What is Vendor Risk Management (VRM) in Cybersecurity?

Vendor relationships are vital to modern business, but they also introduce hidden cybersecurity risks. Vendor Risk Management (VRM) helps organizations identify, control, and monitor these third-party risks. In this guide, we’ll explore what VRM is, why it matters, the common types of risks, practical processes, and how to scale VRM effectively.

What is vendor risk management in cybersecurity?

Vendor Risk Management (VRM) is the process of identifying, evaluating, and controlling the cybersecurity risks associated with third-party vendors, especially those with access to sensitive systems, data, or infrastructure. In today’s interconnected digital ecosystem, organizations often rely on an expanding network of service providers, SaaS platforms, cloud tools, and supply chain partners. While these vendors bring agility and innovation, they also introduce a wide range of potential vulnerabilities.

VRM ensures that every external partner is held to the same security and compliance standards as internal teams. Unlike traditional procurement or vendor selection which focus primarily on cost, contracts, and service delivery, cybersecurity-focused VRM is about minimizing risk exposure and safeguarding your digital assets.

VRM isn’t a standalone activity, it’s a core component of an organization’s broader compliance and risk management strategy. Most regulatory frameworks and industry standards now require formal oversight of third-party vendors and third-party risk management programs. Whether you’re working toward SOC2, ISO 27001, HIPAA, or implementing a Risk Management Framework (RMF), managing vendor risk is no longer optional; it’s becoming a critical expectation for organizations of all sizes and, in many cases, a mandatory requirement.

For Managed Service Providers (MSPs) and Managed Security Service Providers (MSSPs), vendor ecosystems can be particularly complex. MSPs often work with dozens of tools, platforms, and subcontractors across multiple client environments. A single vendor weakness can have a cascading impact across clients, making strong VRM practices – on the MSP/MSSP back-office side – essential. Of course, on the flip side of things, complex vendor ecosystems also present an opportunity for MSP/MSSPs to offer VRM services, which we will touch on later.

The more interconnected your vendor network becomes, the larger your exposure to threats. VRM helps reduce risk by systematically evaluating vendors before onboarding, enforcing contractual security controls, and ensuring ongoing monitoring throughout the vendor lifecycle.

Why is vendor risk management essential?

As vendor risk is one of today’s most prevalent cybersecurity threats, it’s clear that without proper oversight, a third-party misstep can result in data breaches, operational disruptions, regulatory penalties, and long-term reputational harm.

A 2024 study by Prevalent revealed that 61% of companies experienced a third-party data breach or security incident in the past year, highlighting the significant risks associated with vendor relationships.​

From the SolarWinds and MOVEit breaches to numerous smaller-scale incidents, attackers often target vendors as a pathway into otherwise well-defended organizations. Why? Vendors may lack strong security controls but still maintain indirect or direct access to sensitive data, networks, or applications.

Examples include an HR SaaS vendor with access to employee personal data, a logistics partner with VPN credentials to internal systems, or a managed IT service provider managing infrastructure on behalf of its client. Without VRM, these connections become blind spots attackers can exploit.

The regulatory landscape demands VRM

Global and sector-specific frameworks increasingly recognize and insist on formal vendor risk oversight. Frameworks like SOC2, ISO 27001, HIPAA, GDPR, and others explicitly call for organizations to assess third-party risk as part of their compliance and risk management programs.

Failure to implement effective VRM can result in:

• Hefty fines for non-compliance
• Delays or disqualification during security audits
• Higher insurance premiums or denied claims
• Legal liability for damages caused by vendor breaches

Business continuity depends on vendor resilience

Today’s businesses rely on a complex web of third-party tools and services – cloud platforms, CRM systems, outsourced cybersecurity providers, and more. A disruption to just one critical vendor can bring operations to a halt.

Consider the impact if your CRM vendor suffers downtime during a major sales campaign, or if your backup and recovery provider fails during a ransomware event, or if a supply chain partner is hit by a cyberattack, delaying deliveries. 

