In today’s dynamic business landscape, larger organizations typically outsource certain activities to third-party vendors for various reasons, including to optimize costs (either through operational costs or fixed asset costs), transfer risk, and more. While it is acceptable and commonplace to have work completed by another vendor based on mutually agreed contracts, the overall management of related risk is a pertinent point of attention. It is crucial to understand the relevance of establishing and maintaining a comprehensive vendor risk management process from an information security perspective, which must be considered by IT and non-IT organizations alike.
Similar to a traditional risk assessment, a vendor risk assessment reviews the vendor to determine how well equipped it is to provide the needed assurance of maintaining information security throughout the data life cycle and/or contractual period. The vendor risk assessment should identify any potential threats and vulnerabilities that the vendor might encounter and evaluate how well equipped the vendor is to proactively identify and mitigate risk if it materializes. To this end, risk can arise from various sources, including inadequate security practices, data breaches, compliance violations, either from statutory or regulatory requirements, and operational disruptions.
It is strongly recommended that organization’s consider a proactive approach to establish and perform the vendor risk assessment, as the vendor organization often has access to sensitive information and critical systems of the customer organization, and any weaknesses in security posture can directly impact the customer organization with whom the vendor relationship is established. This helps maintain transparency and accountability between the organization and the vendor while helping to facilitate the implementation of effective security control mechanisms in the evolving cyberrisk landscape.
What Drives the Vendor Risk Management Process?
Every organization should consider establishing a documented process to manage the vendor relationship and define its parameters, which helps track governance effectively. Organizations should consider 4 objectives to be non-negotiable when outsourcing deliverables to a vendor through a formal contract.
- Restricting Sensitive Data Access
Vendors, through their authorized representatives, often have access to confidential information, which includes customer data, intellectual property, physical access to facilities, and financial records. Assessing the effectiveness of the vendor's security measures, from operational and technical controls to the scoped services, at periodic intervals against unauthorized access, loss, or theft will help protect sensitive data. Part of this assessment involves reviewing recommended security controls and incorporating identity access management (IAM) as a key security component.
- Ensuring Regulatory Compliance
IT organizations are often subjected to various statutory and regulatory requirements due to the sensitivity of the data they handle. The data might contain personal information, which mandates protection according to the regulations of the region from where the data originates. Vendor risk assessments help ensure that third-party vendors comply with regulations, thereby reducing the risk of legal penalties and damages that may arise due to non-compliance with such regulatory or statutory requirements.
- Mitigating Supply Chain Risk
As with any process, the supply chain life cycle is subject to the exploitation of its weaknesses. The severity of exploitation depends on how effectively the vendor organizations have built the process and validates the effectiveness of the implemented controls. A security breach of a vendor, or by its personnel, can create a domino effect, compromising the entire supply chain. By assessing their vendors' security practices, organizations can identify the potential weak links and take proactive steps to mitigate supply chain risk.
- Maintaining Effective Communication (Bi-directional):
Establishing and maintaining effective communication with vendors on an ongoing basis is critical for organizations to succeed, irrespective of its size or the nature of its operations. This means that establishing where vendor relationships involve the processing of data or information is crucial. Moreover, maintaining efficient communication channels, including escalation mechanisms with the vendors, will help streamline operations on an ongoing basis, as it enhances collaboration and drives overall business sustenance.
Key Elements of a Risk Assessment
After establishing the objectives of the vendor risk assessment, there are several key areas that the organization engaging a vendor’s services should consider and account for.
Due Diligence
Due diligence is performed before engaging the services of the third-party vendor to understand their existing security practices.
This involves thoroughly reviewing the vendor's current security measures to protect the customer organization's sensitive data. There are several questions that organizations should consider when conducting a due diligence review with third-party vendors:
- Have the vendor’s security policies, procedures, and practices been vetted and approved by organizational security leaders?
- Does the vendor follow any industry-recognized best practices or have security certifications?
