In business, it is important to be aware of the risks of working with different vendors. This is especially true for today’s dynamic and digital-first enterprises where there are a lot of moving parts and a high potential for data breaches. In fact, vendors, or third parties, are one of the leading sources of cyber risk.
Vendor risk management (also called third party risk management) is the process of assessing and mitigating the risks associated with the extended enterprise, including third-party vendors, suppliers, contractors, consultants, and partners. For smaller enterprises and large companies with a global presence alike, vendor risk management presents an opportunity to minimize risks, maximize revenue, and achieve a model of governance that allows the business to grow even in an uncertain world.
In this article, we explore IT vendor risk management, why it is necessary for organizations and the best practices associated with it.
Vendor risk management or third-party risk management is the process of assessing, monitoring, and managing risks associated with outsourcing certain aspects of a business to vendors. It includes
Organizations often outsource mission-critical business operations to third-party vendors to reduce costs and gain a competitive edge. As a business grows and scales its operations, the number of third-party vendors also multiplies, exposing them to a multitude of risks.
Organizations need to assess and manage risks associated with using third-party vendors and put mitigation strategies in place to manage those risks.
Vendor risk management enables organizations to adopt a systematic and structured approach to managing the risks across their extended enterprise.
IT (Information Technology) vendor risk management is the process of assessing, monitoring, and mitigating the risks associated with using third-party IT vendors, such as technology providers, cloud service providers, etc. The goal of IT vendor risk management is to effectively manage the risks associated with IT vendors and protect organizations’ assets, operations, and reputation from potential harm.
To do this, organizations need to carefully select their IT vendors, establish clear expectations and contracts, identify, assess, manage, and mitigate associated risks, and monitor performance and riskon an ongoing basis.
With the growing reliance of businesses on IT vendors, it has become imperative for organizations across industries to include IT Vendor Risk Management as part of their broader enterprise risk management program. IT vendors affect several different aspects of an organization including system access, integrity, efficiency, cybersecurity, and business continuity. With high digital dependencies between organizations and IT vendors, businesses are more at risk as an incident at an IT vendor can quickly travel and disrupt a business as well as its customers, resulting in financial, reputational, and operational damage. Therefore, organizations must view IT vendor risk through the lens of the broader third-party risk management program.
Here are the various types of risks that an organization is exposed to while working with IT vendors:
1. Security risks
System and data security is an important consideration when engaging with IT vendors. Data breaches happen more often than ever — and one of the most common origins of such risk is from third parties. Even though in-house security measures of the organization may be ample and adequate, gaps in measures placed by third parties on their systems can cause threat actors to breach company data.
In several cases, the third party might not comply with the latest security standards, operate on outdated systems, or have a response mechanism to prevent oncoming threats. The third party may be too small to set aside a budget for data security.
As a result, any damage sustained by the IT vendor can also have adverse effects on the organization. Your vendor’s risk is your risk – so make sure you assess them carefully.
2. Financial risks
Vendors may not have the financial resources to meet their contractual obligations, leading to service disruptions or project delays. The possibility that they may go bankrupt or out of business could make it difficult for the organization to claim delivery of agreed products or services, or to maintain a relationship with them.
They may also be acquired by another company and become part of a larger entity; this could mean that the organization would have to deal with multiple parties when working on projects, making processes more complex and costly.
Further, vendors may also charge hidden fees, which could increase the cost of doing business with them.
3. Operational risks
Vendors may not have the necessary processes and controls in place to deliver services or products consistently and reliably. Further, vendors may have poorq uality control procedures, which could lead to errors or security breaches. This can have a significant impact on internal efficiency, customer experience, and business objectives. The vendor’s ability to provide services or products that meet business needs is also an important consideration.
A vendor’s internal processes and controls are a key indicator of its quality, reliability, and ability to deliver on promises. This in turn could result in missed Service Level Agreement (SLA) concerns which not only cause contractual complications but also result in lost time and productivity.
4. Compliance risks
Vendors may not be compliant with applicable laws and regulations, which could lead to fines or other penalties. Compliance can be difficult to manage, particularly when there are many different products and services. The goal of compliance is to make the business safer for customers, workers, and the environment. However, when engaging with third-party IT vendors, it is difficult to track every single jurisdiction and regulation that vendors need to comply with. Consequently, as a result of an engagement or relationship, the organization can be held liable by proxy for the non-compliance of a vendor.
5. Reputational risks
Vendors may damage client reputation by delivering poor-quality products or services, or by engaging in unethical or illegal activities. Further, vendors may not provide adequate customer service or may sell unreliable products, which could cause customer frustration and dissatisfaction.
6. Legal risks
Vendors may be sued for breach of contract, infringement of intellectual property rights, or other legal claims. Litigation risk creates the possibility of an organization ending up in court over some dispute or claim made against the organization.
When engaging with vendors, if the products and services acquired do not meet the necessary standards or lead to ill effects when delivered to the end-consumer — can lead to vicarious liability arising for organizations. This can result in the organization facing a lawsuit which can in fact result in significant financial and reputational loss, as well as increased customer acquisition costs to regain goodwill in the market post a fiasco.
