A Guide to Vendor Risk Management (VRM)

September 27, 2022
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On average, businesses have 182 vendors connecting to their systems every week, and over half of those vendors have experienced a potential breach. And that’s only on the information security side. There are additional risks and headaches that come up regarding legal, finance, and compliance status of vendors your team uses. 

Since it’s not practical, or often even possible, to avoid using third-party tools, vendor risk management needs to be a strategic priority for businesses looking to protect their interests — including their employees, clients, and customers.

Below, we'll break down what vendor risk management is, its benefits and phases, and how your organization can establish a risk management plan.

  • What Is Vendor Risk Management?
  • Why Do You Need Vendor Risk Management?
  • Benefits of Vendor Risk Management
  • Types of Vendor Security Risks
  • The 3 Phases of the Vendor Risk Management Lifecycle
  • Tips for Establishing A Vendor Risk Management Plan

What Is Vendor Risk Management?

While cybersecurity is mission critical for any modern organization, vendor risk management goes well beyond standard IT training or password policies. Outsourcing tasks like payroll processing or website development to third-party vendors can save money and make your company more efficient. But where many companies go wrong is when they fail to keep up with the vendor once the contracts are signed.

You don’t want a one-off project to end up disrupting your business performance. Vendor risk management involves monitoring and managing the potential downsides of partnering with a vendor or service provider.

Why Do You Need Vendor Risk Management?

The better question might be, why wouldn't you need vendor risk management? Think about all the different touch points between you and your vendors. An HR vendor likely has access to your employee addresses and social security numbers. A contracted website developer may have access to your company network or codebase. 

But it’s not just about sharing digital resources (though that plays a significant role). Market forces outside of anyone’s control can delay or devastate a vendor. Constant supply chain disruptions might interfere with a vendor’s ability to provide the services you count on them for. For example, if supply chain issues leave computer hardware stranded overseas, your technology vendor may not have enough stock to ship laptops to your new employees.

Assessing risks across your vendors is the first step, but vulnerabilities don’t end with the tools and people you directly employ. You should also perform due diligence on the partners your vendor uses, as they introduce their own risk elements. Even if you and your vendor are on the same page, all it takes is one mistake from a company your vendor works with to bring down all your organization’s hard work.

Benefits of Vendor Risk Management

Vendor risk management is an essential practice to accurately assess the risk posed by your vendors. It’s also helpful in helping you refine your organization’s risk mitigation strategy. Here are just a few benefits of a solid vendor risk management strategy:

Better Insights

Performing vendor risk management helps your company identify and document new scenarios to include in future assessments. You can also uncover ways to make improvements to your current security. For example, by performing a vendor risk assessment on a new analytics tool, you may realize company data is being transferred using encryption methods you haven’t reviewed before. It helps to have that information as you expand your vendor network.

Improved Data Control

Ideally, you want data about your company stored in as few places as possible. It’s never good to have an audit discover that a vendor is housing personal customer information with no idea how they ended up with the data. Establishing a vendor risk management process helps you tighten things up as far as where data ends up and who maintains responsibility for it.

More Efficient Processes

Better data control means companies can use a single tool for CRM needs and reporting rather than having this data and process fragmented across multiple products. Streamlining these activities cuts back on the risk surface, keeping outside threats from finding weak points in your vendor processes to exploit.

Simpler Vendor Sign-Up

Setting up robust vendor risk management controls makes onboarding new vendors easier. The vendor review process helps you and the new vendor understand all interaction points between your two companies. You both better understand your responsibilities regarding potential third-party vendor risk. More streamlined onboarding gets you and new vendor partners up and running quickly.

Types of Vendor Security Risks

It’s hard to believe that working with a vendor who gifts your office with catered lunches once a month could ever pose a problem. But in reality, everything from how vendors accept payments to how they dispose of paper containing sensitive information can expose your organization to added risk.

Are you sure they’re following accepted standards like the Payment Card Industry Data Security Standard (PCI DSS)? How they collect information through their website might not comply with the General Data Protection Regulation (GDPR) or other internet security laws. Below is a breakdown of these and other factors impacting third-party vendor risk.


According to PwC’s 2022 Global Digital Trust Insights report, 75% of company executives worry about how the complexity of their organization and business relationships increases their privacy and cybersecurity risks. The same report finds that 69% have limited or no understanding of potential cyber risks based on regular company-wide vendor risk management assessments.

Another big concern is security protections, or the lack of them, around supply chain processes. How well do you know the supplier tasked with bringing in items from overseas to fill orders for customers? What are those vendors doing to vet the security protocols of fourth-party service providers and the software being used? A lack of end-to-end vendor risk assessments can expand an organization’s vulnerabilities and open you up to information security dangers.


Do you know what’s great about catching the attention of government regulators? Nothing, especially if the problem arises from processes set up by a vendor. Below are examples of regulatory vendor risks that could have your organization in hot water if you don’t adequately vet a service provider through a vendor risk management program.

  • Business risk: The vendor could impact your critical and non-critical business operations, disrupting customer service.
  • Regulatory risk: You could be penalized because a vendor failed to follow established industry regulations.
  • Strategic risk: Bad business decisions or not implementing a change in direction correctly could impact your ability to meet your company’s strategic goals, mainly if they’re not operating in a manner consistent with your business practices.
  • Operational risk: You could lose revenue and negatively impact your business reputation because of failed external vendor events. A vendor could integrate your company processes with those of another, leading to disaster.
  • Transaction risk: Problems could result from product or service delivery issues. That could lead to third-party vendor risk, where you can’t meet your customer’s expectations because of failed technology, fraud, human error, or lack of capacity.


