Articles & Thought Leadership | 7 min read

What Is Vendor Risk Management?


Lauryn Cash
Lauryn Cash

Are you practicing VRM? Learn what vendor risk management is, how to manage vendor risks, and how to implement a business VRM strategy.

What Is Vendor Risk Management?

Most businesses collaborate with vendors to create more efficient business operations and reduce costs. However, if your company partners with a third party, a great deal of confidential data could be shared with that vendor and other external parties.

Vendor risk management (VRM), also known as third-party risk management (TPRM), involves monitoring and managing vulnerabilities (like vendor email compromise) that can arise from involvement with vendors and suppliers.

Vendor fraud attacks equate to 25% of financial fraud attacks and include the following three attack vectors: vendor domain spoofing, vendor account compromise, and vendor impersonation.

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A vendor risk management program is integral to your organization’s overall risk management process as vendors pose many risks, including financial, reputational, compliance, and legal arenas. Therefore, VRM is key when creating security initiatives to protect your business.

This article will review vendor risk management: what it is, its importance, how to manage vendor risks, and how to implement a VRM strategy.

Vendor Risk Management Explained

In the cybersecurity world, VRM strategies involve ensuring that doing business with IT vendors, third-party products, and service providers do not result in data loss, business disruption, or exposure to cyber threats.

With interconnected companies, vendors, and cloud services providers rising, vendor risk management has evolved from an annual checklist item to a critical daily function. VRM focuses on identifying and mitigating vendor-associated risks and ensuring they are handled effectively.

VRM is now a process that requires continuous monitoring, incorporating traditional due diligence methods with automation to ensure:

The Importance of Vendor Risk Management

Outsourcing is often critical in running a modern business successfully, enabling you to incorporate expertise you may not have in-house. However, there are both benefits and risks to outsourcing essential tasks to vendors. Proper vendor management is crucial; otherwise, organizations can face severe financial, legal, and operational impacts.

Here are some risks that improper vendor risk management can pose:

  • Critical data breaches 
  • Unauthorized disclosure of sensitive information (PII, PCI, PHI)
  • Lawsuits and legal issues
  • Intellectual Property loss
  • Compliance and regulatory breaches
  • Brand reputation damage

According to a 2021 Ponemon report, more than 50% of organizations surveyed experienced a third-party data breach that led to the misuse of confidential or sensitive information. An even greater number attributed data breach causes to granting too much access to third parties.

While vendors should have proper documentation and policies, you shouldn’t rely on external parties’ security standards when protecting your critical or sensitive information. If third-party vendors have poor (or nonexistent) security practices, they can pose considerable risks to your business, regardless of how good your own security controls are.

Even the most prepared companies can still be targets for cybercriminals. So monitoring any third- and even fourth-party communications is critical to prevent vendor email compromise or vendor and supply chain fraud.

How Do You Manage Vendor Risk?

An effective VRM plan outlines the access, behaviors, and services that a company and a potential vendor agree on. While each company’s stance on VRM will vary, you should consider a few recommended commonalities:

  • Use the principle of least privilege: Only give vendors access to the data they need – and no more. 
  • Develop a risk appetite statement: Define the amount of risk your business is willing to accept in pursuing your objectives.
  • Create a vendor inventory: List the vendors you do business with, their contact information, and the critical attributes you define.
  • Classify your vendors: Determine your vendors’ levels of importance to your business.
  • Conduct vendor risk assessments: Decide how you will mitigate risks based on threat level.
  • Comply with industry regulations and requirements: The Health Information Portability and Accountability Act (HIPAA), the Sarbanes-Oxley Act (SOX), and the Payment Card Industry Data Security Standard (PCI DSS), require that risk management policies include third-party vendors, consultants, and contractors.

If there are compliance standards you must adhere to, regulatory agencies may have standard vendor questionnaires you can use as you search for the right vendor(s) to serve your business or organization.

Implementing a Third-Party Risk Management Strategy

Your business needs an overall risk management strategy that includes constant vendor measurement and evaluation. Data breaches can originate from any department or source in (and out of) your organization, so vigilance is key.

Here are some best practices for establishing a third-party risk management strategy:

  • Use an email DLP solution: Help guard against transmitting information that could threaten your company and livelihood. 
  • Select the right vendors: Establish the requirements to do business with you. Perform due diligence to ensure that prospective vendors meet your cybersecurity standards. 
  • Identify and control sensitive data: Know where your critical data is stored and who can access it. 
  • Train your employees: Your human layer is the most vulnerable to making judgment errors. Learn about evolving cyber threats and pass that information to your team.
  • Put it in writing: Make sure vendors clearly understand your business relationship and the rules they must follow.
  • Get fourth-party details: Assess your vendors’ policies for their vendors and ensure they align with your standards.

Armorblox: An Essential Part of Your Vendor Risk Management Strategy

There’s no doubt that exposing critical data to third parties puts your business at risk. A comprehensive VRM program enables your business to effectively identify and mitigate vendor email compromise (VEC) risks so you can monitor potential vulnerabilities with minimal human interaction.

VEC can be difficult to detect and prevent, potentially damaging your finances and business. Likewise, protecting your company against vendor email compromise can be challenging. However, consistently using the right tools and strategies can help defend your vendor relationships, reputation, and ultimately, your bottom line.

To learn more about how Armorblox prevents VEC and vendor fraud, take a 5-minute product tour below.

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