Vendor risk isn’t only about data, it’s also about continuity. Organizations must assess not just the cybersecurity hygiene of their vendors, but also their operational resilience and incident response readiness.

Reputational damage, loss of trust and legal accountability

In many cases, the end customer won’t distinguish between your organization and your vendors. If a third-party vendor mishandles sensitive data, the reputational blowback often lands squarely on your brand. Legally, you may still be held liable for damages or disruptions caused by your vendors, as responsibility isn’t separated simply because the task was outsourced. This makes managing vendor risk not just a matter of trust – but of legal and operational survival.

Stakeholder expectations are rising

It’s not just regulators – clients, investors, and internal stakeholders are also demanding greater transparency around third-party risk. Customers expect proof that their data is secure. Procurement teams often require vendor security assessments in RFPs. Boards of directors and executive teams expect vendor risk to be part of overall cyber risk governance. Ignoring VRM can lead to lost deals, failed due diligence reviews, or lack of trust from key partners.

There are many familiar horror stories about breaches originating from vendors, such as the Target breach in 2013 where hackers exploited HVAC vendor credentials to gain access and compromise Target’s payment network, leading to the exposure of 40 million credit card accounts. Another famous example is SolarWinds, in 2020, where a compromised software update impacted thousands of public and private sector organizations globally, and the list goes on. 

Each of these incidents, and many others, could have been mitigated with better vendor risk visibility and controls.

In summary, vendor risk management is essential because it reduces exposure to third-party security incidents, helps meet evolving regulatory requirements, safeguards business continuity and uptime, and  protects brand reputation and customer trust. 

As mentioned, for MSPs and MSSPs, strong VRM isn’t just protection for their own business, it’s also a value-add service that can generate trust, differentiate offerings, and create new revenue opportunities. As the vendor landscape continues to expand, VRM will only grow more central, becoming an essential element in the list of components of cyber risk management.

Types of vendor risks

Vendor Risk Management (VRM) isn’t just about cybersecurity. While digital threats remain front and center, the risks associated with third-party vendors span several domains – from operational risks to reputational and strategic ones. Understanding these risk types is the foundation of an effective VRM program.

For Managed Service Providers (MSPs), Managed Security Service Providers (MSSPs), and any business with a multi-vendor ecosystem, categorizing vendor risks enables better prioritization, targeted mitigation, and a more resilient security posture.

Here’s a breakdown of the primary vendor risk categories every organization should be aware of:

1. Cybersecurity risks

These are the most immediate and often the most damaging risks associated with vendors. When third parties access internal systems, share network infrastructure, or process sensitive data, they can become an unintentional attack vector.

Common cybersecurity risks include unauthorized access to systems or credentials, malware or ransomware introduced via insecure integrations, and data exfiltration or loss due to poor encryption or insider threats. For example, if a marketing agency working with a retail brand suffers a phishing attack, customer data could be exposed without the retailer ever knowing.

Compliance risks

Third-party vendors can compromise your compliance with frameworks like SOC2, HIPAA, GDPR, and ISO 27001. If a vendor fails to uphold contractual or regulatory requirements, your organization may still be held accountable. Consider for example a healthcare provider’s billing vendor storing patient data in violation of HIPAA requirements, resulting in a costly enforcement action to the healthcare provider.

Common compliance risk triggers include:

• Lack of documentation or audit readiness
• Inadequate data protection controls (e.g., encryption, access logging)
• Failure to follow regional data residency laws

3. Operational risks

Vendor performance and reliability are critical to maintaining business continuity. If a vendor fails, whether through downtime, service interruption, or performance degradation, it can disrupt your ability to serve clients. Take as an example a CRM provider that experiences system outages, preventing a B2B sales team from reaching prospects during a product launch – a truly frustrating and damaging experience.

