Vendor Risk Management (VRM) is the process of managing and monitoring security risks resulting from third-party vendors, IT suppliers, and cloud solutions. VRM programs combine continuous third-party attack surface monitoring, risk assessments, and other third-party risk management initiatives to mitigate business disruptions caused by third-party security risks.
As businesses increase their use of outsourcing, the risk of cyber-attacks and data breaches from third-party vendors must be identified and mitigated. While outsourcing has great benefits, if vendors lack strong security controls, your organization is exposed to operational, regulatory, financial, and reputational risk.
A Complete Guide to Third-Party Risk Management
Download this eBook to learn how to better manage vendor risk with an effective Third-Party Risk Management Program.
Why is vendor risk management important?
Vendor risk management is important because vendors can significantly impact your security posture. If not properly vetted, a newly onboarded third-party service may contain exploitable vulnerabilities, making it highly susceptible to data breaches.
Since many vendors require access to your internal processes, a threat actor exploiting a vendor’s weak cybersecurity could gain access to your sensitive data. Once a vendor is onboarded, their security risks become your security risks. A robust Vendor Risk Management (VRM) program gives organizations complete visibility into their third-party risk exposure, enabling them to make informed decisions about which vendor relationships are safe and which are best to avoid.
What are the benefits of vendor risk management?
A good vendor risk management program will ensure that:
- Addressing future risks takes less time and fewer resources
- Accountability for both the company and vendor is understood
- The quality of your services isn't damaged
- Costs are reduced where possible
- Availability of your services is improved
- You can focus on your core business function
- Operational and financial efficiencies are secured
- Third-party security risks are reduced as long as everyone follows the plan
Even if your organization has a high-risk tolerance, regulations such as the Sarbanes-Oxley Act (SOX), Payment Card Industry Data Security Standard (PCI DSS), and the Health Information Portability and Accountability Act (HIPAA) mandate that risk management policies extend to third-party vendors, outsourcers, contractors and consultants.
Learn about the top VRM solution options on the market >
What is vendor relationship management?
When assessing a vendor, it's important to understand how the vendor fits into the overall context of your organization's projects and goals. Third-party relationships can range from a small one-off project with an independent contractor to an ongoing vendor relationship with a large multinational. Common vendor scenarios include:
- An original equipment manufacturer (OEM) who sells something your organizations needs, like a printed circuit board (PCB), to a computer manufacturer.
- A marketing freelancer sells her services to your company on a one-time or ongoing basis (leading to an ongoing vendor relationship).
- A Software-as-a-Service (SaaS) provider who sells software to your organization for a period of time.
Vendor relationship management is focused on overseeing the relationship with vendors, from due diligence and cyber security risk assessment through the delivery of the good or service onto planning for business continuity. The person who oversees vendor relationships is often called a vendor manager. Vendor managers can sit in any part of an organization, from human resources to the supply chain.
The due diligence process is streamlined if the vendor hosts its security documentation on a tool like Trust Exchange. To start simplifying your Vendor Risk Management process, you can sign up to Trust Exchange for free.
For an overview of the tool, watch this video:
What are third-party vendors?
A third-party vendor is an external party that provides a product or service to your organization. Their connections to your internal technologies and processes make them extensions of your attack surface, ultimately increasing your likelihood of suffering a data breach.
Common third parties include:
- Manufacturers and suppliers (everything from PCBs to groceries)
- Services providers, including cleaners, paper shredding, consultants and advisors
- Short and long-term contractors. It's important you need to manage short and long-term contractors to the same standard and assess the information that they have access to.
- Any external staff. It's important to understand that understanding of cyber risk can be widely different depending on the external staff.
- Contracts of any length can pose a risk to your organization, and the Internal Revenue Service (IRS) has regulations about vendor and third-party relationships that go beyond specific time frames, so even the length of a contract can pose risk. In the IRS's eyes, a vendor working onsite with a company email address for longer than a specific period of time should be classified as an employee and receive benefits.
Why you need to manage your vendor risks
Companies face a host of risks when they engage third parties. Vendors who handle confidential, sensitive, proprietary or classified information on your behalf are especially risky. If your third-party vendors have poor security practices, they can pose a huge risk regardless of how good your internal security controls are.
