What is a Vendor Risk Management Framework?

Managing risks from third-party vendors is vital for any business. Third party risk management frameworks give you the structure to identify, assess and mitigate those risks. As part of this, a third party risk assessment is crucial for understanding the specific vulnerabilities that each vendor may introduce to your organization.

In this article we will look at different types of frameworks, the key components you need for robust vendor risk management and how to put these into action in your business.

What are Vendor Risk Management Frameworks?

Vendor risk management frameworks manage risks from third-party relationships and mitigate potential liabilities. These frameworks assess and manage risks associated with third-party vendors, data security, privacy and compliance.

The size of the Vendor Risk Management Market is estimated to be at 11.98 billion dollars in 2024, so understanding vendor relationships in terms of risk management is crucial, as it helps in onboarding, offboarding, and maintaining security and compliance.

A centralized framework brings all vendor risk management under one roof, ensuring consistency and control. A decentralized framework allows individual departments to manage their own vendor risks, which can be more specialized and tailored but can lead to inconsistencies. A hybrid framework combines elements of both, giving you a balanced approach to managing vendor risks.

Key components of a vendor risk management framework are benchmarks, standards for risk assessment and mechanisms for monitoring vendor activity. These are the foundation of a third-party risk management strategy. Having a robust framework allows you to systematically identify, assess and mitigate potential risks, so you’re better protected against vendor vulnerabilities.

Components of a Robust Vendor Risk Management Framework

A robust vendor risk management framework is key to identifying and minimizing business risk, legal obligations and reputational damage.

The following sections will look at the key components of that overall risk management framework:

• vendor identification and classification
• due diligence and vendor risk assessments
• contractual safeguards and compliance requirements

This emphasizes the importance of structured vendor risk management processes.

Vendor Identification and Classification

Vendor risk management begins with vendor identification and classification. Having a process for screening and identifying vendors to understand their risk profile is key. This process helps manage and mitigate third-party risks. Managing vendor risk means having an up-to-date inventory of third-party vendors so you can better assess the risk.

Understanding the criticality of each vendor is important. High risk vendors, those handling sensitive or confidential information, need more attention and more controls. This classification allows you to prioritize your efforts and resources, so high risk vendors are managed correctly and potential digital risks are mitigated.

Due Diligence and Vendor Risk Assessments

Thorough due diligence is key to understanding current and potential risks with vendors. This process involves risk categorisation and evaluation. Regular vendor assessments are needed to assess the ongoing security and compliance posture of suppliers. Using structured tools like due diligence questionnaires can help gather the risk information you need.

Key areas assessed during vendor evaluations are financial, strategic and cybersecurity risks. For example, technology solutions like the Security system allow you to invite and assess vendors, track progress and have a centralized risk management environment. The Shared Assessments management tool has a pre-built set of questions and implementation guidance to help you assess vendors more efficiently.

But organizations often struggle to determine the right level of due diligence and risk tiering for their vendors and so there’s inconsistency in risk management. To address these challenges, you need a structured approach and the right tools and technology to streamline the due diligence and vendor risk management processes.

Contractual Safeguards and Compliance Requirements

Vendor contracts should have specific clauses to comply with data protection regulations. Clear contracts are key to mitigating vendor risks and compliance with laws and industry standards. These safeguards manage vendor risks by outlining expectations and requirements for data security, privacy and regulatory compliance.

Having provisions for regular audits, security controls and incident response protocols in vendor contracts can make your vendor risk management process much more effective. By getting vendors to adhere to these contractual requirements you can manage risks and comply with regulatory standards.

Vendor Risk Management Program

Implementing a vendor risk management program requires a strategic approach to understanding third-party vendor relationships in terms of risk management, onboarding, and offboarding processes. This includes policy development, ongoing monitoring and performance tracking, and a vendor risk management checklist and vendor risk assessment process.

The following sections will go into more detail.

Vendor Risk Management Policies

Creating vendor risk management policies involves documenting security expectations and compliance requirements. These policies should outline who is responsible for monitoring vendor compliance and what the consequences are for non-compliance. Clear guidelines means everyone knows their roles and responsibilities so you can have a consistent approach to managing vendor risks.

Vendor risk assessments should include assessing their compliance to relevant regulations and financial stability. These assessments help you identify risks early and you can implement mitigation strategies so vendor relationships don’t compromise your security and compliance goals. Effective third party cyber risk management is essential for continuously monitoring and addressing potential risks throughout the vendor relationship lifecycle.

Onboarding and Offboarding Processes

Third party vendor partnerships are key to effective vendor management and involve a process for screening third parties. During onboarding, organizations should create a comprehensive vendor profile that includes security protocols and access requirements so vendors meet the necessary security and compliance standards from the start.

Vendors may be onboarded for reasons such as cost, acquisition, business closure, or unnecessary services. A key part of the offboarding process is revoking access privileges and deleting user accounts. Also, secure data disposal methods must be implemented to prevent access after the vendor is no longer engaged. Backing up data regularly is a must.

Like Alan Liska says:

"Hey, you need to do backups in order to protect yourself from ransomware," and they can't just be backup sitting on your network because the ransomware actors will find those and they will encrypt them.”

Ongoing Monitoring and Performance Tracking

Vendor risk monitoring includes:

• Vendor discovery
• Risk assessment
• Continuous monitoring
• Effective risk management

Continuous monitoring of vendor performance ensures compliance to contractual obligations and identifies emerging risks. Using security ratings gives you a quantitative view of vendor security postures so you can continue to assess risks.

