4 Types of Vendor Risks to Be Aware Of

The organizational impact of outsourced services is appealing for a myriad of reasons. And working with a reputable third-party vendor comes with plenty of benefits. It can help optimize workflows, allow you to leave specialized work to field experts, and ultimately save on costs.

However, the crucial term here is “reputable,” as outsourcing does carry some risk. In fact, according to IBM’s Cost of a data breach 2022 report, third-party software vulnerabilities were the cause of 13% of data breaches, costing over $4.5 million.

Minimizing third-party vendor risks requires proper vetting from the start. You must ensure they can satisfy key compliance standards that apply to your business while providing high-quality service and quick response times.

Read on to learn more about four major vendor risks you should be aware of before choosing your next partner in business.

#1 Compliance

Depending on the nature of your organization, you may have various compliance standards you need to satisfy based on industry or legal requirements. What those requirements include and what compliance authorities you must report to depend on the services you provide and the types of information you store, collect, and transfer. 

For example, healthcare organizations must satisfy Health Insurance Portability and Accountability Act (HIPAA) compliance requirements. Any business that accepts electronic card payments must satisfy current Payment Card Industry Data Security Standard (PCI DSS) requirements. And both frameworks require regular risk assessments, robust cybersecurity, and documented organizational processes to demonstrate adherence.

The same goes for any third-party vendors you work with, depending on the types of services and information they’re handling on your behalf. Ultimately, your business remains responsible for compliance and other security risks even when you implement outsourced services. That means it’s your responsibility to verify they’re capable of satisfying those requirements and keeping personal customer and client information secure before you decide to work together.

If a third-party vendor fails to satisfy necessary compliance standards, both of your organizations could face serious consequences, including:

• Compromised sensitive information (e.g., your customers’ and your organization’s)
• Legal consequences
• Fines and financial losses
• Litigation
• Damaged brand reputation
• Loss of customer/client trust
• Business continuity risks

When in doubt, vet your vendors out before signing any contracts.

#2 Data Security and DLP

This may seem like an obvious suggestion, but it’s still worth stating outright: Your vendors should have high security standards, just like you do. Unfortunately, that’s not always the case, which is why you should do your due diligence before onboarding a third-party vendor.

Once you’re aware of the nature of your data security risks and what precautions must be in place for adequate protection in-house, you’ll need to assess what security protections your vendor has in place. This will tell you whether they’re capable of delivering adequate data protection as required by your organization.

A major component of a vendor’s data security protections should include a product dedicated to data loss prevention (DLP), particularly if they are receiving, transferring, or storing any vital or sensitive information for you. 

DLP best practices include:

• Identifying sensitive data and implementing proper protections (e.g., AI-powered detection for emails, downloads, and user behavior)
• Encrypting sensitive data included within emails and documents (at rest and in transit)
• Using multi-factor authentication
• Providing employee training on policies and procedures across all data types

While it’s true that not all security breaches may be preventable, you still want the most comprehensive protections. 

#3 Cybersecurity and Managing Third-Party Risk

Your vendors need to satisfy any cybersecurity requirements applicable to your organization. This makes it essential to assess a vendor’s cybersecurity infrastructure before collaborating with them.

Assess the types of information you expect the vendor to handle, how it will be shared, and how it will be stored. Then, review what applicable compliance standards require and verify whether your vendor has the resources to satisfy them.

Consider asking the following questions to third-party vendors during this process:

• How does your business protect PII?
• What DLP precautions do you have in place?
• How is your data stored? How is it backed up?
• What protections do you have against malware, ransomware, and other threats?
• What other data security measures will be in place?
• What security software does your business use?
• Who provides your IT services?
• How are your servers protected?
• What are your protocols in the event of a data breach?
• Are you aware of what compliance standards we need to follow (e.g., HIPAA, GDPR, PCI DSS)? How will you satisfy each of these requirements?

Depending on the compliance standards you need to follow, your overseeing agency or agencies may provide standard vendor questionnaires you can refer to for guidance as you search for the right vendor to serve your organization.

But again, remember that even third-party vendors with the most robust protections in place can still fall victim to unexpected cyberattacks. It’s also possible that certain breaches could go unnoticed until it’s too late. 

That’s why it’s best to do your due diligence for any and all third- and even fourth-party communications to prevent a vendor email compromise scam.

#4 Supply Chain Risks

Robust security protections should extend across your organization, including vendors and third-party contacts your organization works with. 

When cyber attackers target a particular organization, they’ll look for its weakest links—and often, those can be your vendors. Or, they might choose to target a vendor explicitly with the knowledge that they handle information for multiple organizations (your own potentially being one of them). Attackers target vendors because it’s proven to be an effective and lucrative way to initiate supply chain attacks; one compromised vendor can lead to hundreds or thousands of victims at once.

For instance, consider the infamous SolarWinds cyberattack discovered in 2021, which was attributed to Russia and affected around 250 organizations across various supply chain areas.

To protect your own business against vendor fraud and supply chain attacks, consider these vendor and supply chain risk management best practices:

• Don’t overshare or expose sensitive information to third-party risks if you don’t have to (i.e., the “Principle of Least Privilege).
• Include data protection and cybersecurity requirements in vendor contracts.
• If a third-party vendor must use your network, consider establishing network segmentation breaks so that they can only access the resources they need.
• Understand common risks and vulnerabilities in your vendor’s line of work.
• Conduct a risk assessment according to guidelines established by the National Institute of Standards and Technology in Special Publication 800-30 Rev. 1, Guide for Conducting Risk Assessments.
• Follow your own cybersecurity best practices.
• Develop a security plan for your supply chain that assumes you will experience a data breach. In other words, include post-breach plans to respond to and limit damage after a breach has happened.
• Don’t overlook the importance of physical security—after all, the early stages of data breaches can begin in person.
• Use Armorblox’s vendor fraud and supply chain risk checklist.

Protect Your Organization From Vendor Fraud and Supply Chain Attack With Armorblox

Before deciding to work with any vendor, it’s important to perform a third-party risk assessment at the start. It’s also just as important to periodically re-assess your vendors to make sure they’re still providing a satisfying level of service and meeting necessary compliance standards.

As you work out the details of your vendor relationships, Armorblox can help keep your communications and cloud applications secure and protect sensitive PII and other information.

Learn how to minimize your own vendor risks and keep your organization’s most sensitive data secure. Start by checking out our vendor fraud risk checklist to see how your business stacks up.