Vendor Risk Assessment

Vendor Risk Assessment

Every organization uses third-party vendors, and most organizations use many vendors, which increases vendor risk. When an organization collaborates with a third party, a large amount of confidential data is frequently shared with that vendor and potentially with external parties. As a result, vendor risk assessment is an important security topic that businesses should consider when launching a security initiative. 

What is Vendor Risk Assessment?

A vendor is an external entity that provides goods or services to an organization, often as part of the supply chain. Examples include cloud service providers, consultants, software developers, payment processors, etc.

The process of identifying and evaluating potential risks associated with a vendor’s operations and products, and their potential impact on your organization, is known as vendor risk assessment. This procedure is designed to determine and assess the potential risks associated with vendor work. This is accomplished by evaluating a vendor’s security controls, values, goals, policies, procedures, and other relevant factors. Typically, assessments are based on questionnaires that ask vendors to share information about their security controls.

Importance of Vendor Risk Assessment

A vendor risk assessment evaluates the risks your company faces when utilizing the goods or services of third parties. Companies are increasingly outsourcing critical tasks to third-party vendors, which has advantages and disadvantages. According to statistics, third parties are responsible for nearly two-thirds of all security breaches. Recent events like the SolarWinds cyberattack and the Colonial Pipeline attack have affected millions of businesses and their third-party service providers. As a result, organizations faced financial losses, operational breakdowns, and legal action. In the December 2013 Target breach, an employee of the contractor clicked a malicious link, resulting in the compromise of millions of credit cards. Vendor risk assessment workflows can help your organization streamline procurement processes while meeting compliance audits.

Question examples for Vendor Risk Assessment

The first step is to decide which types of vendor risk to investigate. Some common vendor, risk assessment considerations include IT infrastructure, data security, financial stability, regulatory compliance, reputation, etc. Once you have decided which considerations to include, you’re ready to write questions.

  • What is your communication strategy in the event of a breach?
  • Would you be able to provide proof that you are compliant with the regulations?
  • Who in your company is in charge of data security?
  • Do you keep track of security incidents?
  • When it comes to data recovery, how do you proceed?
  • Do you consider physical and environmental hazards?
  • What policies and procedures are in place to protect data?
  • What data security certifications does your company have?
  • How do you keep the operating systems on your servers patched?
  • Do you have procedures to ensure business continuity if your office is inaccessible?

Types of Vendor Risks

Risk is simply the possibility of a negative outcome rather than its certainty. When deciding what to do about risk, you must consider both the likelihood of the risk occurring and the potential impact if it does.

The types of vendor risks are as follows:

  1. Compliance Risk

Compliance risk is the risk posed by violating of laws, regulations, and internal processes your organization must follow to conduct business. The laws that apply to each organization will differ depending on the sector, but some common regulations apply to all industries, such as GDPR and PCI DSS.

  1. Financial Risk

Financial risk is the possibility that a vendor connection will have a negative financial impact on your company. When an organization’s financial performance suffers, providing value to shareholders may be more difficult.

  1. Reputational Risk

Protecting your company’s reputation is critical to its success and developing future relationships with customers and investors. Third-party vendors can harm your reputation in various ways, including violations of laws and regulations, interactions that do not adhere to company standards, and the loss of customer information due to a data breach.

  1. Strategic Risk

Strategic risks arise when vendors make business decisions that do not align with your organization’s objectives. These risks can impact compliance and reputational risk, and they are frequently a determining factor in a company’s overall worth.

  1. Operational Risk

Operational risk refers to the uncertainties and hazards that a company faces when conducting day-to-day business operations. These risks are highly dependent on the human factor, errors caused by decisions made by employees of a company. Businesses assess operational risk by identifying key risk indicators and collecting data on these metrics.

Advantages of Vendor Risk Management Program

The benefits of a vendor risk management program are as follows:

  • Reduced Risks: Once all vendors are included in your vendor risk management program and classified, you’ll know where third-party risk exists in your organization. Knowing the exact risk for each provider enables you to keep a standard across all vendors. Once you have identified your high-risk vendors, you can start lowering the risk they pose to your company by requiring them to conduct a risk assessment.
  • Continuously managing vendor risk: A successful vendor risk management program allows you to continuously monitor your vendors’ security controls and notify you if their security posture changes.
  • Maintaining compliance: Compliance is critical for businesses in regulated industries. Regulations from the government are a significant pain point for businesses with poor risk management. As third-party breaches continue to rise, regulators are cracking down on organizations not properly managing their third-party vendors. By implementing a VRM program, you can simplify your compliance initiatives and satisfy all industry regulation compliance requirements, thus putting your business in a good position when regulators visit.
  • Visibility: When analyzing vendor relationships, it’s easy to overlook a supplier due to sheer volume. An assessment system by a third party ensures that every business relationship is unbiased and complete.

