One early Friday morning in July 2024, the cybersecurity company CrowdStrike released a faulty software update that crashed more than 8 million Microsoft Windows systems worldwide. Its widespread casualties included important day-to-day establishments like airports, banks, and hospitals, forcing them into a frenetic troubleshooting scramble. Although the error was discovered and resolved within hours, the damage had already been done.
The CrowdStrike incident, responsible for what has been called the “largest outage in history,” illustrates why it’s important to regularly assess the business partners and third-party vendors your business deals with—a process known as vendor risk management.
Vendor risk management (VRM) describes the practice of assessing the potential business threats posed by the external entities a company works with, specifically its vendors and suppliers. It’s also referred to as supplier risk management and falls under the broader category of third-party risk management (TPRM), which includes contractors, service providers, and business partners.
The goal of VRM is to evaluate the risk profile of third-party vendors both before establishing a business relationship and throughout the duration of the contract. The due diligence process spans the entire vendor lifecycle, including onboarding and offboarding.
With its digital security software used by more than half of Fortune 500 companies, CrowdStrike is an example of a cybersecurity vendor. However, beyond cybersecurity, businesses work with vendors across a wide variety of functions and industries, including:
No matter their function, any type of vendor can pose risks—whether reputational, financial, regulatory, or cybersecurity-related. This makes having a comprehensive vendor risk management plan essential.
Businesses are becoming increasingly dependent on third-party vendors to handle essential functions, particularly in a digitally transformed, remote-work world. Consider how many companies depend on software companies like Salesforce, AWS, and QuickBooks for their day-to-day operations.
Third-party vendors offer external expertise so that businesses can scale more efficiently. However, because vendors often have access to sensitive systems and customer data, this reliance also introduces potential risks that, left unmanaged, can have severe consequences. Think security breaches, business interruptions, and legal liabilities. For that reason, VRM has become a critical function, overseen by senior leadership as well as dedicated risk management teams.
The CrowdStrike incident is just one example of many more large-scale events triggered by a vendor vulnerability—the 2020 SolarWinds cyberattack and 2017 Equifax data breach, to name a few. These incidents demonstrate how vendor-related risks can affect all kinds of businesses regardless of industry, geography, and size. However, effective VRM helps companies uncover and mitigate vendor risks before they can negatively impact their operations or reputations.
Because vendors span a variety of functions and industries, the risks they pose are not one and the same. Below are the four most common types of vendor risks:
In industries with especially stringent regulations like healthcare and financial services, vendors can introduce legal risks. That could appear in the form of non-compliance with data privacy regulations or failure to maintain proper licenses or certifications. For example, non-compliance with the EU’s General Data Protection Regulation (GDPR) could expose both your business and the vendor to fines and legal penalties.
Third-party financial risks occur whenever vendors fail to deliver on their obligations or perform inadequately. As part of a broader risk assessment strategy, businesses involved in investment due diligence must evaluate vendor-related risks. For instance, that might be a product distribution delay on the vendor’s end that leads to a decline in your sales, or a supplier that delivers subpar goods. Whether through excessive costs or lost revenue, these complications can hurt your bottom line.
Vendors with weak cybersecurity measures can expose your organization to hacking attempts and data breaches, resulting in the loss of data or performance disruptions. The severity of these risks depends on the type of data vendors have access to, with industries like healthcare and finance being particularly vulnerable.
One such example where a vendor created massive cybersecurity risk is the 2013 Target data breach, in which attackers exploited a refrigerator contractor’s access and stole data from as many as 40 million credit and debit cards. According to Target, the data breach cost $202 million.
A vendor’s actions can reflect poorly on your company, damaging its public image and credibility. Although more difficult to quantify than the other types of vendor risk, reputational risk remains just as great a threat.
Consider what might happen to your company’s reputation if a supplier provides you with a defective component used to make your product. In this way, reputational risk ranges widely, caused by vendor data breaches and bankruptcies as well as negative press, corruption, unethical business practices, and involvement in dubious business dealings.
Some vendor-related risks may be minor and easy to manage, like a missed catering delivery or a delayed project. Others, however, have far more serious implications. For instance, if a vendor is the entry point for a cyberattack, the resulting data breach could create irreversible reputational damage, financial losses, and complex legal ramifications.
To that end, it’s crucial to put together a comprehensive vendor risk management strategy for your business. Below are key steps and components your strategy should include.
As businesses continue to rely more heavily on third-party vendors, managing the associated risks becomes increasingly crucial. By proactively identifying and mitigating these risks, companies can protect their operations, reputation, and bottom line.
Vendor risk management is not just about identifying potential risks but ensuring that your business remains resilient in the face of them. Thoroughly understanding the history and reliability of potential vendors, on top of developing strong policies and regularly assessing your vendors, will keep your business secure.
You can start managing your business's third-party risk with a thorough business background check on your company’s vendors from Business Screen. Contact us today to learn more about our vendor risk management services.
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