Enterprises today are increasingly outsourcing elements of their critical operations to third-party service providers to enhance their efficiency and reduce operational costs. However, that also means firms are sharing sensitive enterprise and consumer data with vendors over whom they do not have direct control, increasing their exposure to potential risks.
Further, the changing nature of the regulatory compliance environment has also put pressure on organizations themselves to assess the risk level of their external service providers. This creates a greater need for a vendor risk management program that is suited to handle the oversight of an organization’s entire third-party ecosystem.
As both the business and compliance environments continue to change, third-party vendor risk management is evolving to keep pace. To stay ahead, organizations need to understand future trends that may impact vendor risk management while instituting proven best practices.
Vendor risk management best practices
Vendor risk management best practices that some organizations have successfully utilized include:
- Establish clear expectations from the very beginning: Successful vendor relationships depend on establishing clear vendor performance expectations at the very start of the engagement. Organizations should take the time to define a clear set of KPIs with critical vendors; those KPIs guide future conversations. Doing so ensures there is an agreed-upon framework for vendor risk assessment.
- Conduct ongoing monitoring: It is important for organizations to conduct frequent conversations with their third-party vendors to review the status of priority KPIs and address all possible issues as they arise. This approach can help ensure commitment to predefined goals and adequate performance throughout the engagement.
- Focus oversight activities on high-risk vendors: Focusing on vendors with the most critical risk profiles will ensure maximum efficiency of an organization’s oversight resources and help reduce overall operating risk.
- Leverage SOC reports whenever possible: Vendors and their audit firms make significant investments in assessing the operating controls that have been put in place to ensure that their financial and operating risks are minimized. A thorough understanding of the results of the auditors’ findings in these reports is a critical first step in understanding the effectiveness of the vendors’ operating environment.
- Assess fourth-party risk: Just as organizations are outsourcing critical operations to third-party service providers, those third parties are in many cases outsourcing key functions to their own network of service providers. These fourth-party dependencies pose potential risk, as the initial organization typically does not maintain a direct relationship with those downstream vendors. Organizations should take the time to understand the Complementary Subservice Organization Controls (CSOCs) that the service provider expects its own vendors to have in place to support the fulfillment of its control objectives and ensure that the third-party provider has an oversight program in place to monitor the performance of its outsourced functions.
- Use customized questionnaires for more focused results: By utilizing questionnaires from trusted oversight partners, organizations can ensure they are gathering the information they need to properly assess vendor controls. Where applicable, they should customize available due diligence questionnaires to best address their specific priorities and ensure third-party controls are sufficient.
Future trends in vendor risk management
Vendor risk management is constantly adapting to keep pace with a changing risk landscape and evolving regulation frameworks. Some of the top future trends in vendor risk management include:
Cyber risk as a growing concern
As businesses continue to move their activities and operations to cloud-based and other digital environments, managing cyber risk has become a high-priority third-party oversight activity. Cyber attackers are constantly fine-tuning their hacking capabilities, enabling them to bypass even the tightest information security controls.
Failing to properly ensure that third-party vendors have sufficient cybersecurity controls in place could increase organizations’ operational and reputational risk exposure. Data from Forrester suggest that 60% of all security incidents in the digital economy could result from third-party relationships.
Increasing reliance on SOC 2 reports
Having the governance protocols in place to protect sensitive data from data breaches and other potential risk is crucial to protecting critical assets and maintaining consumer trust.
Coupled with the above trend of escalating cyber risks, organizations increasingly rely on SOC 2 audits to ensure their vendors have the proper controls in place to maintain data security, availability, processing integrity, confidentiality, and privacy.
Deployment of a vendor risk management program
Vendor risk management has become more time-consuming and resource-intensive in recent years, and organizations are devoting a larger portion of their time and personnel to oversight activities. In response, more organizations are utilizing managed services offered by external oversight analysts to streamline their service provider oversight activities.
Not only do these solutions make it easier for organizations to view all documentation and reporting results throughout the firm, but they also eliminate many of the manual tasks associated with the oversight process. This frees internal teams to focus their available resources on other high-priority oversight activities.
NQR’s third-party risk management solutions
National Quality Review’s Service Provider (SP) INSIGHT service provides clients with the platform, tools, and expertise needed to centralize all vendor oversight activities and facilitate comprehensive review of third-party audit reports.
Core features of NQR’s SP INSIGHT service include:
- View SOC analysis: NQR provides clients with in-depth reporting and analysis on SOC reports that enables clients to focus on key findings from each of their audit reports, including auditor opinions, exceptions, Complementary User Entity Controls (CUECs), Subservice Providers, and more. Custom reporting and centralized access make critical data from these reports easily accessible across the enterprise.
- Manage CUECs: SP INSIGHT’s CUEC interface allows clients to easily manage the internal operating controls associated with the services their vendors are providing. Clients can easily specify and track which controls are relevant to their organization, store information including internal documentation regarding those controls, assign follow-up tasks to individual users, and more.
- Manage due diligence questionnaires: NQR’s platform enables clients to utilize templated or customized questionnaires that support the wide range of frameworks deployed by clients, including those based on NIST and ISO. Vendors respond to the questionnaires through the INSIGHT portal, allowing the clients to obtain real-time results. Clients can capture and record remediation notes, assign follow-up tasks to individual users, and track open items. Customized reporting from the system allows clients to evaluate vendor responses from prior periods and compute risk ratings based on their responses.
- Monitor SLA performance: NQR’s SP INSIGHT service gives clients the tools to consolidate all of their service level agreement (SLA) metrics in a single, centralized location to enhance visibility and monitor progress. In-depth customized reporting allows clients to set and monitor performance thresholds for all metrics; track trend performance monthly, quarterly, and annually; and compare vendor performance.
- Calculate inherent risk: NQR will work with clients to customize their inherent risk ranking process and incorporate the results into their oversight reports. NQR’s approach to inherent risk calculations provides the consistency and flexibility needed to accommodate the wide range of vendors that are typically included in a client’s oversight program.
Partner with NQR for third-party risk management
Vendor risk management is changing, and it is important for organizations to have the right team of analysts and client success managers on their side to stay ahead of those changes and mitigate the risk presented by their third-party vendor relationships.
NQR’s team provides clients with a wealth of industry knowledge, experience, and best practices, helping them manage critical oversight activities to increase operational efficiency and improve performance.
Contact us today to learn more about SP INSIGHT and our other oversight services and capabilities.