The third-party vendor risk landscape is more diverse and complex than ever. According to a Gartner survey, as many as 45% of organizations have experienced some form of third party-related business interruption in the past two years.
Naturally, the primary goal of any risk team today is to build a risk management program that accounts for all vendor risks comprehensively and minimizes the likelihood of such interruptions.
The first step toward successful vendor risk management (VRM) is to understand the types of vendor risks you need to watch out for. This guide explores the most common types alongside practical examples and remediation strategies.
8 types of vendor risks to monitor, assess, and mitigate
Most vendor risks fall under one of the following categories:
- Operational risk
- Financial risk
- Cybersecurity risk
- Information security risk
- Regulatory and compliance risk
- Strategic risk
- Environmental, social, and governance (ESG) risk
- Reputational risk
Know that many of these risks overlap in terms of themes, causes, and consequences. We’ll provide some examples of each type below, as well as tips for effective risk management.
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1. Operational risk
Operational risk is the probability of significant disruptions to your workflow caused by a partial or complete halt of the vendor’s services. Such bottlenecks can come from many threats, most notably:
- Disruptions in the vendor’s internal processes (technical or otherwise)
- Volatile staff turnover
- Service quality drops
Operational vendor risk can be mild—but may sometimes threaten your business continuity by blocking you from maintaining a high standard of deliverables. Certain disruptions can cause significant resource waste if you rely too heavily on a vendor. For example, extended downtime of your project management software due to outages on the provider’s end can impact employee working hours and compromise your project timeline.
To mitigate operational risks, you can do the following:
- Assess and reduce dependencies between your operations and specific vendors. For example, you can have contacts with backup vendors for emergencies.
- Define and track operational vendor KPIs—e.g., supplier lead time, uptime, and product/service defect rate—to keep track of vendor performance.
- Conduct operational performance reviews to evaluate the efficacy of the vendor’s control environment.
2. Financial risk
Financial risks arise due to a vendor’s inability to meet the agreed-upon requirements, which can lead to financial or revenue loss for you. These risks can come in many forms, such as:
- Product distribution delays
- Project cost overruns
- Loss of revenue
This type of risk often goes hand-in-hand with operational risks from the perspective of its impact on your organization. For example, your vendor may fail to provide the raw materials your organization needs to perform its manufacturing tasks. They may also require you to go above your budget to acquire them. Essentially, this can be anything that impacts your financial standing.
While you can’t predict all the unfavorable events leading to financial complications, you can mitigate the risk by following these tips:
- Conduct comprehensive vendor due diligence (VDD) that scrutinizes a vendor’s service reliability.
- Perform periodic audits to re-assess the vendor’s impact on your revenue and profits.
- Diversify your vendor portfolio and have contingency plans aligned with the financial risks detected.
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3. Cybersecurity risk
Cybersecurity risk encompasses performance drops or loss of important information due to a data breach or similar malicious attacks targeting a vendor. It’s a growing concern in today’s predominantly online business environment and stems from many threats, for example:
- Lack of adequate physical and digital security protocols
- Lackluster incident response plans
- Unsecured data storage or transmission
The consequences of cybersecurity risks largely depend on the criticality of the data vendors can access. The impact also varies between industries, with sectors like healthcare and finance being among the most sensitive—as the smallest data breaches can lead to a loss of consumer trust, considerable expenses, and even legal action.
Another factor that influences the impact of cybersecurity risk is the limited scope of vendor breach reporting. There’s often a time gap between a realized risk event and the vendor reporting it, which can leave connected organizations vulnerable for a while.
Some of the best ways to minimize these complications include the following:
- Use vendor cybersecurity questionnaires to collect standard data that helps you assign vendor risk levels and monitoring parameters.
- Conduct frequent security reviews to ensure your vendors have the necessary controls in place.
- Develop well-rounded cybersecurity incident response plans that account for vendor-specific exposure scenarios.
4. Information security risk
Information security risk is similar to cybersecurity risk as it affects an organization’s data, though the threat may come from a different source. For example, instead of a cybersecurity attack, such risks can stem from inadequate data privacy and security policies on the vendor’s end.