To optimize the value of their IT vendor relationships, organizations would do well to implement robust vendor risk management processes.
Here are a few key steps to consider:
1. Consolidate and Harmonize Vendor Information
Since the same vendors are often managed by multiple organizational departments such as Sourcing, IT, and Finance, they need to have a common vocabulary while onboarding, assessing, monitoring, and off-boarding vendors. Consistency in nomenclature makes it easier to track, search, assess, and rate various vendors.
Having a centralized repository of vendor information is also essential, as it forms the backbone of a strong IT vendor risk management program. A single repository provides a comprehensive knowledge base of all vendors and the associated assets, business units, services, and products to help organizations identify and understand their vendor risks clearly.
2. Ensure Clear and Comprehensive Documentation
With regulatory bodies pushing for better vendor risk oversight, organizations need to be able to manage vendor documents effectively, and present them if a non-compliance or security incident occurs. Vendor contracts also need to be comprehensive. Earlier contracts might have been able to make generic statements such as “Reasonable security measures should be used,” without specifying the parameters that constitute “reasonable” effort.
Today, however, contracts need to have well-defined and crisp clauses that help vendors understand what they need to do, while also safeguarding the organization’s own security and reputation. Privacy and security requirements need to be expressed clearly, in addition to general clauses such as quality, cost, and delivery.
3. Categorize Vendors Smartly
Since risk incidents such as security or privacy breaches can be caused by a failure at the vendor’s end, organizations must understand these risks right at the start of their vendor relationships. By segregating critical and non-critical vendors, organizations can determine which ones require maximum attention.
The key is to understand which vendors have a direct impact on the organization’s margins and profitability. For example, if a vendor has access to personally identifiable information (PII), they might be categorized as a critical vendor because a data breach at their end would significantly impact the organization. Similarly, a cyber-attack on a critical vendor in your supply chain can lead to business disruptions, data loss, and operational or financial impacts. Categorizing vendors this way makes it easier to define and plan vendor risk management and control activities.
4. Monitor Vendor Risks on a Continuous Basis
While there are multiple methods to evaluate vendors, the ones used most often are self-assessments, risk assessments, and audits. Some organizations enable continuous vendor risk assessments by integrating with external content providers who offer vendor grades, ratings, and rankings based on various parameters such as security, unsolicited communication, potentially exploited, botnet infections, malware servers, spam propagation, file sharing, and data breaches.
At MetricStream, integration with trusted content sources such as FICO, Dow Jones, D&B, BitSight, Shared Assessments, Transparency International, AI Sustainability Center, Compliance.ai, and others enables organizations to actively monitor third-party risks.
Whatever method is chosen to evaluate vendors, it should be defined based on the risk category associated with each vendor. A risk-based approach helps ensure that appropriate time, effort, and costs are allocated to each vendor’s risk basket.
5. Take Proactive Action
Every risk that is identified requires appropriate mitigation actions. The type of mitigation would depend on the impact of the vendor risk, as well as the risk appetite of the organization. Strategic and critical vendors usually have the most impact on the business, and therefore need more proactive monitoring to prevent disruptions. With these vendors, business continuity plans also need to be clearly defined to deal with risk incidents.
Many organizations are realizing the importance of an IT vendor risk management program and are adding resources to support these programs. Investments in an IT VRM program are not only necessary to develop a holistic strategy to mitigate risks, but also to ensure compliance, specific performance of third parties, staffing, and acquisition of necessary solutions.
Here are steps to effectively manage IT vendor risks throughout their lifecycle:
1. Manage and Assess Third-Party Risks
Third-party relationships come with a range of risks that need to be identified and managed effectively. These risks can span different areas of the organization, from product lines and business units to geographies, and can have a significant impact on different levels of the organization.
An effective IT vendor risk management process begins with a comprehensive identification of risks, including process risks, political risks, undesirable events, contract risks, legal and regulatory non-compliance risks, and information system failures.
2. Know Your Vendors: Screening and onboarding
It is important to have a clear understanding of who your vendors are and what they do. This includes understanding their business model, financial stability, and customer base.
Organizations are taking a risk-based approach to third-party screening, in order to protect themselves from liability. They categorize IT vendors into risk categories based on the product or service offered. Further, they are also considering the vendor’s location and factors such as the current technologies used by them.
The onboarding process establishes clear guidelines and protocols for the vendors to deliver the products and services in a manner that is in line with the goals and objectives of the organization.
3. Conduct Due Diligence
Before entering into a relationship with a vendor, it is important to conduct due diligence to understand their business practices and assess their stability. When conducting business, the only information that can be trusted is information that has been verified. Therefore, before engaging with third-party IT vendors, due diligence becomes necessary — allowing organizations to get a detailed overview of the vendors’ history, capabilities, and risk exposure.
