Vendor Risk Management: A Strategic Framework

Executive Summary

Vendor risk management is the systematic process of identifying, assessing, and mitigating security, compliance, operational, and financial risks introduced by third party suppliers and service providers. As organisations increasingly rely on external vendors for critical functions, ranging from cloud infrastructure to payment processing, the security posture of these vendors directly impacts the resilience of the entire organisation.

In Australia, regulatory expectations around vendor risk management have intensified. Financial institutions face heightened scrutiny under APRA CPS 234, which mandates robust oversight of material service providers. Meanwhile, privacy obligations under the Privacy Act 1988 require organisations to ensure third parties handle personal information responsibly. Furthermore, government agencies and critical infrastructure operators must align with the ASD Information Security Manual, which includes specific controls for managing third party relationships.

This guide explains what vendor risk management is, why it matters, and how to build a structured programme that protects your organisation from third party threats. It covers the vendor risk management lifecycle, key frameworks and standards, and practical implementation advice for Australian organisations.

What Is Vendor Risk Management?

Vendor risk management is the discipline of evaluating and controlling risks associated with third party suppliers, service providers, and business partners. The terms “vendor risk management,” “third party risk management,” and “supplier risk management” are often used interchangeably, though some organisations reserve “vendor” for commercial suppliers and “third party” for a broader set of external entities including contractors, consultants, and joint venture partners.

At its core, vendor risk management focuses on four risk categories:

Security risk arises when vendors have access to sensitive data or systems. A compromised vendor can serve as an entry point for attackers. For instance, the 2013 Target breach originated through an HVAC contractor’s compromised credentials (Krebs, 2014). More recently, the MOVEit file transfer vulnerability in 2023 affected hundreds of organisations worldwide, demonstrating how a single vendor’s weakness can cascade across supply chains (CISA, 2023).

Compliance risk emerges when vendor practices conflict with regulatory requirements. Organisations remain accountable for compliance even when functions are outsourced. Consequently, if a vendor fails to meet data protection standards, the organisation may face penalties. For example, organisations subject to the Privacy Act 1988 must ensure vendors handling personal information comply with Australian Privacy Principles (OAIC, 2023).

Operational risk relates to service delivery and business continuity. Vendor outages, performance degradation, or sudden contract terminations can disrupt operations. Therefore, organisations must assess vendor financial stability, disaster recovery capabilities, and exit strategies.

Financial risk includes cost overruns, hidden fees, and vendor insolvency. Although financial risk management often sits outside the security function, it intersects with vendor risk management when evaluating the long-term viability of critical suppliers.

Why Vendor Risk Management Matters

Third Party Breaches and Supply Chain Attacks

Third party compromises have become one of the most prevalent attack vectors. According to the Verizon 2023 Data Breach Investigations Report, supply chain attacks increased significantly, with attackers targeting software vendors and managed service providers to gain access to downstream customers (Verizon, 2023). The SolarWinds attack in 2020 compromised approximately 18,000 organisations through a trojanised software update, illustrating how a single vendor breach can propagate widely (CISA, 2021).

In addition, the Kaseya ransomware incident in July 2021 affected over 1,500 organisations through a vulnerability in the vendor’s remote management software (CISA, 2021). These incidents underscore a critical reality: your security is only as strong as your weakest vendor.

Australian Regulatory Landscape

Australian organisations face specific regulatory obligations that mandate vendor risk management practices.

APRA CPS 234 applies to APRA-regulated entities, including banks, insurers, and superannuation funds. It requires these organisations to maintain an information security capability commensurate with their size and complexity, explicitly including oversight of material service providers. Specifically, CPS 234 mandates that entities “implement controls to protect information assets commensurate with the sensitivity and criticality of those assets” and “manage information security risks associated with third parties” (APRA, 2019).

The Privacy Act 1988 and Australian Privacy Principles (APPs) require organisations to take reasonable steps to ensure third parties handling personal information comply with the APPs. APP 8.1 states that before an organisation discloses personal information to an overseas recipient, it must take reasonable steps to ensure the recipient does not breach the APPs (OAIC, 2023). Consequently, vendor due diligence is not optional for organisations processing personal data.

