Vendor Risk Management

What is vendor risk management?

Most organizations collaborate with vendors to reduce costs or create more efficient business operations. When an organization partners with a third party, there is often a great deal of confidential data that is shared with that vendor, and potentially to external parties. For this reason, vendor risk management is a highly important security topic that firms should account for in a security initiative.

Vulnerability risk management is the process of evaluating vendors prior to establishing a contract of the potential risks that an organization faces when transferring information and/or allowing a vendor to store your organization’s sensitive information.

If the personally identifiable information (PII) of your customers is accessed through your vendor network by hackers, it can cause legal, financial, and reputational risks for your organization. As such, organizations should get ahead of the risk and create a strategy that accounts for specific vendors with whom your firm works.

The strategy should outline:

1. What type of data you’re sharing with the vendor
2. How you are sharing that data
3. Who has access to this data
4. How that data will be stored
5. How that data will be destroyed
6. How frequently the auditing process takes place

How does vendor risk management affect the initial vendor selection process?

Selecting the right vendors to work with is a critical first step within the vendor risk management process. Before selecting a vendor, use due diligence to verify the following areas of the partnership (note that this list isn’t exhaustive):

• Background
• Performance history
• Financial health
• Market reputation
• Policies in place within the vendor organization
• Compliance
• Stakeholders and board of directors
• Civil or criminal lawsuits against your vendor or its stakeholders

Armed with this information, develop a risk assessment profile identifying the possible risks.

Next, establish a risk management strategy including the necessary steps to mitigate those risks. If your organization already has a strategy in place, note that you may need to add or modify a clause in the document for each vendor with whom you’d like to work. Once the strategy is in place, utilize it for a periodic vendor review.

How do you carry out a vendor risk management strategy?

These eight steps present a high-level overview of elements that make up a strong vendor risk management strategy:

1. List all vendors with whom your organization works. Prioritize these vendors based on how much of a security threat each poses to the organization. This allows you to best coordinate your internal resources to tackle the high and critical threats first.
2. Implement a security framework that maps to your organization. For example, if your business operates as part of the healthcare industry, the vendor must comply with the Health Information Portability and Accountability Act (HIPAA).
3. Prepare a contract outlining the business relationship between your organization and the vendor. This process will involve your legal team.
4. Create documentation of the vendor selection process and criteria, available vendor details, and audit reports of each review taking place at the vendor site.
5. Conduct a periodic review and audit of clauses included within the contract. Ensure they are met. These reviews ensure that the vendor meets regulatory compliance for your industry.
6. Collect fourth-party vendor details and perform an assessment of your vendor’s policies for its vendors.
7. Document risks identified during the process and proposed mitigation plan.
8. Educate employees involved in the process about the importance of the process and an assurance of a clear line of escalation for any red flags.

What vendor risk management tools or resources should organizations implement?

There are four items to consider within your organization to ensure a proactive vendor risk management strategy:

1. Prepare templates for questionnaires, checklists, and process documentation for use during the vendor risk management process.
2. If you don’t have skilled resources in your organization, outsource the requirement to firms that provide specialized services. These organizations can help you hone your risk assessment and risk management techniques.
3. Follow current best practices and compliance requirements. Some current best practice, compliance, and regulatory standards that are helpful as a reference include:
   1. The Sarbanes-Oxley Act
   2. The Gramm-Leach-Bliley Act
   3. The Foreign Corrupt Practices Act (FCPA)
   4. The Health Insurance Portability and Accountability Act (HIPAA)
   5. The Payment Card Industry Data Security Standard (PCI DSS)
   6. The UK Bribery Act
   7. NIST 800-53
   8. NIST Cybersecurity Framework
4. Gather as much information as possible about the vendor before building your strategy. This includes publicly available information relating to items such as physical verification, etc.

The focus of the strategy should be on improving the design and solving any problems along the way rather than collecting data. This will allow you to create a value-added ecosystem for you and your vendors.

Why is third-party security so important?

Statistics show that nearly two-thirds of security breaches originate from third parties. For example, in the December 2013 Target breach, the attack was enabled by an email phishing attack on an HVAC contractor. An employee of the contractor clicked a malicious link which ultimately led to the compromise of millions of credit cards. This is one of many examples highlighting why the security of your vendors directly affects your firm.

Vendors can improve credibility by having proper documentation and policies in place that are an auditing requirement. These firms should also educate all levels of employees of the importance of third-party security.