Vendor Risk Management: Best Practices & Strategies

Vendor risk management (VRM) is a structured approach that organisations use to identify, assess, and mitigate risks associated with third-party vendors. As companies increasingly rely on external suppliers, VRM ensures that vendors meet security, compliance, and operational resilience standards.

Effective VRM goes beyond contract negotiations – it safeguards against vendor failures that could disrupt supply chains, expose sensitive data, or lead to regulatory non-compliance. A strong vendor risk management program allows organisations to mitigate these risks, ensuring continuity and regulatory alignment.

Download Protecht’s Vendor Risk Management eBook for a detailed breakdown of the VRM process and practical steps to strengthen vendor oversight:

Understanding vendor risks

The risks associated with poor vendor oversight are substantial. Vendor-related failures can cause data breaches, financial loss, reputational damage, and even legal penalties. Regulatory frameworks worldwide – including APRA CPS 234 (Australia), GDPR (EU), and DORA (EU financial sector) – require organisations to actively manage vendor risks.

Failure to implement robust vendor risk management processes can lead to incidents like the TSB Bank IT failure, where poor vendor oversight led to service disruptions, regulatory fines, and reputational damage.

Types of vendor risks

Vendor-related risks vary widely depending on the industry, type of service, and regulatory environment. The most common categories include:

Cybersecurity risks: A vendor’s inadequate security measures can expose an organisation to cyberattacks and data breaches. The 2022 Twilio breach, which affected thousands of customers due to weak vendor security, highlights the need for robust security controls[1].
Financial risks: A vendor’s financial instability can lead to unexpected service disruptions or contract failures. Monitoring financial health indicators, such as credit ratings and balance sheets, helps mitigate these risks.
Compliance and legal risks: Vendors must comply with industry-specific regulations to avoid fines, legal action, and reputational damage. Ensuring that vendors meet the required legal and compliance standards is critical to risk mitigation.

Vendor risk assessment

A vendor risk management program must include structured risk assessments to evaluate vendor security, financial stability, and regulatory compliance. The process involves:

Risk identification: Determining the specific threats a vendor poses to the organisation
Due diligence: Conducting security audits, financial checks, and compliance reviews
Risk scoring: Applying standardised frameworks, such as ISO 27001[2] or NIST[3], to categorise vendor risks
Ongoing monitoring: Continuously reassessing vendor risks to identify emerging threats

The SolarWinds cyberattack demonstrated the consequences of inadequate vendor risk assessment. Attackers compromised a widely used IT vendor, leading to security breaches across thousands of companies[4].

The vendor risk management process

There are three key phases of the VRM process:

Pre-contract: Vendor selection and due diligence
Contracting: Embedding risk management into agreements
Post-contract: Continuous vendor risk monitoring

Pre-contract

Before engaging a vendor, organisations should conduct thorough risk assessments, including:

Evaluating vendor security policies, encryption methods, and access controls.
Reviewing financial health indicators to assess long-term viability.
Verifying regulatory compliance through certifications and audits.
Implementing a risk-based tiering system to categorise vendors based on their risk profile.

Contracting

Contracts must include clearly defined risk management obligations, such as:

Service level agreements (SLAs): Outlining performance expectations and penalties for non-compliance.
Data protection clauses: Requiring vendors to comply with security standards such as ISO 27001.
Incident reporting obligations: Mandating immediate disclosure of security breaches or regulatory violations.

Post-contract

Vendor risks evolve over time, requiring ongoing oversight. Organisations must:

Conduct regular audits to reassess vendor risk exposure.
Monitor vendor compliance with contractual obligations and regulatory updates.
Ensure vendors participate in business continuity exercises and cybersecurity drills.

A Ponemon Institute study found that 66% of organisations experienced a data breach due to vendor security failures, but only 34% felt confident that vendors would report breaches promptly. Continuous monitoring reduces the likelihood of undisclosed risks.

Implementing a vendor risk management program

A successful VRM program is built on structured processes and proactive oversight. Organisations should apply consistent methodologies when assessing vendors to ensure standardised evaluations across all third parties. Clear communication between procurement, compliance, and risk teams strengthens vendor oversight, ensuring expectations are aligned and enforced.

For the VRM program to be a success it requires a clear framework, incorporating:

Defined objectives: Aligning VRM strategies with enterprise risk management (ERM) goals
Vendor categorisation: Identifying high-risk vendors that require more extensive scrutiny
Technology-enabled risk monitoring: Automating assessments through vendor risk management software

Organisations should strike a balance between continuous monitoring and periodic audits. While some vendors may require ongoing risk tracking, others may only need assessments at contract renewal points. A hybrid approach – combining automated vendor risk management tools with scheduled evaluations – provides comprehensive oversight.

Regulatory frameworks for vendor risk management

Vendor risk management programs must align with evolving regulatory frameworks. Key regulations to keep in mind include:

APRA CPS 234 (Australia)[5]: Mandates security controls for financial institutions’ third-party providers
DORA (EU Financial Services) [6]: Requires IT vendors to meet operational resilience standards
FFIEC Third-Party Risk Management Guidelines (US)[7]: Covers vendor risk management best practices for financial institutions
GDPR (EU)[8]: Imposes strict data handling and breach notification requirements
HIPAA (US Healthcare)[9]: Governs third-party access to patient data
Modern Slavery Acts: Impose due diligence obligations to manage risks of forced labour in supply chains. Legislation exists in multiple countries including the UK[10] and Australia[11]
NIST Cybersecurity Framework (US): Provides guidelines for managing cybersecurity risks in third-party relationships
PRA SS2/21 (UK)[12]: Sets third-party risk management expectations for banks and insurers
SOC 2 (US)[13]: Defines security and privacy requirements for technology vendors handling sensitive data

Conclusions and next steps for your organisation

Vendor risk management is not just a regulatory requirement, it’s a critical component of an organisation’s overall risk strategy. Effective VRM ensures business continuity, strengthens supply chain resilience, and reduces the potential for operational disruptions due to vendor failures. As third-party ecosystems continue to expand, organisations must take a proactive approach to managing vendor risks before they escalate into financial losses, regulatory penalties, or reputational damage.

By implementing a structured vendor risk management program, organisations can:

Reduce the risk of cybersecurity breaches, financial failures, and compliance violations by ensuring vendors adhere to rigorous security and governance standards
Improve operational resilience by embedding vendor oversight into enterprise-wide risk frameworks, ensuring business continuity in case of vendor-related incidents
Enhance regulatory compliance by aligning vendor risk management practices with evolving industry standards and legal requirements

A well-structured VRM program integrates automated risk assessments, contract governance, and ongoing monitoring into a centralised framework. Organisations that invest in proactive vendor risk management gain a competitive advantage by reducing uncertainty and building more resilient third-party relationships.

See Protecht’s VRM solution in action – request a demo today: