Vendor Risk Management: What It Is and Why It Matters in 2025

Whether you’re onboarding a new business partner or scaling your vendor network, your company should always mitigate potential risks when managing vendor relationships. A single third-party security breach can slow down contracts, create compliance headaches, and even put your business revenue at risk.

For high-growth companies, vendor risk management (VRM) is the solution, as it keeps operations and deals moving while you focus on scaling up. However, managing vendor risk is more complex than ever, with proper diligence and practice required for evolving regulations. 

This guide shows you how to utilize vendor risk management to reduce operational, regulatory, and financial risk. We cover why VRM matters, best practices and automation tools to consider, and how to create a good vendor risk management program that evolves with your business. 

What is Vendor Risk Management (VRM)? 

So, what is vendor risk management? VRM is the process of identifying, evaluating, and mitigating the risks that third-party vendors can introduce to your business, from compliance gaps to security vulnerabilities. This process is done before a business relationship is established and also during the duration of a business contract. 

Third-party vendors are any external vendors that provide a product or service to your business. Because they have a direct connection to your internal processes and technologies, they can increase your chance of cybersecurity attacks and data breaches even if you have strong data protection.  

Why is Vendor Risk Management Important? 

Even a single high-risk vendor can have a significant impact on your security posture. A robust vendor risk management program within the supply chain thoroughly vets any newly onboarded third-party vendor and regularly assesses existing vendors. 

Once you have visibility into your third-party vendor risk exposure, you can make informed decisions on which vendor relationships are safe and which should be avoided. 

If there’s no structured VRM program, your company will rely on ad hoc checks, manual spreadsheets, or inconsistent evaluations, which leaves gaps that can result in vendor security breaches. 

A strong third-party risk management program will: 

• Protect your business from security breaches, operational failures, and regulatory fines.
• Accelerate vendor onboarding.
• Streamline mitigation and remediation. 
• Develop accountability for both your business and vendors. 
• Allow teams to focus on core business functions.
• Turn risk management from a reactive task into a strategic enabler for business growth. 

Why Do I Need to Manage Vendor Risks?

Common third-party vendors like contractors, manufacturers, and service providers, introduce various risks. This is especially high in specific industries like healthcare or legal, and if they regularly handle sensitive or confidential information on your behalf. Even if your internal security is strong, vendors can bring a high cybersecurity risk. 

A narrow focus on performance metrics like KPIs or SLAs isn’t enough to protect your business—you need thorough third-party risk management. In 2025, the most significant risks from vendors are reputational, financial, and regulatory, like security data breaches, cybersecurity threats, and compliance violations. 

Here are some common vendor risk categories:

• Cybersecurity Risk and Data Privacy: Manage how much information a vendor has access to, to eliminate unauthorized access to sensitive data or breaches in security practices.
• Financial Stability: Vendors facing financial instability may be unable to deliver services reliably, impacting business operations. 
• Compliance and Regulatory: Vendor non-compliance, whether through legal or regulatory breaches, including HIPAA, GDPR, or industry-specific requirements, can threaten business continuity. 
• Operational Resilience: Evaluate a vendor’s business continuity capabilities to determine the risk of operational disruptions within the vendor and your business, including poor processes, downtime, or inadequate disaster recovery.
• Reputational Concerns: Vendor misconduct will reflect on your brand, affecting customer confidence and future partnerships.

How Do I Create an Effective Vendor Risk Management Framework? 

A robust vendor risk management framework provides the structure that you need to manage the life-cycle of third-party vendor risk management, from vendor selection to onboarding, contract negotiations, and beyond. The same criteria should be applied to all vendors and adapted to the product or service they provide for you. 

You can build your vendor risk management framework around these core components:

1. Define Objectives 

Start by establishing what your VRM program aims to achieve. Is it for protecting business revenue, meeting strict regulatory requirements, or improving the vendor onboarding process? Outline clear objectives to guide every decision in your framework.

2. Classify Vendors 

Not all vendors carry the same risk. It’s better to categorize vendors by risk levels by segmenting vendors based on criticality, risk exposure, and potential impact on operations or revenue. This helps separate critical vs non-critical vendors, prioritize assessments, and allows for efficient resource allocations. 

3. Outline Policies and Controls 

Document the standards, procedures, and controls that govern your vendor interactions. These include security requirements, service level expectations, and other policies that provide consistency and reduce gaps. When policies and controls aren’t established, this can lead to operational or compliance issues.

4. Assign Roles and Responsibilities

Clarify the key stakeholders who own every stage of the VRM process, from initial risk assessments to monitoring, reporting, and mitigating. Establish a work flow for effective cross-department collaboration between operational, legal, and information security teams. Assigning roles and responsibilities beforehand means quick follow-ups, better decision-making, and fewer bottlenecks at key VRM stages. 

5. Implement Ongoing Monitoring 

Integrate continuous monitoring and periodic reassessments based on vendor risk level into your VRM framework to detect changes in vendor performance, compliance, and security posture. 

Automation in VRM monitoring is a popular option in 2025 as it provides thorough vendor oversight, continuous data collection, real-time risk detection, and proactive monitoring for increased accuracy, compared to manual processes. 

Workstreet and Vanta’s AI-powered and streamlined VRM solution saves you time and money by automating your VRM process. Find out more here. 

