efforts on critical and high-risk vendors. Allocate resources based on this classification and ensure you are thorough. 
2. Define acceptable risks for each vendor and develop mitigation strategies for the prioritized ones. Develop mitigation strategies and incident response plans for vendors that exceed your risk appetite. 
3. Consider transferring your risks for unavoidable ones, like insurance. 

Challenge 3: Difficulty in monitoring ongoing vendor performance 

Struggle to monitor vendor performance continuously can arise due to:

1. N number of data points that need to be considered and accounted for. 
2. Inconsistency in manual reporting.
3. Lack of real-time visibility. 
4. Difficulty in correlating data. 

Solution: Implement continuous monitoring mechanisms

1. Start by creating a set of metrics and KPIs you want to track 
2. Align these KPIs with service level agreements and also establish key risk indicators.
3. Implement a dedicated vendor risk management platform that has advanced monitoring capabilities. 
4. You can establish a structured cadence for vendor performance reviews and schedule check-ins for high-risk areas. 
5. Ensure that cross-functional participation is present in the reviews. 
6. Integrate the VRM data board with your internal systems to avoid silos. 

If you want to automate your vendor risk management, Sprinto is the solution. Sprinto is a GRC platform that has VRM capabilities. It leverages advanced analytics to give you continuous and real-time updates of your vendor’s risk profiles. It aggregates data from various sources to provide a holistic view of your vendor’s health. 

It’s an end-to-end vendor risk management platform designed to streamline the entire vendor lifecycle. You can easily add vendors, upload contracts and privacy policies, and create a centralized inventory of your vendors. 

Sprinto has a tiered alert system for prompt issue resolution, where it sends automated notifications to ensure compliance. You can also score risk levels independently from the default rankings, and the system is adaptable to evolving vendor relationship profiles. 

Have any questions? Talk to us 

Limiting third-party risk exposure 

More than merely reducing risk, effective vendor management is about building relationships that improve your company. Even while it takes constant work, the benefits are substantial: enhanced security, increased operational effectiveness, and the freedom to concentrate on core skills. 

Mutual accountability and regular communication are essential. Maintaining a proactive and flexible approach to third-party connections puts your company in a position to take advantage of possibilities and overcome obstacles in the increasingly interconnected business world.

FAQs 

What are the five components of a risk management framework?

The five components of a risk management framework are: 

1. Risk identification
2. Risk assessment 
3. Risk mitigation
4. Risk monitoring
5. Risk reporting

What is the vendor risk management process?

Vendor risk management process usually involves identifying vendors, assessing risks associated with them, negotiating contracts, mitigating risks, and regularly assessing vendors. 

How do you mitigate vendor risk?

To mitigate risks related to vendors, you have to limit your third-party risk exposure. You can do so by:

1. Conducting due diligence before you onboard a vendor 
2. Implementing strong contractual safeguards 
3. Regularly assessing and monitoring vendor performance
4. Diversifying vendors to reduce dependencies 

What is the risk matrix for vendors?

A vendor risk matrix is a tool used to visualize and prioritize risks. It has:

1. Likelihood of the risk occurring
2. The potential impact of the same 
3. Categories of the risk 
4. Vendor criticality