Drive Business with Effective Vendor Risk Management

Estimated reading time: 4 mins

Regardless of whether you are incorporating cloud service providers or installing a point-of-sales system into your enterprise, keep in mind that you are continually bringing in new vendors into your company’s data ecosystem. According to the Global Cloud Index Forecast released by Cisco, about 95 percent of the entire data center traffic will emanate from the cloud. It also suggests that 85.1M, 46.4M, and 402.2M cloud Infrastructure-as-a-Service, cloud Platform-as-a-Service, and cloud Software-as-a-Service workloads respectively will be available by 2021. In short, this means that vendor risk management or VRM is expected to drive both business success and cybersecurity.

Effective Vendor Risk Management (VRM)

How do you analyze possible third-party risks?

Whenever third-party vendor due diligence crops up in a conversation, the first word you are likely to think of is a risk assessment. However, risk assessment does not meet the criteria for proper due diligence.

When conducting a risk assessment, you must focus on your list of risks and critical infrastructures. However, checking for the existence of a threat is different from evaluating the possible negative impact of risk.

Risk analysis calls for the need to focus on the types of information that a third-party vendor deals with before reviewing the possible legal, reputational and financial impact that could arise from a data breach.

For instance, if your vendor is involved in accessing protected health information or individually identifiable information, then the occurrence of a data breach would affect you considerably. Furthermore, if the vendor only evaluates the information that is available publicly, then the impact of a data breach would be far less.

Are there any regulatory compliance requirements for risk management?

Regulations mostly concentrate on vendor risk management (VRM), imposing penalties and fines stemming from vendor data breaches. For instance, the General Data Protection Regulation or GDPR refers mainly to data processors or rather vendors. On the other hand, the 2017 New York Department of Financial Services regulation (23 NYCRR 500), dedicates a whole section to the security of third-party providers.

Both regulations, among others, can levy penalties and fines over businesses that do not maintain enough vendor management activities.

How do you manage third-party risk effectively?

As you continue to grow your number of vendors who facilitate business performance, wondering whether you can develop a useful risk management program is normal. Bear in mind that some vendor risks are not apparent even though you often consider the risks involved before bringing any vendor on board. For example, most vendors leverage third-party information technology suppliers as well. As such, you may find it difficult to track their vendors even though assessing the risk of your own contracted enterprise partners is possible.

5 Steps involved in the Vendor Management Lifecycle

  1. Assess Risk

In any compliance objective, the first step involves risk assessment. However, this is not an easy undertaking. Even with all your devices, networks and systems cataloged, you may lack knowledge about each vendor who connects to them.

Make sure that all your applications involved in connecting your networks and systems to the cloud in a bid to facilitate the sharing data have the necessary controls.

  1. Ensure that Security is part of your Contracts

In case you realize that a vendor’s security position aligns to yours, you have to incorporate cybersecurity into the Service Level Agreement (SLA). Contracts not only act as an agreement that binds enterprises but can also assist you in defining liability. Most regulatory prerequisites require you to pay for the damages arising from any data breach that affects your customers.

  1. Continuous Monitoring

Cybersecurity experts emphasize the need to trust but verify. You can include vendor duties into your contract as well as approve vendor controls and policies. Nonetheless, businesses do not always comply with their internal control choices. You have to retain the responsibility of monitoring your data environment and that of your vendors since their risk is yours too. Hence, say something if you spot anything unusual with your vendors.

  1. Incident Response Planning

Vendors often facilitate crucial business processes. Irrespective of whether it is a database SaaS platform or a payment system vendor, any vendor cybersecurity occurrence can disrupt your business. To effectively manage third-party risk, you need to come up with an incident response program that can help you to get back to normal business operations quickly.

Aside from creating this program, you ought to consider customer notification. You have to inform your customers about any breach even if it was not your fault.

  1. Maintaining Internal Communication

Regardless of whether you are aligning to industry standards or regulations, effectively communicating risk with both your senior management and Board of Directors is a must. Your board and senior management team may not oversee your vendor risk management (VRM) program effectively in case you fail to inform them about the potential risks and preferred techniques of mitigating them.

Author Bio

Ken Lynch is an enterprise software startup veteran, who has always been fascinated about what drives workers to work and how to make work more engaging. Ken founded Reciprocity to pursue just that. He has propelled Reciprocity’s success with this mission-based goal of engaging employees with the governance, risk, and compliance goals of their company in order to create more socially minded corporate citizens. Ken earned his BS in Computer Science and Electrical Engineering from MIT. Learn more at

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