‍Vendor Risk Assessment: Ensuring Secure & Reliable Partnerships

‍Unsure whether the vendors you are engaging with uphold proper security practices or are reliable enough for a long-term commitment? If so, then consider conducting a vendor risk assessment. But what is vendor risk assessment? In this article, we'll discuss it in detail. 

On 20th June 2024, the U.S. Department of Commerce's Bureau of Industry & Security (BIS) made headlines by banning Kaspersky Lab, Inc. 

Note: Kaspersky is a Russia-based cybersecurity company offering various anti-virus products and data protection services.

Why did they do so? According to BIS research, Kaspersky secretly accessed U.S. customer information through administrative privileges and shared that data with the Russian government without the consent of U.S. citizens. But that's not all. This vendor also installed malware (harmful software) and withheld crucial updates, which further compromised the safety of U.S. individuals' data and exposed critical infrastructure to some serious risk.

Surprisingly, this wasn't the first time such an incident has occurred in the global market. Unfortunately, it won't be the last due to increasing reliance on vendors for essential products and services.

So, ask yourself — 'Is your organization truly safe from third-party suppliers?' 

Let me tell you – the hard truth is probably not! In fact, no organization (that relies on vendors for services) can truly claim to be completely safe. What can be done?

You can take precautionary action, like conducting a vendor risk assessment (VRA), to avoid becoming one of the next victims. What is a vendor risk assessment? Let's find out.

What Is Vendor Risk Assessment?

Vendor risk assessment refers to the process of identifying risks (data breach risk, compliance risk, operational risk) associated with a vendor's practice, products, and services and evaluating how those risks can potentially impact your organization. 

Note: Vendor risk assessment is commonly known as 'vendor risk review.'

But what exactly is involved in the process?

While conducting vendor risk assessment, the organization assigns a dedicated team with a task — to request vendors to fill out a security questionnaire (at the time of the request-for-proposal stage). In this questionnaire, the third-party suppliers are required to fill in details such as — what data security practices they follow, what policies they have, compliance certification, and a few more. Once the details are submitted, the team reviews their responses to determine if their practices and policies can impact data security or the organization's operations overall. 

If any threat is detected, the team further rates those threats based on how much harm it can do (they assign a vendor risk score, which can be calculated with this formula: Likelihood x Impact = Vendor Risk).

With these insights, organizations decide whether to onboard the third-party vendor (i.e., sign the contract with them). This approach helps organizations protect themselves from potential risks associated with third-party partnerships. 

However, you need to note that — ‘not all vendors carry the same level of risk.’ The risk factor will vary depending on the type of vendor you engage with. Check out this flowchart to gain more clarity.

Also Read: 6 Vendor Management KPIs You Must Track

Now, let’s understand when you actually need to perform vendor risk assessment.

When To Perform Vendor Risk Assessment?

Generally, a vendor risk assessment should be performed before you engage with any third-party vendor. Then, once the initial assessment is done, you can conduct the risk evaluation periodically or whenever you notice that they are mishandling your data or not following the agreed-upon standards or contract terms. However, there are other scenarios as well when vendor management risk assessment needs to be conducted; some of them are listed below:

• Scenario 1: When You Engage With High-Risk Vendors 

High-impact or high-risk vendors manage critical operations and access your organization's sensitive data. Given their role and responsibilities, any lapses (mismanagement of data or mishandling of operations) in their practice can cause severe issues, such as data breaches and operational disruptions.

So, if you engage with any such critical vendors, you need to perform a vendor risk assessment every six months (bi-annually) without fail. This way, you can identify and address potential threats before they become a serious problem. Moreover, by practicing this proactive approach, you can safeguard your sensitive data from potential breaches and minimize the risk of operational interruptions.

• Scenario 2: When Regulatory Changes Occur

Whenever new compliance regulations are introduced, or the existing ones get updated, it is important to conduct a thorough vendor risk review (regardless of whether it's the initial onboarding phase or midway through the contract phase). 