The ASD Information Security Manual (ISM) provides guidance for government agencies and critical infrastructure operators. The ISM includes controls for managing third party access, assessing third party security, and ensuring secure disposal of data by third parties (ASD, 2024). Organisations seeking IRAP certification must demonstrate compliance with relevant ISM controls, including those related to vendor management.

Reputational and Operational Consequences

Beyond regulatory penalties, vendor-related incidents can cause significant reputational damage. When a vendor breach exposes customer data, the affected organisation faces public scrutiny, customer attrition, and loss of stakeholder trust. In addition, operational disruptions from vendor failures can halt business processes, delay product launches, and erode competitive advantage.

The Vendor Risk Management Lifecycle

Effective vendor risk management is not a one-time activity but rather a continuous lifecycle that begins before vendor engagement and extends through contract termination.

Onboarding and Due Diligence

The vendor lifecycle begins with discovery and initial assessment. Before engaging a vendor, organisations should conduct due diligence to evaluate security posture, compliance certifications, and operational maturity.

Vendor discovery involves identifying all third parties with access to systems, data, or facilities. This step often reveals “shadow IT” vendors procured outside formal channels. Consequently, organisations should maintain a vendor inventory that includes vendor name, services provided, data access level, and contract details.

Security questionnaires are a primary due diligence tool. These questionnaires assess vendor practices across domains such as access control, encryption, incident response, and business continuity. Standardised frameworks such as the Consensus Assessments Initiative Questionnaire (CAIQ) or the Standardised Information Gathering (SIG) questionnaire provide a baseline set of questions. However, organisations should tailor questionnaires to their specific risk profile and regulatory requirements.

Compliance certifications provide evidence of vendor maturity. Common certifications include ISO/IEC 27001, SOC 2 Type II, PCI DSS, and IRAP. Organisations should verify certifications are current and cover the services in scope. For instance, a vendor may hold ISO 27001 certification for its corporate network but not for the cloud environment hosting customer data. Therefore, organisations must ensure certifications align with the services being procured.

Contract reviews should incorporate security and compliance requirements. Key contractual provisions include data ownership, breach notification timelines, audit rights, subcontractor management, and liability limitations. In Australia, contracts should address cross-border data transfers and compliance with the Privacy Act 1988.

Risk Assessment and Classification

Once due diligence is complete, organisations should classify vendors based on risk. A common tiering model includes:

Critical vendors provide essential services where failure would cause significant operational, financial, or reputational harm. Examples include cloud infrastructure providers, payment processors, and core banking systems. Critical vendors warrant the most rigorous assessment and ongoing monitoring.

High-risk vendors have access to sensitive data or systems but are not essential to core operations. Examples include HR systems, email security providers, and CRM platforms. These vendors require thorough assessment and periodic review.

Medium-risk vendors have limited access to non-sensitive data or provide non-critical functions. Examples include office supply vendors, marketing platforms, and training providers. Assessment can be streamlined through questionnaires and attestations.

Low-risk vendors have no access to data or systems and provide commodity services. Examples include catering services, facilities management, and courier services. Minimal assessment is required, though organisations should still verify basic legal and financial standing.

Risk classification should consider both inherent risk (the risk before controls) and residual risk (the risk after vendor controls are applied). This distinction helps prioritise remediation efforts.

Ongoing Monitoring

Vendor risk is not static. Security postures degrade over time due to personnel changes, configuration drift, and emerging threats. Therefore, organisations must implement continuous monitoring to detect changes in vendor risk profiles.

Continuous assessments involve periodic reassessments of vendor security. Critical vendors may be reassessed quarterly, while lower-risk vendors may be reviewed annually. Reassessments should focus on changes since the last review, such as new compliance certifications, recent security incidents, or changes in data access.

Security scorecards provide real-time visibility into vendor security posture. These tools scan external-facing infrastructure for vulnerabilities, misconfigurations, and indicators of compromise. Scorecards complement traditional questionnaires by providing objective, evidence-based assessments. However, organisations should recognise that scorecards focus on external attack surface and may not capture internal controls or compliance practices.

Incident notifications should be contractually mandated. Vendors should commit to notifying the organisation of security incidents, data breaches, and significant outages within defined timeframes. In Australia, the Notifiable Data Breaches (NDB) scheme under the Privacy Act 1988 requires organisations to notify affected individuals and the OAIC of eligible data breaches. Consequently, vendor contracts should align incident notification timelines with NDB obligations.