- Have audit and assessment reports been reviewed and on-site assessments conducted, if required?
- Has guidance been sought where required to assess the vendor’s security practices, depending on the complexity of the business operations that will be outsourced?
Furthermore, documenting the vendor risk assessment is crucial, especially concerning information and communication technology (ICT) products and services in the supply chain, including the outsourced systems development and maintenance-related activities. It is prudent that appropriate controls are adequately identified, documented, and implemented before granting the vendor access to an organization’s systems. Organizations may face difficulties obtaining detailed information from vendors, especially if they have complex supply chains or use multiple third-party providers. Additionally, assessing vendors' security practices can be resource-intensive and time-consuming, requiring specialized expertise and tools.
Supply Chain Management
Understanding inter- and intra-dependent activities (including those of the subcontractors or sub-processors) is a significant facet of the vendor supply chain. Assessing the security processes of the vendor should be considered at every step of the supply chain to ensure that sensitive data and systems are secure. However, this can be challenging and may require a comprehensive approach to managing vendor supply chain risk. Therefore, it is crucial for organizations outsourcing deliverables through a third-party vendor to document supply chain-related risk and include supply chain management as part of the overall governance process.
Resource Constraints
Organizations with limited resources can benefit from seeking the support of a third-party vendor to augment resource challenges. This may be useful either from a skills and competence perspective or in helping acquire the resources required to perform the scoped activities.
Organizations can act proactively and pragmatically by considering the resource constraints that are likely to exist within the vendor. This aids in mitigating potential challenges related to the availability of dedicated resources, including skilled personnel and specialized tools required to perform the scoped services.
Organizations often overlook this aspect when drafting third-party contracts, which are predominantly focused on deliverables and timelines. However, these agreements may struggle to assess all applicable risk, leading to potential gaps in the vendor’s risk management.
Continuous Improvement
This enhances the vendor management process and improves the overall efficiency of the product or service.
Furthermore, organizations should treat the vendor risk assessment as a dynamic process that evolves with changing risk and business needs. The key to this is the regular reviewing and updating of the risk assessment criteria, methodologies, and tools to ensure that they remain relevant and effective.
Last, organizations must continuously monitor the vendor’s performance and address any identified gaps or weaknesses promptly.
Governance Process
As part of the governance process, organizations should adopt and establish stringent process controls, which need to be validated per timelines mutually agreed upon with the vendor organizations. This assures the organization that vendor processes are aligned with the agreed-upon requirements and restrictions and can be evidenced on an as-needed basis.
There are several recommended areas of focus for the governance report:1
- Organizations should request documented evidence of the vendors’ security policies/procedures, contracts that document the vendor’s commitment to adhering to agreed-upon terms and conditions, periodic management review reports, and intervention as needed based on internal and external audits findings.
- Organizations should seek input related to data privacy based on the scope of services. This includes input on application security, such as the adoption of secure development life cycle (SDLC) activities (e.g., periodic vulnerability and penetration test reports for services) and validation of related controls from a security perspective.
- A governance reporting mechanism should be established to verify the effectiveness of the overall vendor management process by summarizing key risk areas, if any, and the action plans to mitigate the identified risk. The organization should obtain the reports at periodic intervals, and they should be subject to validation as part of the audits performed by the organization or its representatives.
Conclusion
Vendor risk assessments evaluate how well vendors handle the secure information of the Customer throughout the data life cycle and identify potential threats, such as security vulnerabilities, data breaches, compliance violations, and operational disruptions. Effective vendor risk assessments enhance transparency, accountability, and security controls in an evolving cyberrisk environment.
Endnotes
1 Donohue, J.; “Corporate Governance Reporting: Definition, Requirements & Best Practices,” Diligent, 4 August 2023
VJ Srinivas
Is a cybersecurity leader with over 30 years of work experience and is a certified ISO – ISMS Lead Auditor.