Another important differentiator is the scope of affected data. Information security risk encompasses threats to data confidentiality, such as compromised intellectual property due to dealings with a vendor, as well as loss of stored data. Such threats can also include:
- Unauthorized access
- Data leaks
- Weak security of infrastructure like servers, data stores, containers, and other system components
The consequences of information security risks are also similar to those of cybersecurity risks—loss of revenue, damaged operations, or customer mistrust due to mishandled data. To avoid such escalations, consider the following tips:
- Categorize data and information systems according to sensitivity.
- Implement strict access controls.
- Conduct data security training for employees handling vendors.
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5. Regulatory and compliance risk
Even if you comply with all the necessary regulations, your vendor might not. In this case, they may expose you to issues related to non-compliance. Some examples of such risks include:
- Non-compliance with the applicable data privacy standards
- Fines and penalties due to vendor-related violations
- Poor compliance audits and scattered reporting processes
Depending on the severity, regulatory and compliance vendor risks may significantly impact your organization’s workflow and weaken your regulatory standing. For example, if your customers are from the EU, and you store their data in a cloud solution that isn’t GDPR-compliant, you run the risk of non-compliance.
Some of the best ways to avoid such problems are as follows:
- Understand the necessary standards and regulations you invite by partnering with a vendor, as well as work with them to sign relevant contractual agreements for data protection—such as data protection addendums (DPAs) and business associate agreements (BAAs).
- Perform regular vendor compliance audits (including checking SOC reports, public forum complaints, business continuity plans, etc.).
- Build a streamlined vendor communication channel with regular touchpoints for timely updates.
6. Strategic risk
Strategic vendor risks encompass any threats to an organization’s ability to meet its long-term goals. Some of their primary examples here include the following:
- Misalignment between the vendor and organization
- Lack of shared long-term vision and innovation strategies
- Business instability and poor contingency plans
The long-term focus of strategic risks is also their main challenge, as such risks may be hard to measure and quantify. You might spend years working with a vendor before any signs of misalignment surface.
The good news is that you can still prevent such risks from damaging your organization’s long-term viability—here’s how:
- Conduct comprehensive vendor evaluation that registers their long-term focus.
- Communicate your organization’s vision to your key vendors.
- Outline strategic KPIs and timelines.
7. Environmental, social, and governance (ESG) risk
ESG risks are similar to compliance risks, though they’re not tied to any specific compliance framework. Instead, they have a broader scope and include ethical and sustainable practices that vendors should follow. Here are some examples of ESG risks:
- Causing excessive pollution or environmental damage
- Irresponsible resource use
- Violation of labor rights
Customers don’t only look at an organization's ESG practices—they also want to know how their partners approach them. If vendors violate any laws and ethical practices, their negative publicity can impact the market standing of the organizations they do business with.
There are several ways to mitigate vendor ESG risks, most notably:
- Conduct environmental vendor compliance audits.
- Monitor vendors based on location-specific ESG data.
- Define strict ESG policies and organize training and awareness programs for vendors.
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8. Reputational risk
If you’re associated with a company facing scrutiny, your reputation can be at stake—that’s reputational risk. It isn’t an isolated category but more of an umbrella term encompassing many third-party risks that can impact the public’s perception of your organization. Common examples include:
- Unethical vendor practices
- Negative publicity of business partners due to the vendor’s violation of important laws
- Public concerns regarding a vendor’s service quality (especially undesirable if a vendor has a direct influence on the organization’s customers)
Consider following these best practices to reduce reputational risks:
- Clearly outline service level agreements (SLAs) with each vendor to reduce the risk of subpar product or service quality.
- Diversify your vendor base to avoid being associated with a single vendor.
- Develop a crisis management plan.
Monitor and manage your vendor risks effectively with Vanta
Effective vendor risk management requires complete visibility of your supply chain and related threats—and you need a robust software solution for that.
Vanta’s comprehensive Vendor Risk Management solution can help you stay on top of your vendor risk profile with less effort. It’s equipped with many features that help you identify and mitigate risks, including:
- Centralized inventory with automated vendor discovery
- Comprehensive dashboard with data on vendor status, risk profile, category, etc.
- Customizable vendor risk auto-scoring
- Automated vendor security reviews
These features streamline your VRM workflows by automating mundane tasks and leaving more time for high-impact work.
Want to explore Vanta’s VRM product? Watch our webinar or schedule a custom demo today.
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Introduction to TPRM
8 types of vendor risk: Examples and risk management tips
Introduction to TPRM
The third-party vendor risk landscape is more diverse and complex than ever. According to a Gartner survey, as many as 45% of organizations have experienced some form of third party-related business interruption in the past two years.