Sources of operational risk include downtime during critical business operations, delayed deliverables from outsourced developers or suppliers, failure to meet service-level agreements (SLAs) and more. 

4. Financial risks

Financial stability matters. A vendor that folds mid-contract or faces insolvency can create ripple effects across your operations. Think about a cloud backup provider that shuts down operations unexpectedly, forcing clients into costly and rushed migration efforts. It’s highly important to take note of financial red flags when working with external vendors. These red flags may include poor financial health or unstable revenue, dependency on a small number of customers, lack of cyber insurance or breach response funds, and more. 

5. Reputational risks

Even if your systems aren’t directly affected, association with a negligent or compromised vendor can damage your brand. Imagine getting your name mentioned in a vendor’s scandal involving improper data resale, prompting customer backlash. Customers may question your due diligence and choose to take their business elsewhere. 

Take note of these potential reputational risk drivers:

• Vendor involved in a data breach or legal scandal
• Public mismanagement of sensitive information
• Negative press tied to unethical vendor behavior

6. Strategic risks

Vendors should align with your long-term security and business strategy. When vendors underperform, shift priorities, or fail to scale with your organization, they become strategic liabilities. Strategic misalignments can include vendors not keeping pace with industry best practices, demonstrating incompatibility with future compliance frameworks, product development stagnation or lack of transparency around roadmap direction. 

Why categorization matters

Each type of risk calls for different assessment questions, mitigation plans, and monitoring strategies. For example, cybersecurity risks may be addressed through security questionnaires and penetration testing, operational risks might require contractual SLAs and uptime tracking, whereas reputational risks could involve ongoing media monitoring or ethical conduct clauses.

Recognizing the full spectrum of vendor risks helps MSPs and MSSPs build stronger, more proactive risk management strategies. When integrated into a broader risk management framework (RMF), this risk-based approach enables smarter vendor selection, more effective monitoring, and a faster response times to issues that arise.

What is the process of vendor risk management?

Vendor Risk Management (VRM) is a continuous, structured process. For MSPs, MSSPs, and security-conscious organizations, implementing an effective VRM program means going beyond ad hoc assessments, by building a repeatable, scalable workflow that supports proactive risk reduction and ongoing compliance.

In this section, we break down a step-by-step approach to VRM that can be adapted and optimized for organizations of all sizes, especially those managing multiple clients or operating in regulated industries.

Step 1: Vendor identification

You can’t secure what is unknown, so the process begins with full visibility.

Create an inventory of all vendors, suppliers, and partners. Include both direct vendors (e.g., cloud providers) and indirect ones (e.g., subcontractors with data access). Capture vendor roles, contact points, and the type of data or systems they engage with and have access to. Lastly, be sure to include vendors integrated via third-party tools (e.g., through API connectors) and track vendors inherited from client environments.

Step 2: Risk categorization

Different vendors come with different risk profiles. A graphic design agency is not equivalent to a cloud hosting provider. Categorization helps prioritize time and resources.

It’s common to categorize vendors by tiers:

• Tier 1: High-exposure vendors connected to essential infrastructure, confidential data, or regulated activities.
• Tier 2: Moderate-risk vendors with indirect access or limited operational impact.
• Tier 3: Low-risk vendors without access to your systems or sensitive data.

Factors to assess in order to decide on tiers include type and volume of data shared, access to critical systems or credentials, vendor’s role in regulated business functions, and potential business continuity impact.

Step 3: Due diligence

Due diligence involves collecting and reviewing information that allows you to assess the vendor’s security posture and compliance readiness.

Information to request includes:

• Security questionnaires (tailored by tier)
• Certifications (e.g., SOC 2, ISO 27001, HIPAA, PCI DSS)
• Audit reports or penetration test results
• Data handling policies
• Incident response plans
• Insurance coverage (cyber liability)

Automation tools like Cynomi can help here by auto-generating, sending, and tracking questionnaires at scale – reducing friction while maintaining consistency.

