How to assess, monitor, and manage third-party security risks to meet compliance requirements and protect your business.
Your security is only as strong as your weakest vendor. With organizations using an average of 130 SaaS applications, third-party risk management isn't optional—it's essential for compliance and protecting your business.
Why Vendor Risk Management Matters
High-profile breaches like SolarWinds, Kaseya, and MOVEit have demonstrated that attackers increasingly target the supply chain. If a vendor with access to your systems is compromised, you're compromised too.
Every major compliance framework—SOC 2, ISO 27001, HIPAA, PCI DSS—requires formal vendor risk management. Beyond compliance, effective vendor management protects your data, reputation, and bottom line.
The Cost of Vendor Breaches
- • 60% of data breaches involve third parties
- • $4.65M average cost when third parties are involved
- • 21% increase in breach cost for supply chain attacks
- • 292 days average time to identify supply chain breaches
The Vendor Risk Management Lifecycle
Phase 1: Inventory and Classification
You can't manage what you don't know about. Start by creating a complete inventory of all vendors who:
- Have access to your systems or networks
- Process, store, or transmit your data
- Provide critical business services
- Have physical access to your facilities
Classify vendors by risk tier:
Access to sensitive data, system integration, business-critical services. Examples: Cloud hosting, payment processor, HRIS
Limited data access, supporting services. Examples: Marketing automation, customer support tools
Minimal data access, easily replaceable. Examples: Office supplies, travel booking
Phase 2: Due Diligence and Assessment
Before onboarding a vendor, conduct due diligence appropriate to their risk tier.
Assessment Requirements by Tier
Tier 1 (Critical)
- • SOC 2 Type II or ISO 27001 report review
- • Detailed security questionnaire (SIG or custom)
- • Penetration test results
- • Business continuity/DR documentation
- • On-site assessment (if applicable)
- • Contract review by legal
Tier 2 (Important)
- • SOC 2 or equivalent certification review
- • Abbreviated security questionnaire
- • Insurance verification
- • Contract review
Tier 3 (Standard)
- • Basic security questionnaire
- • Standard contract terms
Phase 3: Contracting
Security requirements must be documented in contracts. Key provisions include:
- Data protection obligations: Encryption, access controls, retention, disposal
- Security standards: Requirement to maintain certifications
- Breach notification: Timeframes and procedures for notifying you of incidents
- Audit rights: Your ability to assess their security
- Subcontractor requirements: Ensuring fourth parties meet your standards
- Termination provisions: Data return/destruction requirements
- Liability and indemnification: Responsibility for breaches
Phase 4: Ongoing Monitoring
Vendor risk doesn't end at onboarding. Implement continuous monitoring:
- Annual reassessment: Review certifications, questionnaires for Tier 1-2 vendors
- Continuous monitoring services: Track vendor security posture changes
- News monitoring: Alert on vendor breaches or security incidents
- Performance tracking: Document security-related SLA breaches
- Certification expiry tracking: Ensure certifications remain current
Phase 5: Offboarding
When vendor relationships end, ensure proper offboarding:
- Revoke all system access immediately
- Obtain written confirmation of data deletion
- Recover any company equipment or assets
- Update your vendor inventory
- Document lessons learned
Security Questionnaire Best Practices
Security questionnaires are the primary tool for assessing vendors. Make them effective:
- • Use standardized questionnaires (SIG, CAIQ)
- • Tailor questions to vendor type and risk
- • Request evidence, not just answers
- • Set clear deadlines for response
- • Follow up on concerning responses
- • Ask 500 questions to every vendor
- • Accept "yes" without proof
- • Let responses sit unreviewed
- • Skip questionnaires for "trusted" vendors
- • Forget to reassess annually
Compliance Framework Requirements
Here's how major frameworks address vendor risk:
| Framework | Key Requirements |
|---|---|
| SOC 2 | CC9.2: Vendor risk assessment, monitoring, and management |
| ISO 27001 | A.15: Supplier relationships, security in agreements |
| HIPAA | Business Associate Agreements required for all PHI handlers |
| PCI DSS | Req 12.8: Service provider management program |
| GDPR | Article 28: Data Processing Agreements with processors |
Tools for Vendor Risk Management
As your vendor portfolio grows, manual management becomes impractical. Consider:
- VRM platforms: Centralized vendor management, questionnaire automation, risk scoring
- Security ratings services: Continuous external monitoring of vendor security posture
- Contract management: Track security terms, expiration dates, renewals
- GRC platforms: Integrate vendor risk with overall risk management
Building Your Program: Start Here
- Week 1-2: Create complete vendor inventory
- Week 3-4: Classify vendors by risk tier
- Month 2: Define assessment requirements per tier
- Month 3: Assess highest-risk vendors
- Month 4: Update contracts for critical vendors
- Ongoing: Roll out to remaining vendors, establish monitoring
Common Pitfalls
- Treating all vendors equally: Risk-tier your approach
- Set-and-forget: Vendor risk changes; monitor continuously
- Shadow IT blindness: Employees adopt tools without security review
- Fourth-party neglect: Your vendors have vendors too
- No offboarding process: Former vendors retain access
Next Steps
Effective vendor risk management is essential for both compliance and security. Start with a complete inventory, prioritize your highest-risk vendors, and build systematic processes. Need help establishing or maturing your VRM program? Our team can help you build a program that scales with your business.