4. Develop and Implement Policies and Procedures for Fourth-Party Risk
With a clear understanding of vendors and their business practices, organizations must develop and implement policies and procedures to mitigate the risks associated with them. The need of the hour is to develop policies to prevent unauthorized subcontracting. It is important to be aware if the products or services sought are in fact being delivered by an authorized third-party vendor or a fourth party that has been subcontracted by the vendor.
In the event of an unauthorized sub-contract, the organization is exposed to unforeseen risks which cannot be gauged and mitigated owing to limited knowledge and protocols. Further, they can create immense liability for the organization without effective control.
5. Establish a Common Risk Communication Framework for All Stakeholders
Maintaining open communication with all stakeholders is critical to managing risk. Organizations must ensure to promptly address any concerns that arise and keep everyone apprised of changes to policies and procedures.
To avoid liability, all vendors must be duly informed of changes or updates to the policies and protocols. Further, if the vendors are facing any concerns, they must be communicated to the necessary teams to resolve them at the earliest opportunity.
On the other hand, if the organization identifies problems with a vendor, it is important to escalate the issue to a designated IT Risk Manager who understands both the risk landscape as well as the technical nuance of IT VRM. It is imperative to keep C-suite executives in the loop to help them be prepared with the necessary information should a risk become reality.
6. Monitor the Effectiveness of a Risk Program
Ensure the effectiveness of the IT VRM program by implementing robust policies, processes, controls, compliance surveys, assessments, and audits. Organizations must ensure that all allocated IT VRM resources are available with their responsibilities defined and monitored to assess if they are working as planned.
Further, it is important to continuously monitor vendor performance to ensure they are complying with policies and procedures and to identify any potential red flags. If there are gaps in compliance from the vendors, necessary measures must be taken to ensure compliance without impacting business continuity.
Designated risk managers must evaluate the program regularly to identify and mitigate potential risks, ensure compliance with requirements, and take appropriate remedial action when red flags arise. Further, the organization must rely on quantification and disqualification criteria for vendors and define key metrics to help evaluate the effectiveness of an IT VRM program.
Here are some ways by which vendor risk management helps organizations:
1. Helps Prioritize Risks
IT Vendor risk management helps organizations prioritize risks by identifying and assessing the risks associated with their vendor relationships. This allows organizations to focus their resources on the most critical risks. IT vendor risk management helps identify, assess, and prioritize risks by analyzing the organization’s IT environment.
IT VRM is not just a one-size-fits-all approach to risk, however. Too much regulation and mission-critical tasks might become hard to perform, and too little oversight can also leave organizations vulnerable. Once the risk mitigation team identifies which vulnerabilities need immediate attention, they can start implementing the remediation plans with immediate effect as they would apply to each vendor.
2. Improves Communication
Vendor risk management helps improve communication between an organization and its vendors. By establishing a clear and concise process for communicating risks, both parties can be more effective in addressing them.
To mitigate risks before they materialize, all stakeholders must have access to relevant information and the ability to share it easily. This helps ensure that everyone is on the same page, as well as help identify issues early so they can be resolved quickly.
3. Facilitates Collaboration
Vendor risk management facilitates collaboration between an organization and its vendors. Here are some ways how IT VRM helps improve collaboration:
4. Enhances Visibility
An IT vendor risk management program helps an organization increase the visibility of all risks related to IT vendors. The knowledge gained from these activities helps an organization to make informed decisions about how best to mitigate potential threats while also taking advantage of opportunities that may exist with their vendors. For example, opportunities to either diversify or consolidate sourcing certain services as part of better risk management, may make themselves apparent. Alternatively, a comprehensive analysis of vendor profiles may help negotiate better terms even at the beginning of an IT vendor relationship.
5. Builds Trust
IT Vendor risk management helps build trust between an organization and its vendors, as well as end-customers. Here are some ways IT VRM helps inculcate trust with customers:
Together, these steps help increase service delivery efficiency for customers, who in turn benefit from not being exposed to the same quantum of risk as they may in other circumstances.
The IT Vendor Risk Management process is fairly complex and includes several moving parts that are interdependent. With so much information flowing in and out of an organization, it becomes difficult to keep track of all the processes and best practices required to keep risks associated with IT vendors in check.
To resolve this, the use of software tools is an ideal approach.
Automation is a key component of any good technology-driven risk management program. Because it allows for an efficient and consistent approach to risk assessment, automation can help to reduce errors and costs, leading to a more effective overall strategy. Automating the process also ensures that everyone is using the same methodologies and standards in their decision-making processes.
Consider the following benefits of eliminating expensive, tedious manual efforts:
Organizations can leverage solutions such as MetricStream’s IT Vendor Risk Management to effectively manage their IT vendor risks throughout the lifecycle. MetricStream helps organizations reduce vendor onboarding time by up to 80% and helps reduce the cost and time required to assess and identify vendor risks by 50%.
Teams get access to powerful tools that generate comprehensive reports, manage issues with AI, improve performance management, and handle due diligence without lapses.
Learn more about how MetricStream can help you with your IT vendor risk management requirements.