Step 4: Risk evaluation

Once all the data has been gathered, the next step is to analyze it and identify any gaps, red flags, or weaknesses.

Evaluation methods include:

• Scoring vendors based on control coverage
• Mapping responses against compliance frameworks (e.g., NIST RMF, SOC2)
• Comparing responses against internal security baselines
• Identifying missing safeguards or policy violations

A vendor lacking multi-factor authentication, for example, poses high risk, whereas a vendor that hasn’t updated incident response plans in 2 years poses a moderate risk. It’s recommended to use a centralized VRM dashboard to compare vendors side-by-side and generate automated risk summaries.

Step 5: Remediation planning

When gaps are identified, remediation is key to reducing risk before onboarding or renewal.

Remediation options include requiring specific control implementations (e.g., MFA, endpoint encryption), limiting access or scope of work, introducing additional monitoring for at-risk vendors, or simply offering recommendations and tracking remediation status.

It’s important to provide vendors with clear, time-bound expectations, making remediation a condition of contract execution, and aligning remediation steps with business priorities – to make VRM programs effective over time.

Step 6: Contractual controls

New and renewed legal agreements should reflect security and compliance expectations. Security-related clauses should include data handling protocols, breach notification timelines, security audit rights, SLA-defined response times, compliance with specific frameworks (e.g., HIPAA, GDPR), and whether a vendor can use subcontractors and under what conditions or limitations. If you haven’t already, now would be the time to collaborate with legal and procurement to embed standardized security language across all vendor agreements.

Step 7: Ongoing monitoring

Vendor-related threats aren’t constant; they develop and fluctuate. Continuous oversight is what separates mature VRM programs from reactive ones.

Make sure your VRM process includes some best monitoring practices:

• Annual or bi-annual reassessments
• Security scorecard tools (e.g., BitSight, SecurityScorecard)
• Monitoring for news of breaches or lawsuits
• Alert-based tracking (credential leaks, service outages)

Here too, it’s really helpful to use tools like Cynomi to schedule reassessments, update vendor profiles, and receive posture alerts without manual overhead.

Step 8: Offboarding and post-mortem review

When a vendor relationship ends, security oversight should continue to operate. An effective VRM strategy incorporates an offboarding checklist that includes:

• Termination of all user accounts and API tokens
• Revoking data access and credentials
• Confirming secure deletion of proprietary or client data
• Removing the vendor from access management platforms
• Conducting a performance and compliance review

This step is critical, as many breaches occur after vendor relationships end, due to lingering access or unmonitored data. Post-engagement risk is still a risk.

Building a sustainable VRM workflow

Scaling VRM can feel daunting, but with the right tools and processes, it becomes manageable and delivers measurable ROI.

MSPs and MSSPs managing dozens of vendors across client environments will highly benefit from:

• Automation: Reducing time spent chasing vendors for documents or updating spreadsheets
• Standardization: Using tier-based workflows and templates for faster onboarding
• Integration: Aligning vendor oversight with overall compliance and risk management strategy
• Visibility: Maintaining a centralized view of vendor posture across all accounts

The VRM process isn’t a checkbox, it’s a lifecycle. From onboarding to offboarding, every step should be designed to reduce exposure, ensure compliance, and maintain business continuity. By building structured, repeatable workflows, and leaning on automation where possible, security teams and service providers can turn VRM into a scalable, high-impact discipline.

The key to a successful and scalable VRM strategy

Implementing Vendor Risk Management (VRM) is one thing, but scaling it effectively across multiple vendors, clients, and environments is another. For MSPs, MSSPs, and organizations managing complex vendor ecosystems, the key to success lies in building a VRM strategy that is scalable, repeatable, and aligned with business priorities.

A successful VRM program balances thorough risk oversight with operational efficiency. It ensures that high-risk vendors get the attention they deserve, while routine assessments don’t drain valuable resources. Here’s how to build a VRM strategy that works at scale.