A myopic focus on operational risk factors like performance, quality standards, KPIs and SLAs is not enough. Increasingly, the biggest risks that come from third-party vendors are reputational and financial risks like data breaches.
Here's a sample of the risk that vendors can pose:
- Legal or compliance breaches, especially if you work in government, financial services or a military contractor
- Breach of the Health Insurance Portability and Accountability Act (HIPAA) that require protected health information (PHI) to be secured correctly
- Legal issues like lawsuits, class actions, loss of work or termination of relationships
- Information security and data security risks. You need to know how much information a vendor should have access to and has access to.
- Loss of intellectual property. If a vendor has access to proprietary information, there is a risk they steal it for themselves or expose it through a data breach
- Relaxed restrictions with long-term vendors can be a big risk, it's important for controls to be as rigorous five years in as on the first day
One key way to reduce risk is to only give vendors access to what data they need to get their job done and no more.
That said, to really reduce risk, organizations need to have an overall risk management strategy which means vendors are constantly measured and evaluated. It's not enough to have subject matter experts who own their vendors. Data breaches can come from any part of your organization.
Without organizational wide practices, departments can pick their own metrics to measure and ad hoc requirements that can result in substandard risk management.
Learn why VRM is particularly critical for businesses in India >
What is vendor lifecycle management?
The general lifecycle of a vendor relationship is as follows:
- Define and determine needs
- Create vendor assessments for all vendors
- Search for vendors and send out bids
- Select vendor(s)
- Define contract terms and timeframes
- Monitor relationship and performance
- End of contract, relationship or renewal
For high-risk vendors, steps may be skipped and may even result in early termination of a contract.
Learn how to get vendor questionniares completed faster >
A Complete Guide to Third-Party Risk Management
Download this eBook to learn how to better manage vendor risk with an effective Third-Party Risk Management Program.
What is a vendor risk management plan?
A vendor risk management plan is an organizational-wide initiative that outlines the behaviors, access, and services levels that a company and a potential vendor will agree on.
The document should outline key vendor information and be valuable to the organization and the third party. It should outline how your organization tests and gains assurance of vendor performance. And it should outline how the vendor will be able to ensure your organization's regulatory compliance and not expose customer data in security breaches.
Depending on the vendor and services provided, the relationship may be spelled out step by step with Vendor Risk Management checklists or in a more casual manner.
In order for a vendor risk management plan to be useful, your organization must understand the vendor risk assessment process and be willing to work with your compliance, internal audit, HR, and legal teams to ensure the vendor risk management plan is followed for each new and existing vendor.
An effective vendor risk management plan is characterized by its vendor due diligence policy. Vendor onboarding is one of the most delicate phases of a VRM program because it has a significant impact on an organization’s security posture. Poor onboarding practices will overlook the different types of risks and security vulnerabilities of new vendors, adding these risk to your risk profile.
Proper vendor onboarding requires a thorough assessment of cyber threats and other cyber risks that are unique to each type of vendor, such as their compliance requirements. If available, certifications should also be reviewed - these make the onboarding process much faster.
Beyond onboarding, a VRM plan should aim to streamline third-party security risk management to expedite remediation processes, reducing negative impacts on security postures. Advanced techniques, such as vendor tiering, are very effective at improving remediation efficiency.
How do you create an effective vendor risk or third-party risk management framework?
To create an effective third-party risk management framework, you need to apply the same criteria to all vendors, adapted to the type of product or service they provide.
You should:
- Recognize and outline all challenges. In the era of cloud computing, a poorly configured S3 bucket can be as big a threat as a sophisticated attacker. Make sure your third-party vendors are checking their S3 permissions or something else will. You could be liable for your vendors data breaches. The introduction of GDPR means that businesses that operate in the EU must provide data breach notifications, appoint a data protection officer, require user consent for data processing and anonymize data for privacy.
- Ensure the entire organization is onboard, without total compliance to your vendor management framework, it won't be as successful as it could be.
- Ensure your contracts have the "right to audit" as well as what security controls and requirements the supplier has in place.