Offboarding

When vendor relationships end, organisations must ensure data is securely returned or destroyed and access is revoked.

Data return or destruction should follow contractual terms. Organisations should verify that all copies of their data, including backups, have been deleted or returned. Destruction should be certified through attestation or audit evidence.

Access revocation involves disabling vendor accounts, revoking API keys, and removing network access. Organisations should conduct a final access review to ensure no residual permissions remain.

Knowledge transfer ensures continuity of operations. Before offboarding, organisations should document configurations, integrations, and operational procedures to facilitate transition to a new vendor or in-house team.

Key Frameworks and Standards

Several frameworks provide guidance for vendor risk management. Organisations should adopt frameworks that align with their industry, regulatory environment, and maturity level.

ISO/IEC 27001

ISO/IEC 27001 is an international standard for information security management systems. Annex A.15 addresses supplier relationships, requiring organisations to establish controls for managing information security risks associated with suppliers. Specifically, A.15.1 mandates that information security requirements for mitigating risks associated with supplier access are agreed and documented. Furthermore, A.15.2 requires organisations to monitor, review, and audit supplier service delivery (ISO/IEC, 2022).

Organisations pursuing ISO 27001 compliance must demonstrate effective vendor risk management as part of their certification audit.

SOC 2

SOC 2 is an auditing framework developed by the AICPA for service organisations. It evaluates controls across five Trust Services Criteria: security, availability, processing integrity, confidentiality, and privacy. Vendor risk management is addressed under the “Common Criteria,” which requires service organisations to obtain commitments from vendors and subservice organisations and monitor their performance (AICPA, 2023).

Organisations undergoing a SOC 2 audit must provide evidence of vendor due diligence, ongoing monitoring, and contract management. Auditors often request vendor SOC 2 reports to assess subservice organisation controls.

NIST Cybersecurity Framework

The NIST Cybersecurity Framework (CSF) provides a risk-based approach to managing cybersecurity risk. The “Identify” function includes category ID.SC (Supply Chain Risk Management), which addresses identifying and managing cybersecurity risks within the supply chain. The “Protect” function includes category PR.IP (Information Protection Processes and Procedures), which covers requirements for managing external service providers (NIST, 2023).

NIST CSF is widely adopted in both public and private sectors. Organisations can use NIST CSF as a foundation for vendor risk management programmes, particularly when preparing for compliance audit services.

APRA CPS 234

APRA CPS 234 imposes heightened obligations on APRA-regulated entities. It requires entities to “implement controls to protect information assets commensurate with the sensitivity and criticality of those assets” and “maintain an information security capability commensurate with information security vulnerabilities and threats” (APRA, 2019). Specifically, CPS 234 requires entities to define “who is accountable for information security and the security of information assets,” which extends to third party service providers deemed “material” to operations.

Material service providers are those whose failure would have a significant impact on the entity’s operations, financial position, or reputation. Entities must conduct due diligence on material service providers and include contractual arrangements that facilitate the entity’s ability to manage information security risk. In addition, entities must notify APRA of material information security incidents within 72 hours, which necessitates real-time visibility into vendor security events.

ASD Information Security Manual

The ASD ISM provides security controls for government agencies and organisations handling government data. The ISM includes controls for managing third party access, such as requiring security assessments of third parties before granting access and ensuring third parties comply with security policies equivalent to those of the organisation (ASD, 2024).

Organisations seeking IRAP certification must demonstrate compliance with relevant ISM controls. This often includes evidence of vendor risk assessments, third party access reviews, and vendor incident response procedures. Consequently, vendor risk management is integral to achieving and maintaining IRAP status.

Building a Vendor Risk Management Programme

A structured vendor risk management programme requires governance, clear processes, and enabling technology.

Policy and Governance

A vendor risk management policy establishes the foundation for the programme. The policy should define scope, roles and responsibilities, risk appetite, and escalation procedures. Key questions the policy should address include: Which vendors are in scope? Who is responsible for conducting vendor assessments? What risk thresholds trigger escalation? How are exceptions handled?