1. Establish clear ownership and governance

One of the most common pitfalls in VRM is unclear accountability. When no one “owns” vendor risk, it gets lost between procurement, legal, and security teams.

It’s highly recommended to appoint a dedicated VRM lead (or team) responsible for oversight, define roles for each stakeholder (procurement, IT, legal, compliance), and ensure alignment with broader risk management frameworks and compliance programs.

For MSPs and MSSPs, this may mean centralizing VRM ownership within security operations or compliance functions, so vendor governance remains consistent across clients.

2. Standardize onboarding and risk tiering workflows

Standardization is the secret to scaling. Without it, vendor assessments can become inconsistent, subjective, and resource-heavy.

Here are the main elements that should be standardized:

• Risk tiering: Use predefined criteria (e.g., data sensitivity, system access) to classify vendors into tiers.
• Questionnaires and assessments: Automate security questionnaires based on tier level.
• Remediation expectations: Set standard protocols for addressing identified risks.

Automation tools can simplify this standardization process by offering out-of-the-box workflows, tiering logic, and templates tailored for MSP/MSSP environments.

3. Integrate VRM with compliance and security platforms

VRM should be integrated within your broader compliance and risk management strategy. This integration streamlines processes, reduces duplication of effort, and ensures that vendor risk oversight supports broader security goals.

It’s highly recommended to map vendor assessments to compliance frameworks like SOC2, ISO 27001, NIST, HIPAA, and others, connect with internal GRC systems or cybersecurity platforms for unified reporting, and ensure vendors’ risk scores inform broader security postures and client risk assessments.

4. Align risk scoring with business priorities

Not all risks carry the same weight. A strong VRM strategy ties risk scoring and prioritization to business impact and acceptable risk levels.

Make an effort to understand and map vendor risk scoring to the potential financial, operational, or reputational impact, including input from executive leadership on acceptable risk levels, and use scoring models that factor in both qualitative and quantitative data.

For MSPs and MSSPs, this means tailoring risk scoring models to each client’s risk appetite, so that risk mitigation plans reflect what truly matters to them.

5. Automate evidence collection, monitoring, and reporting

Manual VRM processes are a bottleneck to scaling. Automating evidence collection, vendor assessments, and continuous monitoring is essential to keep pace with growing vendor ecosystems without overburdening your team.

Automation presents several important advantages:

• Eliminating repetitive outreach for documentation (questionnaires, certifications)
• Monitoring vendor posture in real-time (e.g., security scorecards, breach alerts)
• Generating standardized reports for clients or internal stakeholders

6. Foster a feedback loop for vendor improvement

Successful VRM is not just about identifying risks – it’s also about improving vendor security over time. Building a feedback loop helps vendors remediate issues, align with your standards, and grow as partners. This collaborative approach strengthens relationships and reduces overall risk exposure across your vendor base.

Here are a few tips on how to foster vendor improvement:

• Clearly share findings and expectations with vendors
• Provide support or resources for remediation where possible
• Track vendor progress over time, and reassess at regular intervals
• Reward high-performing vendors with preferred status or extended contracts

7. Maintain a centralized view for multi-vendor environments

For MSPs and MSSPs, managing vendor risks across multiple clients demands a centralized dashboard. This allows for visibility across vendor tiers, clients, and geographies, making it easier to spot systemic risks and to streamline reporting. Centralization helps in consolidating vendor risk data across clients for quick analysis, effortlessly generating multi-client or client-specific reports, and identifying trends (e.g., repeated risks among similar vendors) and adjusting strategy accordingly.

Scaling VRM as a Service

For MSPs and MSSPs, an effective VRM strategy reduces risk but can also create new revenue opportunities, offering Vendor Risk Management-as-a-Service (VRMaaS). This type of service allows service providers to differentiate their cybersecurity offerings, and generate ongoing value through continuous monitoring and reporting of vendor related risks and security posture.
When VRM is standardized, automated, and integrated, it becomes an efficient, scalable service, not a resource drain. 