- Outline how vendor risk monitoring will occur, when it will occur, how reviews and feedback will be conducted, and how risk exposures will be identified and mitigated.
Read our guide on how to select a third-party risk management framework.
An ideal vendor risk management framework should streamline the complete lifecycle of third-party vendor risk management, from procurement and vendor selection to vendor contract negotiations, to business relationship establishment and continuous monitoring.
Streamlined management of vendor partnerships is achieved when management teams move from a linear vendor lifecycle style of risk management to an ongoing vendor risk management model. The following illustration can be used as a high-level template of this superior risk management model.
Learn how to implement TPRM into an existing security framework.
This ongoing monitoring model is optimized to keep stakeholders informed of an organization’s vendor risk management efforts. And the emphasis on continuous monitoring helps regulated industries, such as those in healthcare, rapidly identify and address emerging risks impacting regulatory compliance. If the vendor risk vicibility component of your VRM program requires development, refer to this post ranking the top vendor risk monitoring solutions on the market.
For an illustration of this framework being implemented in a Vendor Risk Management workflow, watch this video:
What is a Vendor Risk Management Maturity Model (VRMMM)?
A vendor risk management maturity model (VRMMM) is a holistic tool for evaluating maturity of third-party risk management programs including cybersecurity, information technology, data security and business resiliency controls.
A VRMMM allows organizations to develop a strategy before building out a program and to identify where and how goals will be set to make the program robust.
Any VRMMM must have two important parts:
- A way to identify and evaluate needs and potential risks
- A way to measure the relative development of maturity in components of the overall risk management framework, such as determining how each department is managing risks, where resources need to be moved and how improvements can be made
What are the vendor risk management maturity levels?
There are six levels of a vendor risk management maturity model:
- Startup or no third-party risk management: new organizations beginning operations or organizations with no existing vendor risk management activities.
- Initial vision and ad hoc activity: third-party risk management activities performed on an ad hoc basis and considering how to best structure third-party risk activities.
- Approved road map and ad hoc activity: Management has approved a plan to structure activity as part of an effort to achieve full implementation.
- Defined and established: Organizations with fully defined, approved and established risk management activities where activities are not fully operationalized with metrics and enforcement lacking.
- Fully implemented and operational: Organizations where vendor risk management activities are fully operationalized with compliance measures, including reporting and independent oversight - to undertstand how to apply VRM to different vendor risk contexts, refer to this list of Vendor Risk Management examples.
- Continuous improvement: Organizations striving for operational excellence with clear understanding of best-in-class performance levels and how to implement program changes to continuously improve the process.
Understanding where your organization's vendor risk management maturity level is a key part of understanding how to best manage vendor risk and where you can improve.
How to create a third-party or vendor risk management checklist
When your organization is preparing to hire or onboard a new vendor, you need to work through a due diligence checklist to ensure they are fit. This is also known as a vendor assessment.
The critical parts to a vendor assessment are as follows:
- Ask for references from the vendor's other clients.
- Determine that the vendor is financially solvent, you may need to request financial statements.
- Verify they have liability insurance.
- If you operate in an industry with regulatory requirements, verify that they have the correct licensing and training, such as HIPAA training, security clearance or financial licence to provide the service.
- Conduct background and criminal checks.
- Assess whether the vendor will be able to meet your required service levels.
- Determine whether the vendor has proper security controls, technology and expertise to properly manage your sensitive information.
- Review the contract, including terms, renewals, required service levels, and termination requirements.
- Provide an overview of critical third-party security risk exposures in Vendor Risk Management reports for senior management.
For inspiration, refer to this VRM checklist for CISOs and this generic VRM checklist.
Read our full guide on how to use a vendor risk management checklist here.
Vendor risk management best practices in 2025
The best practices for vendor risk management include:
- Maintaining an up-to-date inventory of all third-party vendors: Take stock of every vendor your organization works with to ensure you have a complete and accurate list.
- Cataloging your cybersecurity risks: Identify the cyber threats and vulnerabilities that each third party could introduce to your organization.
