Vendor risk scoring is a critical component within vendor risk management (VRM) or third-party risk management (TPRM) programs and an organization’s overall risk management strategy. Risk scoring is an integral tool in the risk assessment process, helping organizations identify, evaluate, and mitigate potential risks associated with third-party vendors or service providers.
In an era of increasingly sophisticated cyber threats and supply chain attacks, understanding and managing vendor risks is essential for maintaining strong security postures. This guide will cover everything you need to know about vendor risk scoring and why organizations must implement it.
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What is vendor risk scoring?
Vendor risk scoring is a systematic approach to identifying, evaluating, and quantifying the potential risks associated with new and existing third-party vendors and their potential impact on an organization’s overall operations. This process involves assessing various risk factors and assigning a score that reflects the overall level of risk posed by each vendor.
The aim is to help organizations perform their due diligence on new and potential vendors, make informed decisions about their existing vendors, monitor their vendors throughout their lifecycle, and prioritize risk and vulnerability remediation workflows. Risk scoring should be done at all stages of the vendor lifecycle, from procurement to onboarding to annual audits until the vendor’s lifecycle ends.
Why is vendor risk scoring important?
Vendor risk scoring is important for a number of reasons:
- Increased dependency on third-party vendors: As organizations outsource more functions, they become more vulnerable to risks originating from their vendors. However, each additional vendor increases the organization’s attack surface and risk exposure.
- Strict regulatory compliance requirements: Regulations, like GDPR for European countries, HIPAA for the healthcare industry, PCI DSS for the financial services industry, and others mandate rigorous vendor risk management practices that can impact a vendor’s risk score. Non-compliance to mandatory requirements outlined in regulations or laws can negatively impact a vendor’s risk score.
- Reputational damage: A security breach caused by a vendor can significantly harm an organization's reputation and trustworthiness. To maintain their own reputations, businesses may want to avoid working with high-risk vendors with bad risk scores.
- Operational disruption: Vendor-related risks can disrupt business operations, leading to financial losses and system downtime. By scoring each vendor’s biggest risks, businesses can prioritize risk mitigation and remediation tasks to prevent business disruptions.
- Risk identification: Risk scoring provides businesses with a deeper level of insight into their most vulnerable areas by identifying each risk during the scoring process. New vendors introduce new risks, but using a risk-scoring methodology allows organizations to understand where third-party risks can affect them and how they can begin to fix them.
How vendor risk scoring is used in Vendor Risk Management
Vendor risk scoring is a fundamental component of vendor risk management (VRM) and third-party risk management programs. It allows organizations to prioritize their resources and efforts by focusing on vendors that pose the highest risks.
How are vendor risk scores calculated?
Vendor risk scores are calculated by assessing various risk categories through qualitative or quantitative methods. The calculation process involves assessing different risk categories and assigning weighted scores based on the vendor’s performance in each category.
Different vendor risk scoring tools may use different scoring systems, such as through a letter grade (A-F), a numerical ratings system, (0-100), or a risk criticality labeling system (Low, Medium, High, or Critical risk).
Different risk categories considered in calculation methods
Each identified risk can have different weights on a vendor’s overall risk score. As part of the vendor risk management process, it’s up to your organization to categorize these risks and determine how each risk impacts the business, like which risks pose the biggest hazards to sensitive data, the IT ecosystem, to customers, etc.
- Cybersecurity risks: The vendor's security measures, internal security controls, vulnerability management, and incident response effectiveness to protect against the biggest cyber threats, like ransomware or phishing attacks.
- Operational risks: The impact on business operations and the vendor’s resilience to operational disruptions.
- Compliance risks: The vendor’s adherence to relevant laws, regulations, and industry standards. Compliance risks can be identified through security questionnaires and industry-standard security frameworks or certifications, like SOC 2, ISO 27001, or NIST CSF.
- Financial risks: The vendor’s financial stability and the potential impact of financial issues on their ability to provide services.
- Reputational risks: The vendor's reputation in the industry and the potential damage to reputation following a cyber attack.
- Strategic risks: The alignment of the business goals and the vendor’s business strategy with the organization’s goals and potential long-term risks.
Qualitative vs. quantitative methods
Generally, there are two main ways to measure and assess vendor risk: qualitative and quantitative methods.
