Essentials of Vendor Risk Assessment
Did you know that 74% of companies don’t know all the third-party vendors who handle their personally identifiable information and data? Or that 66% of security professionals think it’s highly possible they suffered a security breach through their third-party vendors without realizing it?
Those are scary numbers. But for your customers, they’re even scarier–and unless you change them, you run the risk of losing your customer base.
It’s time to invest in better security–and better vendor risk management. Here’s an overview of what you need to know about vendor risk assessment and how Privva can help you take charge of your vendor relationships.
What is Vendor Risk Assessment?
Vendor risk assessment, sometimes called third-party security assessment, is your way of ensuring that you can trust your vendors with sensitive data.
Basically, vendor risk assessment is a process that businesses use to vet and monitor their potential and current third-party partners. Using this process, a business identifies and evaluates the potential risks associated with a partner, as well as the potential impact on the organization. That way, you can assess whether the vendor is a good fit for your risk management style and risk tolerance before you hand over any sensitive data.
You can think of vendor risk assessments as a way to logic out the future. You imagine potential adverse events so that you can identify, measure, and prioritize them. That way, you can assess if a vendor is the right fit.
Every risk assessment looks slightly different depending on the business, but they all have a few key features in common.
Regulatory Risk and Business Impact
The biggest components of vendor risk management are business impact and regulatory risk. Regulatory risk is the risk that changes in laws will materially impact how your company operates. Then there’s business impact, which helps you assess whether a vendor is critical or non-critical.
These are important to measure together because regulatory compliance is one of your chief concerns in vendor risk management. If a vendor is loose and fast with compliance, there’s a much higher regulatory risk attached. After all, if regulations materially change, the vendor will have to scramble to keep up–and your business will suffer for it.
This is where the business impact comes in. For a non-critical vendor, this scramble isn’t ideal, but it’s not a death knell. For a critical vendor, however, this scramble can dangerously impact your ability to operate. If you answer yes to any of the following questions, a vendor is critical:
Would the loss of this vendor seriously impact our ability to do business?
Would the loss of this vendor have a significant impact on our customers?
Would our recovery time be greater than 24 hours?
Does the vendor have frequent and extensive access to critical data?
Keep in mind that most vendors are not critical. However, your critical vendors have an outsized impact on risk, which is why they need extra attention and stricter risk management procedures.
Inherent risk refers to the natural risk in a process that has not been controlled by risk management. In other words, if you were to encounter your would-be vendor in the wild, before they make any changes to comply with your risk management, inherent risk measures their risk landscape at that moment.
In vendor risk management, inherent risk comes with a risk score. Basically, you score the vendor’s risk level based on your first impression. While you shouldn’t judge a book by its cover when meeting someone new, in vendor risk management, judging a book by its cover delivers some essential lessons.
For example, if you go through due diligence and notice the vendor is in litigation, that’s a sign of higher inherent risk. Higher inherent risk means the vendor would have to make significant changes to be a good match.
Last but not least is the residual risk. This is the level of risk left over after every effort has been made to identify and mitigate risks.
If inherent risk measures risk levels before the intervention, residual risk measures risk levels after the intervention. In a good candidate, the residual risk should always be lower than the inherent risk. Think of residual risk as the risk measurement that lets you feel good about moving forward with the vendor.
Why You Need Third Party Risk Assessment
So, with all of that in mind, why do you need a vendor security assessment process? Why go to all the trouble of identifying what could go wrong?
To put it simply, if you identify what could go wrong, you won’t be surprised by it.
The reality of today’s business world is that you need third-party vendors to do business. They fulfill needs that you could not meet on your own, like developing financial software or providing a database for essential customer data. This gives you the freedom to develop your business in ways that would not otherwise be possible.
Unfortunately, it also introduces new layers of risk. Every new access point in your system introduces a potential weak link. And if your vendors do not have strong security practices, they weaken your strong security practices in the process.
In other words? If you want to partner with a vendor, you need vendor risk assessment, from security assessments to supplier financial risk assessments.
There’s just one problem: building the infrastructure to maintain a rigorous risk management program. This is an area where many businesses struggle, from the basic design of a security assessment questionnaire to maintaining a routine assessment schedule.
Your Partner in Successful Vendor Risk Management
This is where Privva can help. You know your business like the back of your hand–and we know vendor risk management. We make it easy to ask the right vendor the right question at the right time, allowing busy companies to maintain a rigorous security assessment protocol without sacrificing valuable hours or customer experience.
Ready to take charge of your vendor relationships? Schedule a call today to learn more about how our risk management solutions can help.