Naturally, the primary goal of any risk team today is to build a risk management program that accounts for all vendor risks comprehensively and minimizes the likelihood of such interruptions.
The first step toward successful vendor risk management (VRM) is to understand the types of vendor risks you need to watch out for. This guide explores the most common types alongside practical examples and remediation strategies.
8 types of vendor risks to monitor, assess, and mitigate
Most vendor risks fall under one of the following categories:
- Operational risk
- Financial risk
- Cybersecurity risk
- Information security risk
- Regulatory and compliance risk
- Strategic risk
- Environmental, social, and governance (ESG) risk
- Reputational risk
Know that many of these risks overlap in terms of themes, causes, and consequences. We’ll provide some examples of each type below, as well as tips for effective risk management.
{{cta_withimage5="/cta-modules"}}
1. Operational risk
Operational risk is the probability of significant disruptions to your workflow caused by a partial or complete halt of the vendor’s services. Such bottlenecks can come from many threats, most notably:
- Disruptions in the vendor’s internal processes (technical or otherwise)
- Volatile staff turnover
- Service quality drops
Operational vendor risk can be mild—but may sometimes threaten your business continuity by blocking you from maintaining a high standard of deliverables. Certain disruptions can cause significant resource waste if you rely too heavily on a vendor. For example, extended downtime of your project management software due to outages on the provider’s end can impact employee working hours and compromise your project timeline.
To mitigate operational risks, you can do the following:
- Assess and reduce dependencies between your operations and specific vendors. For example, you can have contacts with backup vendors for emergencies.
- Define and track operational vendor KPIs—e.g., supplier lead time, uptime, and product/service defect rate—to keep track of vendor performance.
- Conduct operational performance reviews to evaluate the efficacy of the vendor’s control environment.
2. Financial risk
Financial risks arise due to a vendor’s inability to meet the agreed-upon requirements, which can lead to financial or revenue loss for you. These risks can come in many forms, such as:
- Product distribution delays
- Project cost overruns
- Loss of revenue
This type of risk often goes hand-in-hand with operational risks from the perspective of its impact on your organization. For example, your vendor may fail to provide the raw materials your organization needs to perform its manufacturing tasks. They may also require you to go above your budget to acquire them. Essentially, this can be anything that impacts your financial standing.
While you can’t predict all the unfavorable events leading to financial complications, you can mitigate the risk by following these tips:
- Conduct comprehensive vendor due diligence (VDD) that scrutinizes a vendor’s service reliability.
- Perform periodic audits to re-assess the vendor’s impact on your revenue and profits.
- Diversify your vendor portfolio and have contingency plans aligned with the financial risks detected.
{{cta_simple17="/cta-modules"}}
3. Cybersecurity risk
Cybersecurity risk encompasses performance drops or loss of important information due to a data breach or similar malicious attacks targeting a vendor. It’s a growing concern in today’s predominantly online business environment and stems from many threats, for example:
- Lack of adequate physical and digital security protocols
- Lackluster incident response plans
- Unsecured data storage or transmission
The consequences of cybersecurity risks largely depend on the criticality of the data vendors can access. The impact also varies between industries, with sectors like healthcare and finance being among the most sensitive—as the smallest data breaches can lead to a loss of consumer trust, considerable expenses, and even legal action.
Another factor that influences the impact of cybersecurity risk is the limited scope of vendor breach reporting. There’s often a time gap between a realized risk event and the vendor reporting it, which can leave connected organizations vulnerable for a while.
Some of the best ways to minimize these complications include the following:
- Use vendor cybersecurity questionnaires to collect standard data that helps you assign vendor risk levels and monitoring parameters.
- Conduct frequent security reviews to ensure your vendors have the necessary controls in place.
- Develop well-rounded cybersecurity incident response plans that account for vendor-specific exposure scenarios.
4. Information security risk
Information security risk is similar to cybersecurity risk as it affects an organization’s data, though the threat may come from a different source. For example, instead of a cybersecurity attack, such risks can stem from inadequate data privacy and security policies on the vendor’s end.
Another important differentiator is the scope of affected data. Information security risk encompasses threats to data confidentiality, such as compromised intellectual property due to dealings with a vendor, as well as loss of stored data. Such threats can also include:
- Unauthorized access
- Data leaks
- Weak security of infrastructure like servers, data stores, containers, and other system components
The consequences of information security risks are also similar to those of cybersecurity risks—loss of revenue, damaged operations, or customer mistrust due to mishandled data. To avoid such escalations, consider the following tips:
- Categorize data and information systems according to sensitivity.
- Implement strict access controls.
- Conduct data security training for employees handling vendors.
{{cta_withimage5="/cta-modules"}}
5. Regulatory and compliance risk
Even if you comply with all the necessary regulations, your vendor might not. In this case, they may expose you to issues related to non-compliance. Some examples of such risks include:
- Non-compliance with the applicable data privacy standards
- Fines and penalties due to vendor-related violations
- Poor compliance audits and scattered reporting processes
Depending on the severity, regulatory and compliance vendor risks may significantly impact your organization’s workflow and weaken your regulatory standing. For example, if your customers are from the EU, and you store their data in a cloud solution that isn’t GDPR-compliant, you run the risk of non-compliance.
Some of the best ways to avoid such problems are as follows:
- Understand the necessary standards and regulations you invite by partnering with a vendor, as well as work with them to sign relevant contractual agreements for data protection—such as data protection addendums (DPAs) and business associate agreements (BAAs).
- Perform regular vendor compliance audits (including checking SOC reports, public forum complaints, business continuity plans, etc.).
- Build a streamlined vendor communication channel with regular touchpoints for timely updates.
6. Strategic risk
Strategic vendor risks encompass any threats to an organization’s ability to meet its long-term goals. Some of their primary examples here include the following:
- Misalignment between the vendor and organization
- Lack of shared long-term vision and innovation strategies
- Business instability and poor contingency plans
The long-term focus of strategic risks is also their main challenge, as such risks may be hard to measure and quantify. You might spend years working with a vendor before any signs of misalignment surface.
The good news is that you can still prevent such risks from damaging your organization’s long-term viability—here’s how:
- Conduct comprehensive vendor evaluation that registers their long-term focus.
- Communicate your organization’s vision to your key vendors.
- Outline strategic KPIs and timelines.
7. Environmental, social, and governance (ESG) risk
ESG risks are similar to compliance risks, though they’re not tied to any specific compliance framework. Instead, they have a broader scope and include ethical and sustainable practices that vendors should follow. Here are some examples of ESG risks:
- Causing excessive pollution or environmental damage
- Irresponsible resource use
- Violation of labor rights
Customers don’t only look at an organization's ESG practices—they also want to know how their partners approach them. If vendors violate any laws and ethical practices, their negative publicity can impact the market standing of the organizations they do business with.
There are several ways to mitigate vendor ESG risks, most notably:
- Conduct environmental vendor compliance audits.
- Monitor vendors based on location-specific ESG data.
- Define strict ESG policies and organize training and awareness programs for vendors.
{{cta_testimonial6="/cta-modules"}}
8. Reputational risk
If you’re associated with a company facing scrutiny, your reputation can be at stake—that’s reputational risk. It isn’t an isolated category but more of an umbrella term encompassing many third-party risks that can impact the public’s perception of your organization. Common examples include:
- Unethical vendor practices
- Negative publicity of business partners due to the vendor’s violation of important laws
- Public concerns regarding a vendor’s service quality (especially undesirable if a vendor has a direct influence on the organization’s customers)
Consider following these best practices to reduce reputational risks:
- Clearly outline service level agreements (SLAs) with each vendor to reduce the risk of subpar product or service quality.
- Diversify your vendor base to avoid being associated with a single vendor.
- Develop a crisis management plan.
Monitor and manage your vendor risks effectively with Vanta
Effective vendor risk management requires complete visibility of your supply chain and related threats—and you need a robust software solution for that.
Vanta’s comprehensive Vendor Risk Management solution can help you stay on top of your vendor risk profile with less effort. It’s equipped with many features that help you identify and mitigate risks, including:
- Centralized inventory with automated vendor discovery
- Comprehensive dashboard with data on vendor status, risk profile, category, etc.
- Customizable vendor risk auto-scoring
- Automated vendor security reviews
These features streamline your VRM workflows by automating mundane tasks and leaving more time for high-impact work.
Want to explore Vanta’s VRM product? Watch our webinar or schedule a custom demo today.
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