Steps to conduct a vendor risk assessment

The steps to conduct vendor risk assessment are as follows:

  • Determine which types of vendor risk to investigate: The first step is deciding which vendor to investigate. Some common vendor, risk assessment considerations include IT infrastructure, data security, financial stability, regulatory compliance, reputation, etc. Before you can start evaluating third parties, you must first understand every type of risk (such as strategy, compliance, financial, geographic, operational, technical, etc.) that could arise when entering a business agreement.
  • Develop risk criteria: Now that you’ve identified all potential risk categories, you’ll need to create risk criteria for third-party assessments.
  • Evaluate vendors: Before you enter into a partnership with any vendor, you should evaluate them no matter how small or what product or service they provide. Once you have decided which considerations to include, you’re ready to write questions.

Question examples for Vendor Risk Assessment include:

  • What is your communication strategy in the event of a breach?
  • Would you be able to provide proof that you are compliant with the regulations?
  • Who in your company is in charge of data security?
  • Do you keep track of security incidents?
  • When it comes to data recovery, how do you proceed?
  • Do you consider physical and environmental hazards?
  • What policies and procedures are in place to protect data?
  • What data security certifications does your company have?
  • How do you keep the operating systems on your servers patched?
  • Do you have procedures to ensure business continuity if your office is inaccessible?
  • Classify vendors by risk level: After you’ve assessed a vendor, you should determine its overall level of risk. Separating potential vendors into risk levels can assist you in deciding whether or not to work with them.
  • Risk Management Plan: After determining their risk level, it’s time to develop a customized risk management strategy. Create a plan for how your organization will manage each potential risk posed to it by the vendor.
  • Determine vendors’ vendors: Vendors cannot outsource personal data without the organization’s knowledge. If the vendor shares any personally identifiable information with downstream processors, legal and compliance must also sign off on vendor risk assessments with the downstream processors.

How Can Scrut Help?

By incorporating automation, organizations can fully leverage the insights gained from vendor risk assessments without devoting significant time or resources to the process.

Scrut assists you in evaluating, monitoring, and managing vendor risks. The platform helps you understand your vendors’ security postures. This allows you to determine whether a vendor meets your compliance requirements.

Scrut manages vendor security from onboarding to offboarding. It identifies vendors, evaluates and assesses vendor-related risks, and mitigates risks.

The tool assists you in streamlining your vendor compliance check with security questions. You can design your questionnaire or use one of our pre-made templates, as shown in the screenshot below.

Scrut allows you to identify, evaluate, and track vendor risks that your company faces in a single window. It speeds up assessing your vendors’ security posture by 70% and determines whether they meet your compliance standards.

The platform automates your risk assessment by keeping a close eye on your risk posture through continuous risk monitoring.

Scrut uses automated risk scoring to assess your risk profile. Risk scores are calculated based on likelihood and impact.

Risk = Likelihood * Impact

Taking the screenshot below as an example, let’s look at employee screening risk.

The likelihood of this event = 5 (very high)

The impact in case the event occurs = 4 (high)

Thus, the inherent risk associated with this event is also high = 20 (high)

Likelihood (5) * Impact (4) = 20

The final score lies between 0 – 25. 

  • 0 – 5 – Very Low
  • 6 – 10 – Low
  • 11 – 15 – Moderate
  • 16 – 20 – High
  • 21 – 25 – Very High

Scrut is the central repository for all vendor security information, including certificates, audits, and paperwork, as shown in the screenshot below:

The tool allows you to easily share vendor responses with customers and auditors. As a result, you can assess risks for all of your vendors.

Scrut Vendor Risk can be used to evaluate any vendor, regardless of the risk level. This entails performing audits and collecting data via curated pre-built security questionnaires. You can automate the audit process by determining which vendors require security audits and distributing a simple web-based form.

You can easily compare vendors to find the lowest-risk business partner or create a risk security strategy based on vendor risk categories.

Schedule a demo to see how Scrut can help you automate your vendor risk program. 

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