You have to find out whether your vendor is adhering to the new compliance standards. If they are not practicing them, ask them to file for certification to continue their partnership with your organization. 

This step is crucial because partnering with vendors who are not committed to adhering to compliance regulations puts your data security at stake and exposes your organization to penalties for non-compliance or compliance violations.

• Scenario 3: During Vendor Contract Renewal

Before renewing your vendor’s contract (180 days prior to renewal), it is crucial to perform a vendor risk review. This assessment will help you determine whether your third-party supplier is following the terms, industry standards, and practices outlined in your initial agreement. 

If you find that they are not meeting those expectations, it will be better not to proceed further with renewing their contract. After all, continuing to engage with a vendor that fails to uphold their commitments will only compromise your data security and operation efficiency. So, rather, look for a new vendor who meets your commitments and can be reliable enough to hold long-term partnerships. However, note that — before switching to a new vendor, make sure you are not in any vendor lock-in terms, and even if you are, try to settle it before starting a new partnership. 

But why is performing a third-party risk assessment so important? Let’s find out.

Why Is Vendor Risk Assessment Important?

Here are the two key reasons why performing vendor risk assessment becomes important:

1: Closes The Entry Points For Cybercriminals

By performing vendor risk assessment, you can get a complete picture of what security measures your vendor practices to keep data safe and how well-prepared they are to handle cyber attacks (if one were to occur). 

If a vendor’s security practices are not up to your standards or reliable enough to protect highly sensitive data, you can take precautionary action, such as requesting them to improve and modify their security measures to align with your organization’s data security requirements. By doing this, you can close security gaps (weak points) in your vendor’s practices that cybercriminals can exploit to gain unauthorized access to your system or highly sensitive data. 

This practice also helps prevent financial instability by mitigating expensive disruptions and disaster recovery expenses that could arise from potential security breaches.

2: Helps Your Organization Stay Compliant With Stringent Regulations

Generally, most organizations are obligated to comply with multiple regulations, such as the General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA), and industry-specific regulations, such as the New York State Department of Financial Services (NYDFS), the Payment Card Industry Data Security Standard (PCI DSS), and the Health Insurance Portability and Accountability Act (HIPAA). 

What’s common among all these regulations is that they mandate organizations to only partner with suppliers that adhere to their security and privacy requirements. So, if you want to keep your organization in line with legal standards, you have to make sure the vendor you are engaging with adheres to the regulatory requirements. To confirm their adherence, you need to conduct a vendor risk assessment (focusing on the compliance part) without fail. 

Basically, to avoid non-compliance issues, your adherence won’t suffice; you also have to make sure your vendors are equally committed to following regulations. 

Now that you are familiar with why vendor risk assessment is important, you may also be willing to review your vendors. But, unsure where to start? To address your confusion, we’ve outlined a few simple steps that you can follow to conduct an effective vendor risk assessment.

How To Perform Vendor Risk Assessment Effectively?

Here are the steps to conduct third-party vendor risk assessment effectively:

Step 1: Familiarize Yourself With Different Types Of Vendor Risks

Before you even start with the vendor assessment, first make sure to understand the different types of vendor risk, which include: 

• Strategic Risk: This risk occurs when service providers misuse or expose your organization’s trade ideas, secrets, or intellectual property (IP).
• Compliance Risk: This risk occurs when vendors do not comply with the necessary requirements.
• Geographical Risk: This risk occurs when vendors operate from or are based in a location that experiences frequent service disruptions because of political instability, war, or other regional challenges. 
• Technical Risk: This risk occurs when a vendor’s data security management practices are not reliable or effective enough to withstand cyberattacks.
• Resource Risk: This risk occurs when vendors lack sufficient resources (time, money, staff, products) to fulfill your organization's growing demands.
• Reputational Risk: This risk occurs when you partner with a specific vendor who can ruin your organization's brand image or credibility (this can be because the vendor does not have a good image in the market due to their poor commitments and security or regulatory compliance practices).    