In addition to building your VRM framework around core components, we recommend:

• Identify and outline all challenges, including checking S3 permissions, GDPR for businesses that operate in the EU, and privacy or user consent requirements.
• Ensure your entire organization and the vendor organization is on-board before starting, for total compliance.
• Outline how vendor risk monitoring and management will occur, the feedback and review process, and how risk exposures will be mitigated in a clear and shareable document that can be accessed at any time.   

A good vendor risk management framework should streamline the entire process of VRM. Once this framework is established, vendor partnerships can be streamlined further. 

For this, management teams need to move from a linear vendor lifecycle to an ongoing vendor risk management model, designed to keep stakeholders informed at every stage of your organization’s vendor risk management efforts. 

How To Perform a Vendor Risk Assessment in 5 Steps 

A structured vendor risk assessment ensures your vendor relationships are secure, compliant, and don’t slow down your business as you focus on growth. 

Wondering how to perform a VRM assessment? Once you’ve assigned clear ownership and provided the tools to track vendors, assess risk, and flag issues, here are 5 steps to follow: 

1. Gather Vendor Information

Collect all available information about each vendor, including publicly available security documentation, financials, and compliance certifications. Use this information to assess risk before engaging. The more comprehensive the information gathered, the more you can streamline your vendor risk assessment workflow.

2. Conduct Due Diligence

Verify the information provided and review factors like past vendor performance and security audits. Effective due diligence helps you identify potential issues and critical vendors that could impact your operations and revenue down the line. 

3. Evaluate Risk and Impact 

Generate a list for each vendor, focusing on those that bring the greatest risk to your business. These could be regular security breaches and operational disruptions. Some risks may require follow-up, so you can request additional information when needed. Scoring vendors based on their risk helps you focus resources where they’re needed. 

4. Review and Document 

Document your findings with detailed commentary, risk ratings, and recommendations based on the evidence collected. This helps to form the vendor’s overall risk profile, and also ensures consistent documentation processes to help with communication within internal teams and to vendors.

5. Reassess Periodically 

Vendor risk and compliance requirements are always evolving. Conduct periodic reassessments and ongoing monitoring to identify and mitigate changes in vendor performance and security posture. Share the ongoing monitoring plan with stakeholders to ensure future contract negotiations and revenue won’t be affected. 

Vendor Risk Management Best Practices

Establishing vendor risk management best practices helps you strengthen compliance, reduce cybersecurity breaches, and manage vendor risk as best as possible.

As your business grows and scales in 2025, consider adopting some of these best practices to ensure your VRM program stays efficient and accurate. 

Establish Clear SLAs

Define service level agreements that outline security requirements, vendor responsibilities, and performance expectations. Clear SLAs make it easier for you to identify and mitigate vendor risks while setting a baseline for accountability to reduce misunderstandings down the line. 

Keep an Up-To-Date Inventory of Vendors

All third-party vendors should be accurately listed and categorized on a regular basis. Without a clear and complete list, it’s easy for high-risk vendors to slip through the cracks, making it more difficult to identify and figure out future security breaches. 

Practice Continuous Monitoring 

Regular check-ins with vendors ensure new issues are caught early and priorities are aligned. Ongoing security assessments and continuous monitoring should be prioritized to detect new vulnerabilities as they escalate. 

Maintain Incident Response and Contingency Plans 

Ensure your VRM program is tied into your broader incident response strategy and establish contingency plans. This will help you develop clear action steps when a data breach occurs or a vendor falls below standards. 

Automate Vendor Risk Management with Workstreet + Vanta 

Workstreet + Vanta offers a comprehensive solution that addresses each stage of vendor risk management, from policy creation through implementation and evidence generation. We combine our expertise with Vanta’s cutting-edge VRM automation tools to bring: 

• Expert Guidance: Our virtual CISO services ensure your VRM procedures are tailored for your business and industry.
• Seamless Automation: We implement and optimize VRM’s automation tools to improve your workflow and enable questionnaires, approvals, and evidence collection to run automatically.
• Continuous Improvement: We work closely with you to refine your VRM process as new threats and regulations evolve. 
• Audit-Ready: Stay prepared for any audit with our expert oversight and Vanta’s automated evidence collection process. 

See how Workstreet can streamline your vendor risk management process here. 

FAQs: Vendor Risk Management 

How can I integrate VRM into existing compliance initiatives? 

VRM works best when it’s part of your broader compliance framework, as it complements SOC 2, ISO 27001, and other compliance frameworks. Link vendor assessments to your existing policies, audits, and reporting workflows so that risk data flows directly into the systems your teams already use. 

Do I still need VRM if my business only has a few critical vendors? 

Yes. Even a small number of vendors can introduce potential risks, especially if they’re critical to your business revenue or operations. A proper VRM framework provides structure for due diligence and prevents overreliance on specific vendors, even if you only have a few.  

How often should vendor risk assessments be conducted?

The frequency will depend on vendor type, their risk level, and regulatory requirements. Vendors noted as high-risk or critical should be assessed regularly (at a minimum, annually) and monitored continuously, especially with significant changes in regulatory updates, security incidents, and services.

Can my small businesses implement VRM with limited resources?

A simplified approach that focuses on the most critical vendors can be prioritized. Over time, and if resources allow, the program can be gradually expanded. If you have limited resources, automated VRM tools are also worthwhile. They can help distribute questionnaires, monitor vendor risk in real-time, and generate reports quickly, without adding headcount.