Third-party risk management: How to detect and assess high-risk vendors in your business
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Third-party risk assessment has become a black hole for several companies. A few of them need a solid list of vendors or identify them. The others have better knowledge about their vendors but need to learn about the impact they have on the company. Still, others might know about the impact but need help quantifying the risk. There are even the ones who either have thousands of vendors and need to learn where to begin or those who think that they are too small for a company to get affected by any breach.
Irrespective of the kind of camp you are falling into, vendor breach is a serious threat that should be addressed sooner rather than later with the help of risk assessment. While third-party data breaches hit the headlines, it becomes imperative for companies to target the riskiest vendors with the help of risk assessment and start the process of evaluation, monitoring, and management of the vendors. In our post today, we are going to identify the high-risk vendors, the importance of vendor risk assessment, and more.
What is vendor risk assessment?
Vendor Risk Assessment is a critical process across modern business management to identify and mitigate the risks when partnering or outsourcing with third-party vendors. While the companies are depending majorly on the external suppliers they should evaluate the vendor practices, abilities, and policies for mitigating the possible risks of compliance, cybersecurity, financial instability, operational disruptions, and reputational damages. The vendor risk assessment program will ensure that every vendor in a company’s ecosystem matches the expectations and standards to safeguard the company and ensure seamless operations.
Importance of vendor risk assessment
Vendor security assessments or third-party risk assessments are important since they help you deal with the risks connected to operating with third-party partners. These risks result in legal issues and data breaches. Reportedly, 98% of global companies have integrations with third-party vendors that were breached in the last couple of years. If you fail to assess how to secure your vendors, then it will lead to getting exposed to cyber-attacks and results that are financially draining, costing millions of dollars.
Identifying the high-risk vendors
You can manage your vendor relationships and mitigate your risks by identifying the high-risk vendors for your company. You can boost the operational efficiency, customer satisfaction, and regulatory compliance.
Defining risk category
The initial step involved here is to establish your risk criteria on the basis of the goals, policies, and standards of your company. You have to clearly define the things that constitute the high third-party or fourth party risk for the company and the way you can scale it. You may even consider different factors like the type of vendors, scope of work, duration, contract value, performance history, location, security posture, status, and business continuity plans. You can use such industry benchmarks, best practices, or frameworks for guiding your risk criteria.
Conducting a risk assessment
The other step is to conduct the risk assessment for every vendor using the risk criteria. You have to gather the key information from numerous sources like vendor audits, questionnaires, reports, references, certifications, or reviews. You can use third-party tools or services to verify the vendor data or perform background checks. You have to analyze this information and assign a risk rating or a scorecard to every vendor on the basis of the risk criteria.
Vendor categorization
The last step involves the categorization of your vendors on the basis of the risk ratings or the different scores. You have to group every vendor into varied risk levels like the high, medium, or low or different risk tiers such as tier 1, tier 2, or tier 3. You have to define the criteria and the thresholds clearly for every category or tier and communicate them to the stakeholders. You have to use different categories for the vendors or the tiers, emphasizing your risk management actions and resources.
High-risk vendors can specifically be identified by considering the type of product or service. Let us further check out a couple of questions to have regarding the vendor:
- Is the vendor processing financial transactions on behalf of your company, customers, or employees?
- Does the vendor need access to sensitive data like nonpublic information or personally identifiable information?
- Does your vendor interact with the customers in any manner?
- Does your organization use the vendor’s products or services to maintain regulatory compliance?
- Are the products or services of the vendor unique across the marketplace and without any reasonable substitution?
Assessing third-party risks
When you assess the third-party risks, it entails a complete analysis of the vendor’s risk profile, covering numerous aspects of cybersecurity, operational reliability, and compliance. They are extensive assessments offering a clear knowledge of the amount of risks associated with the particular vendor. The following are the main ways you can assess the risks:
Here are the most essential features your vendor risk assessment reports should include:
Vendor profile and background
When you assess the reliability and suitability of a vendor, it is important to have a proper knowledge of their background and profile. Here, you need to get comprehensive details on the vendor’s business model, history, market position, size, and location. It is the key step in terms of evaluating the ability of the vendor to meet the contractual obligations and the possible impact on the business. By attaining key insights about the vendors and whatever they represent, companies can determine the amount of risk and the nature of the relationship they are getting into.
Compliance with regulations and standards
This section of assessment can help evaluate the compliance of the vendor with standards and laws like HIPAA, GDPR, and others, ensuring they are meeting every legal and ethical requirement. Assessment of vendor compliance involves the comprehensive evaluation of the policies, processes, practices, and ability to meet the distinctive regulatory requirements. It includes everything ranging from data privacy and security to employee training and risk management protocols. The essence of vendor compliance can never be overstated, considering the risks and possible outcomes of non-compliance.
Cybersecurity measures and infrastructure
Assessment of the cybersecurity measures and infrastructure of the vendor is the key in an increasingly sophisticated time of cyber threat. The report aims to strengthen the cybersecurity defenses of the vendor, including the use of security controls, firewalls, and methods of encryption.
It demonstrates the vendor’s ability to protect sensitive information and systems from cyber attacks, which is essential for preserving the confidentiality and integrity of your data.
Data management and privacy practices
Safeguarding sensitive information needs strong data management and privacy practices. It is the section that examines the manner in which the vendors are handling, processing, and storing data ensuring to follow the best privacy and data security practices. It is important to analyze these practices in terms of preventing the data breaches resulting in substantial loss of finances and reputational harm.
Incident response and recovery plans
Having the ability to respond to and recover from the incidents is a vital factor in terms of evaluating the resilience of the vendor. The section will assess the potential of the incident response and disaster recovery plans that include their preparedness for unfortunate events like system failures or data breaches.
The main objective here is to determine their ability to reduce downtime and ensure service continuity, which is important to reduce any operational disruptions.
Risk assessment methodology
The risk assessment methodology offers key information on the way a vendor would assess and manage varied forms of risks. The assessment is important to know about the risk management for financial services in detail and its effectiveness. It will outline the way in which internal personnel will identify, assess, mitigate, and monitor the possible risks, offering clarity into the approach of the vendor to the management of possible threats.
Access control and identity management
Ensure the effectiveness of access control and identity management that prevents any unauthorized access to sensitive data and systems. The assessment evaluates the policies and technologies of the vendors for the management of user access, verifying the identities, and controlling the permissions. The assessment is important to ensure that only authorized people access sensitive information to reduce the risk of data breaches.
Supply chain and third-party dependencies
Analysis of the supply chain and third-party dependencies is critical for understanding the risks involved. The assessment of the risks associated with the network of vendor suppliers and partners will consider the manner in which the relationships would impact the risk profile, thereby affecting your business. It is important to identify and manage the possible risks that arise out of the interconnected relationships.
Conclusion
In the space of business and technology, effective third-party vendor risk assessment is an imperative process. Companies must always pay attention to the important task of evaluating and managing the risks posed by their third-party vendors. The effective process of high-risk vendor identification and assessment is important for the entire security of a business and the protection of sensitive data. The efficient vendor risk assessment is more than just a measure of compliance as it forms the pillar supporting the long-term success and resilience of modern businesses across the interconnected world.