By thoroughly understanding these inherent risks, you can better prepare yourselves (like having security controls and measures in place) to address them (note: you can take this action after the risk assessment only).

Step 2: Determine Which Vendor Risks Can Impact Your Organization 

The next step is to clearly define which type of risks are relevant or applicable to your organization. Suppose you're running a hospital, so your priority will be safeguarding data privacy. Therefore, you need to watch out for vendor risks that can hamper your data security and privacy. On the other hand, if you are running a cloud kitchen, your primary focus will be maintaining uninterrupted services, so you need to watch out for vendor risks that can interrupt your services (supply chain).

By identifying the vendor risks that matter, you can perform more targeted vendor assessments and address those risks effectively.

Step 3: List Out The Vendors You Want To Engage With & Categorize Them Based On Their Risk Levels

Compile a list of all the vendors you wish to partner with and the products and services they offer. Then, dig deeper and collect relevant data for each vendor, such as their financial stability, compliance status, and past performance. Also, investigate any previous incidents of data breaches or service disruptions. You need to perform due diligence prior to entering an agreement.

Based on these insights, you can assign them a risk level. To assign a risk level, you can use any scoring system, such as color grading: red for high risk and green for low risk, or a number scale of 1 to 10; the lower the number, the lesser the risk.

Step 4: Create A Contingency Plan

Lastly, you have to create a plan to mitigate the vendor risks (when one occurs), and here’s what you must include in your contingency plan:

• Outline Incident Response Plan

For each vendor risk (which is applicable to your organization), you have to outline a set of actions (mention which tools will be tools, which team will respond, and within what duration it needs to be tackled) to address them effectively. For example, if a vendor risks compromises data security, then you can assign a designated team with expertise in cybersecurity to manage the security incidents.

This well-planned approach allows you to act promptly on such issues and minimizes their potential impact on critical business operations and data security. 

• Implement Risk Reduction Strategies

Enforce strategies that can prevent vendor risks from happening in the first place. For example, you can implement a vendor risk control policy, conduct proper due diligence annually or annually, and regularly monitor vendor processes to ensure no practices go unnoticed. 

• Include A SaaS Management Platform To Gain Complete Visibility Into Your Vendor Portfolio

Multiple SMPs offer vendor insights in the market, but Zluri offers precise, actionable insights. 

Zluri’s SMP provides detailed vendor-related information, such as the type of vendor (direct or reseller), the vendor contracts you are bound by, when their contract starts and ends, which services and products they offer, estimated expense vs. actual spend, and more—all in a centralized dashboard. 

With these valuable insights, you can effortlessly review vendor details during mid-term and end-of-tenure without having to switch multiple screens to gather information. This saves significant time and speeds up the vendor risk review process, reducing the likelihood of service interruptions and delays.

Also Read: Vendor Relationship Management - A Guide for IT Teams

Prevent Vendor-Related Pitfalls By Conducting Vendor Risk Assessment

In conclusion, since every organization directly or indirectly engages with third-party suppliers, it has become extremely necessary to conduct vendor risk reviews to avoid falling into the trap of vendor risks. However, to truly reap the maximum benefits of this review, you need to know when to exactly execute this assessment. For instance, you need to perform a vendor risk assessment prior to signing the agreement, whenever there is a change in regulations, and when you find out they are not adhering to your organization’s set standards. 

In addition, how you conduct the assessment also makes a huge difference, so try incorporating strategies like understanding vendor risks, finding the relevant risk, setting up a scoring system, and more to attain effective results. 

Apart from that, since regulations, organization needs, and market trends keep fluctuating and evolving, make sure to update your vendor risk assessment process on a timely basis. This approach will help you find vendors that can truly adapt and align with changing requirements. Also, note that vendor risk assessment is not a one-time task but an ongoing process! So, perform vendor risk assessment on a regular basis! And find out whether your potential vendor is reliable enough to partner with your organization.