- Assessing and segmenting vendors by potential risk: Evaluate vendors based on their risk level and prioritize mitigation efforts for those exceeding your organization’s risk appetite.
- Developing a rule-based system for vendor evaluation: Establish clear, standardized criteria to assess future vendors in real time (e.g., data security requirements and independent reviews).
- Assigning an owner for vendor risk management: Designate a specific individual or team to oversee all aspects of vendor and third-party risk.
- Defining three lines of defense:
- First line: Functions that own and manage risk.
- Second line: Functions that oversee or specialize in risk management and compliance.
- Third line: Functions that provide independent assurance, typically internal audit.
- Establishing contingency plans: Develop clear action steps for scenarios where a vendor falls below acceptable standards or a data breach occurs.
- Ensuring your VRM program is supported by scalable processes: Leverage dashboards, GRC software, or automation-focused questionnaire managers —instead of manual tasks like spreadsheets—to support VRM scalability.
- Identifying your supply chain attack surface: Include both third-party and fourth-party vendors in your VRM program. Manual inventories are time-consuming, prone to inaccuracies, and make it difficult to discover fourth parties. An automated VRM solution centralizes vendor tracking and enables the automatic discovery of fourth-party relationships. Categorizing all vendors by risk level helps security teams focus remediation efforts effectively across the vendor lifecycle.
- Prioritizing your high-risk vendors: With hundreds or even thousands of third parties, you cannot apply the same level of scrutiny to every vendor. Create a vendor tiering system based on the level of risk to ensure your information security team invests the most resources in higher-risk relationships. While prioritizing top threats, continue to routinely assess all vendors against standardized checks to uncover any emerging cybersecurity issues.
- Assessing third-party regulatory compliance: Regulatory and industry frameworks (e.g., PCI-DSS, HIPAA, ISO) offer added assurance of robust security measures. Because an organization remains liable for its data even if a breach occurs within its supply chain, it is vital to consistently assess each vendor’s compliance throughout the vendor lifecycle. Using security questionnaires—and automating their distribution and analysis—simplifies this process, especially in highly regulated industries like finance and healthcare.
- Practicing continuous monitoring: Vendor risk management is never “set-and-forget.” New vulnerabilities emerge daily, and vendors’ security postures can change over time. Ongoing assessments and continuous monitoring help your security team detect and address third-party risks before they escalate. Automation is critical to maintaining visibility over a growing, complex vendor ecosystem and ensuring timely remediation of identified threats.
Learn how UpGuard helped Schrödinger shave hours from its vendor security program by eradicating spreadsheets.
Read the case study >
Breaches by vendors are almost always caused by failure to enforce already existing rules and protocols. You and your vendors need to be transparent about what you expect from each other and what risks are posed.
Read more about vendor risk management best practices >
How to address a vendor breach
It's no longer simple enough to ensure your organization's systems and enterprise web presence are secure. Your risk management program must address third and even fourth-party risk.
Your vendors can be the target of cyber criminals or accidently leak confidential information by poor configuration. Delays in schedules, failing to fulfil contracts, going over budget and cutting corners can cause financial and reputational damage even if your organization is not at fault.
By having and following a vendor risk management framework, your organization will be able to act quickly and follow a protocol if a vendor breach does occur. This can include anything from having your vendor pay the financial damages to termination of contract.
Automating vendor risk management with UpGuard
UpGuard offers a suite of features supporting each stage of the VRM lifecycle, including:
- Due Diligence - Instantly gets a sense of a prospective vendor's cybersecurity efforts with external attack surface scans quantifying security postures. Then, perform targeted evaluations with a library of industry-leading security questionnaires mapping to popular frameworks and regulations.
- Continuous Attack Surface Monitoring - Have real-time awareness of the state of your vendor attack surface with real-time monitoring complimenting point-in-time assessments.
- Third-Party Data Leak Detection - Use UpGuard's propriety data leak detection engine to locate sensitive data leaks on the surface and dark web. With cybersecurity efforts reviewing each detected leak to remove false positives, you can have confidence in the reliability of all detected data leaks.
And much more!
Watch the video below to learn how UpGuard leverages AI to streamline Vendor Risk Management.
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