Continuous monitoring controls are key to keeping up with changing vendor risks. Organizations should have a continuous monitoring system for vendors to stay up to date with security issues and compliance failures.

Regular monitoring and audits are crucial in third-party risk management to ensure ongoing security and compliance.

Vendor Risk Management Challenges

Despite your best efforts, organizations often face challenges in vendor risk management, including resource constraints, lack of visibility into vendor operations, and managing cyber risks. Streamlined vendor risk management processes are crucial in overcoming these challenges.

The following sections will go into more detail.

Resource Constraints

Resource constraints can hinder third party risk management. Economic downturn, geopolitical issues, inflation and shrinking budgets are the culprits. Showing the cost of a data breach can help organizations see the importance of risk management and allocate the necessary resources.

Regular evaluations help you identify compliance gaps and strengthen your risk mitigation strategies over time. Consistent vendor audits help with compliance monitoring so you can identify risks early.

Lack of Visibility into Vendor Operations

Limited visibility into vendor operations can expose organizations to high risk. Many struggle to maintain visibility over their growing vendor ecosystem making management harder. Implementing tools and technology can help map your vendor ecosystem so you can see everything and support vendor lifecycle management.

Centralized vendor management systems bring procurements into one view so you can see across teams. Regular vendor performance assessments can reinforce accountability and highlight areas for improvement. Better communication and transparency with vendors helps you identify and manage risks.

Managing Cyber Risks

Cyber threats are getting more sophisticated so we need to manage these risks more. Common risks with vendors include data breaches, non compliance with privacy regulations, service disruptions and sensitive information mishandling. Organizations need to assess vendor collaborations for data privacy functions and security controls.

Ways to mitigate vendor risks include due diligence, contractual agreements, monitoring vendor practices and having a contingency plan. Proper offboarding of a vendor is key to prevent digital backdoors and exposure to attacks.

A vendor breach occurs when a third party with access to your confidential data is compromised and has various vulnerabilities.

Best Practices for Vendor Risk Management

Implementing best practices can help you with your vendor risk management processes. The following sections will go into regular vendor audits and assessments, using technology and automation tools, and building strong vendor relationships.

Regular Vendor Audits and Assessments

Regular vendor audits are key to identifying compliance weaknesses and bridging the gaps that can lead to financial risks. Periodic audits help you discover compliance weaknesses and gaps in vendor practices. Using security questionnaires during audits helps you monitor compliance.

The Security research team’s analysis includes an independent review of a vendor’s privacy and security policies to ensure they meet the requirements.

Using Technology and Automation Tools

Automating vendor assessments with technology can make the process more objective and faster. Integrating automation tools in vendor risk management can increase efficiency and accuracy by a lot. Advanced technology solutions give you real time visibility into third party risks and helps you make better decisions.

Centralized dashboards in vendor risk management tools helps you manage your third party vendors and monitor the associated risks and vulnerabilities. Automation tools can help you track vendor risks and compliance in real time and overall efficiency of monitoring.

Building Vendor Relationships

Trust with vendors is key to collaboration and risk management. Strong vendor relationships are key to collaboration and to mitigate risks.

Having strong relationships with vendors helps with collaboration, communication and ensures alignment on common goals.

Vendor Risk Management in Action

A leading energy company improved their vendor screening process by using a cybersecurity tool and now have better risk management and faster decision making. This tool helped them to enhance their third party screening and avoid partnering with vendors that had no security measures.

By using advanced cybersecurity they were able to manage risk faster and cheaper and partner with secure suppliers. This proactive approach not only protected them from cyber threats but also improved their vendor risk management process overall.

Organizations are looking for effective vendor risk management frameworks to protect against risks. These case studies show the importance of using advanced tools and strategies to manage vendor risk so organizations are protected from vendor vulnerabilities.

FAQs

Why is due diligence important in vendor risk management?

Due diligence is important in vendor risk management as it helps you to identify current and future risks, so security and compliance throughout the vendor relationship. So you are protected from surprises.

How can organizations overcome resource constraints in vendor risk management?

Organizations can overcome resource constraints in vendor risk management by showing the cost of data breaches to get the necessary funding and doing regular reviews to identify compliance gaps and enhance risk mitigation strategies. This proactive approach means resource allocation for risk management.

What are the benefits of using technology in vendor risk management?

Using technology in vendor risk management makes it more efficient and objective by automating assessments and giving real time visibility into third party risks so better decision making. This strategic approach will strengthen overall risk management.

How do you build strong vendor relationships?

Strong vendor relationships build risk management by building trust and collaboration so better communication and alignment on shared goals. This will help to identify and manage risks better.

Summary

In summary, a vendor risk management framework is key to organizations to mitigate risks from third party vendors. Key components are identifying and classifying vendors, due diligence and risk assessments, contractual safeguards and compliance requirements. A robust vendor risk management program involves developing policies, onboarding and offboarding processes and continuous monitoring of vendor performance.

By understanding and overcoming challenges like resource constraints, lack of visibility into vendor operations and managing cybersecurity risks organizations can improve their vendor risk management. By using best practices like regular audits, using technology and building strong vendor relationships you can further strengthen the overall risk management. Ultimately these will help you to protect your operations, comply and protect your brand.

Ready to work on your security strategy? Try a demo of Recorded Future today and see firsthand how our intelligence can help you improve your vendor risk management strategy.