Qualitative methods use descriptive analysis and hypothetical situations or scenarios to evaluate risks based on likelihood and impact. For example, businesses can use a Vendor Risk Matrix to designate vendor risks using a scale from Low to High on the likelihood of occurring and potential impact on your organization. Risks identified as “high impact, high likelihood” are severe risks that must be remediated as soon as possible.
> Related: Vendor Risk Management Assessment Matrix
Quantitative methods attempt to measure vendor risk using numerical data and statistical analysis. As opposed to subjective risk mapping or judgments through qualitative methods, quantitative methods measure risks through various security metrics and generate an objective score that can be standardized across all vendors.
> Related: IT Security Risk Assessment Methodology: Qualitative vs. Quantitative
Vendor risk scoring should use both qualitative and quantitative methods as much as possible to generate a final vendor risk analysis. Both risk methodologies can be used to effectively communicate the vendor’s risk to stakeholders and senior management.
Example of a quantitative approach - Security Ratings
Vendor risk scores can be calculated by collecting and analyzing data from multiple sources and generating a score or “security rating” that reflects the vendor’s overall security posture. Many security ratings tools aggregate that data to provide a final risk score, using sources of data such as:
- Vulnerability scanning results
- Data protection and data privacy policies
- Past data breaches or security incidents
- Network security configurations
- Incident response capabilities (business continuity plans, disaster recovery plans, incident response plans)
- Software or application security
- User behavior
- Endpoint and data security
- Information security controls
UpGuard’s Security Ratings methodology
UpGuard calculates security ratings by collecting and analyzing billions of data points to instantly generate a comprehensive security score for each vendor. Our proprietary rating algorithm is constantly updated over time to provide the most accurate risk score and reflection of the vendor’s security posture.
The ratings are generated with a final score of 0-950, using a subtractive rating algorithm. Each identified risk or failed security check is deducted from the 950 rating, with the deduction based on the severity or weight of the risk. Additionally, the UpGuard ratings system is based on a Gaussian-weighted mean, giving more weight to the lowest-rated risk categories.
UpGuard focuses on six main risk categories:
- Network security
- Email security
- Website security
- Phishing & malware risk
- Brand & reputation risk
- Questionnaire risks
Each vendor is assessed individually and given a security rating based on their overall security performance. From there, users can see every vendor’s risk rating and view their risks in the UpGuard dashboard.
> Related: Learn more about UpGuard’s Security Ratings
How accurate are security ratings for vendor risk scoring?
While security ratings are useful for providing a snapshot of a vendor's security posture, their accuracy can be influenced by several factors. The accuracy of security ratings also depends on the quality and comprehensiveness of the data used and the methodology employed to analyze it.
Some factors to consider:
- Data quality: Reliability of the data sources used
- Timeliness: How current the data is or how recently it was pulled
- Context: Understanding the context of the vendor’s security environment
While security ratings provide a high-level overview of the vendor’s security posture, they may not show the full picture. Organizations should use security ratings as part of a broader risk assessment strategy, using them alongside additional qualitative assessments, like security questionnaires, and other risk evaluation methods.
> Related: What are Security Ratings?
How is vendor risk scoring used in vendor risk assessments?
In vendor assessments, vendor risk scoring is used to:
- Identify high-risk vendors: Risk scores help prioritize high-risk vendors for more detailed assessments and ongoing monitoring.
- Allocate resources: Organizations can focus their risk management efforts on vendors with the biggest risks. Vendors essential to business operations and have high risk should be prioritized for remediation.
- Develop mitigation strategies: Based on the risk scores, organizations can create targeted workflows to begin addressing identified risks and streamline the mitigation and remediation process.
- Determine risk tolerance: During the risk assessment process, decisions must be made regarding the vendor's importance relative to its risk level. If a vendor is classified as high-risk but is considered an essential piece of your organization’s business operations or handles large amounts of customer data, your company’s risk tolerance may need to be adjusted to allow the vendor to remediate its security issues and fix its security practices.
- Enhance decision-making: Risk scores provide a clear, quantifiable basis for key stakeholders to make business decisions about vendor relationships and risk management initiatives.
- Continuous monitoring and review: Standardized risk scores allow organizations to track vendor risks and monitor their risk remediation progress in real time. Scores are updated over time to reflect the vendor's most accurate security posture.