How Cynomi supports vendor risk management

Building an effective Vendor Risk Management (VRM) program can be resource-intensive, especially for MSPs and MSSPs managing multiple clients across diverse environments. That’s where Cynomi comes in.

As the AI-powered vCISO platform purpose-built for service providers, Cynomi helps automate and streamline the end-to-end VRM process, making it scalable, repeatable, and efficient. It empowers even lean security teams to deliver expert-level vendor oversight across their client base, without additional headcount or manual overhead.

Here’s how Cynomi transforms VRM into a manageable and profitable service offering.

AI-powered third-party risk assessments

Cynomi automates vendor risk assessments using AI, infused with seasoned CISO knowledge. Instead of relying on spreadsheets or manually built questionnaires, Cynomi:

• Generates tailored impact and vendor security risk assessments aligned with the level of access, data sensitivity, and regulatory requirements
• Provides pre-built, customizable questionnaires that help collect the right information from vendors
• Guides users step-by-step through vendor risk evaluation, ensuring even junior team members can deliver CISO-level insights

By automating the assessment process, Cynomi significantly reduces manual workload, enabling service providers to assess more vendors in less time.

Automated evidence collection and compliance mapping

With Cynomi, gathering documentation from vendors, such as security certifications (SOC2, ISO 27001), policies, or audit reports, is automated and centralized. The platform also maps vendor responses to leading compliance frameworks, ensuring that vendor risk management is fully aligned with clients’ broader compliance strategies. This is a critical advantage for service providers aiming to deliver end-to-end security and compliance services.

Continuous monitoring of vendor posture and gaps

Cynomi doesn’t stop at assessments. It provides ongoing visibility into vendor compliance gaps and risk posture. As vendor environments shift, Cynomi continuously tracks alignment with security frameworks, highlights gaps, and recommends remediation steps, ensuring vendors improve over time.  This continuous monitoring enables proactive risk reduction, ensuring that vendor oversight remains dynamic – not reactive.

Centralized multi-tenant management for service providers

Built for MSPs and MSSPs, Cynomi’s multi-tenant support enables service providers to oversee vendor risks across multiple clients or departments from a single, centralized platform. This helps MSPs/MSSPs to: 

• Gain a consolidated view of vendor risks across all client environments
• Easily generate client-specific reports for audits, executive briefings, or compliance readiness
• Deliver VRM-as-a-Service (VRMaaS) without duplicating effort across clients

This centralized approach ensures consistency, improves efficiency, and enables scalable delivery of vendor risk management services.

Align vendor oversight with broader cybersecurity programs

Cynomi  is a complete cybersecurity and compliance management hub. The platform ensures vendor oversight is fully integrated with risk assessments, compliance readiness, remediation planning, and cyber posture reporting. This means that vendor risks are factored into client-wide risk profiles; that compliance gaps, whether internal or vendor-related, are visible in one place; and that service providers can track and improve overall client security maturity, demonstrating measurable value.  This integration makes Cynomi the ideal platform for delivering cohesive, end-to-end security services that align vendor oversight with broader cyber risk management.

Summary: The Cynomi advantage for VRM

For MSPs and MSSPs, Cynomi offers a VRM solution that is:

• Automated: Minimizes manual effort with AI-driven workflows
• Scalable: Handles vendor oversight across multiple clients or departments
• Aligned: Connects vendor risks to relevant compliance frameworks and client-specific priorities
• Accessible: Empowers even junior staff to deliver expert-level VRM services
• Efficient: Saves time, reduces costs, and delivers measurable results – fast

By streamlining and standardizing VRM, Cynomi enables service providers to grow their cybersecurity offerings, support clients more effectively, and differentiate their services in a crowded market.