If your company fails to investigate the financial status of a vendor, you could end up in a situation where your vendor can’t meet the financial obligations of a contract. If a third-party vendor is in financial distress and needs to lay off team members or scale back their services, your company could be directly harmed. While not all vendors require a full financial analysis, consider at least a basic assessment to ensure your vendor has the necessary financial stability to fulfill their contract.

Think about how much you could lose by partnering with a vendor if things turned sour. Can your company survive if you end up having to cancel orders? Could you potentially lose a major customer? If you note any financial issues during the vendor assessment process, look at how long they’ve been in the red and whether they have a reasonable chance of righting the ship. Assign them a risk score based on all relevant factors.


If you don’t make it a point to keep up and enforce the terms of contracts, you expose yourself to legal risks. You may also run into trouble when different departments within your company interpret the terms of agreements differently. Without automation tracking your vendor risk management processes, you could overlook a contract rollover clause.

You could have problems with business continuity if your vendor fails to meet the conditions outlined in the legal agreement drafted by your lawyers. Vendors may also try to slip in clauses and language to try and gain an advantage. Missing one clause could lead to a domino effect that could put your company out of business.

The 3 Phases of the Vendor Risk Management Lifecycle

While it’s good to understand the basics of risk management, that’s not going to be enough to help you start working out the controls and procedures to implement for third-party risk management. Let’s go over the three basic phases of the vendor risk management lifecycle.

1) Pre-Contract Phase: Assessment and Expectations

Vendor risk management is not an area where organizations should try and “wing it” to get by. Before you sign a formal contract with a vendor, perform due diligence around services or products in scope for your program based on your vendor selection. It’s where you outline the terms of an agreement between you and the vendor. You should review how the relationship could impact your business operations and the risks associated with various interaction points.

You should be confident about the following once you’re done with the pre-contract phase:

  • Whether the vendor runs a legitimate business
  • If the vendor has necessary controls in place to address potential risk
  • The level of residual risk that exists after applying all controls
  • The vendor's overall reputation
  • Whether the vendor has any pending sanctions

Once you’re satisfied with the topics above, start outlining, negotiating, and approving the terms of the legal document covering the expectations between you and the vendor. It should cover the entire vendor lifecycle, including renewals and grounds for termination.

2) Contracting Phase: Performance and Relationship Management

Vendor risks can emerge and change throughout the vendor management lifecycle. Just because a vendor was sufficiently secure on the day you signed your contract doesn’t guarantee they are still equally secure months (or even days) later. Your company needs to set up tools and automation that support continuous monitoring and third-party vendor risk assessment.

3) Post-Contract Phase: Offboarding, Termination, and Refinement

Terminating the contract sets up the final stage of the vendor risk management lifecycle. The activities covered in this stage include:

  • Termination: This involves sending a formal notification to the vendor informing them that you won’t renew the contract.
  • Exit plan: Here, you enact your exit strategy, which could mean performing the activity in-house or hiring a new vendor. Details you might include in your exit plan include destroying sensitive information and removing vendor connections to your company systems.
  • TPRM closure: Once you complete your exit plan, you may need to finalize details like paying the last invoice or archiving vendor data.

Tips for Establishing a Vendor Risk Management Plan

As the economy continues to recover after a challenging period, it’s more important than ever that companies have solid policies to handle vendor risk. A report from KPMG notes that 73% of businesses have experienced disruptions because of a third-party vendor. To help you stay out of that 73%, here are some guidelines for establishing a third-party risk management program.

Administrator Vendor Reviews

Outline the risks your company is willing to accept, then ensure that your policies include all relevant points to review in these areas. You should consider issues like any technical controls put in place, covering all processes needed for your IT environment and the personnel tasked with keeping everything running smoothly. You should also conduct periodic vendor reviews, which ensure that vendors meet your business’s security standards.

Vendor reviews should include:

  • A security questionnaire: Sent to a vendor you wish to work with to get a sense of potential vulnerabilities.
  • Incident reports: A detailed retrospective around security incidents like a data leak.
  • Action plans: Details your company’s approach to governance, security, and data protection currently and in the future.
  • Customer interviews: Conversations had with a vendor’s other customers to get a sense of the value they provide.

Utilize Vendor Security Assessment Questionnaires

Create a vendor security questionnaire template to help you identify security risks for future analysis. You want to ensure vendors apply controls around personally identifiable information (PII) to protect it from theft or misuse. That’s especially important in industries like healthcare, where there are severe penalties for not complying with data protection guidelines outlined in the Health Insurance Portability and Accountability Act (HIPAA).

Conduct Ongoing Vendor Audits

Create vendor management documentation to include with your information security policy. After performing due diligence, conduct regular audits to help expose compliance gaps and potential vulnerabilities. Make sure you provide detailed audit reports of your vendor relationships.

Monitor and Refine Your Plan Continuously

Once you’ve established your vendor security plan, review it periodically to cover any changes to your business environment or a third party. That way, your policies are always up-to-date, making establishing automatic workflows to track compliance with the plan easier.

Upgrade Your Vendor Risk Management Plan With HyperComply

Maintaining security when working with your vendors is paramount regardless of your industry. Using the tips outlined above, your organization can establish a solid vendor risk assessment strategy that protects your business and customers.

HyperComply helps companies establish robust security protections in their interactions with partners. Learn more about how our AI technology can transform your business by setting up a demo with one of our experts.