Governance structures should include a cross-functional vendor risk committee comprising representatives from IT, security, procurement, legal, and risk management. This committee reviews high-risk vendors, approves exceptions, and monitors programme effectiveness. In addition, the committee should report to senior leadership and the board on vendor risk trends and material incidents.

Risk Appetite and Tiering

Organisations should define risk appetite for vendor engagements. Risk appetite statements articulate the level of risk the organisation is willing to accept. For example, an organisation might state: “We will not engage critical vendors that lack SOC 2 Type II certification or equivalent assurance unless a formal risk acceptance is approved by the CISO and CFO.”

Vendor tiering translates risk appetite into operational practice. Tiering criteria should consider data sensitivity, system criticality, and regulatory obligations. For instance, vendors processing personal health information should be classified as high-risk or critical due to privacy obligations. Similarly, vendors with privileged access to production environments should be classified as critical due to the potential for widespread impact.

Assessment Methodologies

Organisations should employ a range of assessment methods tailored to vendor risk tier.

Questionnaires are efficient for initial assessments and ongoing reviews. However, questionnaires rely on vendor self-attestation, which may be inaccurate or incomplete. Therefore, organisations should validate questionnaire responses through document review, such as examining compliance certifications, penetration test reports, and incident response plans.

On-site audits provide the highest level of assurance but are resource-intensive. On-site audits are typically reserved for critical vendors or vendors with significant gaps identified through questionnaires. Audits should focus on key control areas such as access management, change control, and incident response.

Third party certifications and attestations reduce assessment burden. Organisations should accept certifications such as ISO/IEC 27001, SOC 2 Type II, and PCI DSS as evidence of control maturity. However, certifications should be verified for currency and scope alignment. In addition, organisations should review audit reports rather than relying solely on certificates, as reports provide detailed findings and exceptions.

Technology and Automation

Manual vendor risk management does not scale. Organisations with hundreds or thousands of vendors require technology to automate discovery, assessment, and monitoring.

GRC platforms centralise vendor data, automate questionnaire distribution, and track remediation. Leading GRC platforms integrate with procurement systems to trigger vendor assessments automatically when new vendors are onboarded. In addition, GRC platforms support managed compliance programmes by providing dashboards, reporting, and audit trails.

Vendor risk management solutions provide specialised capabilities such as continuous monitoring, security scorecards, and threat intelligence. These tools scan vendor infrastructure for vulnerabilities, misconfigurations, and data breaches. Consequently, they provide real-time visibility into vendor security posture, complementing periodic questionnaires.

Integration with procurement ensures vendor risk management is embedded in procurement workflows. Procurement systems should trigger security reviews before contracts are signed, preventing unauthorised vendor engagements. In addition, integration enables procurement teams to view vendor risk ratings when making sourcing decisions.

Common Pitfalls and How to Avoid Them

Despite the maturity of vendor risk management practices, organisations frequently encounter common challenges.

• Treating all vendors the same leads to wasted resources and missed risks. Organisations should apply risk-based tiering to focus effort on critical and high-risk vendors. Low-risk vendors require minimal oversight, freeing resources for higher-priority assessments.
• Over-reliance on self-attestation creates blind spots. Vendor questionnaires provide a starting point, but organisations should validate responses through document review, third party certifications, and periodic audits. In addition, organisations should use security scorecards to objectively assess external attack surface.
• Point-in-time assessments fail to detect changes in vendor risk. Security postures degrade over time. Therefore, organisations should implement continuous monitoring and periodic reassessments to maintain visibility into vendor risk.
• Siloed ownership fragments accountability. Vendor risk management requires collaboration across IT, security, procurement, legal, and business units. Organisations should establish a cross-functional governance structure and define clear roles and responsibilities.
• Lack of offboarding controls leaves residual risk. Organisations often focus on onboarding but neglect offboarding. Consequently, former vendors may retain access to systems or data long after contracts end. Offboarding checklists should ensure data return, access revocation, and knowledge transfer.

How CyberPulse Supports Vendor Risk Management

CyberPulse provides comprehensive vendor risk management services tailored to Australian organisations. Our approach combines deep regulatory expertise, practical assessment methodologies, and enabling technology to help organisations build and sustain effective vendor risk programmes.

Vendor risk assessments conducted by CyberPulse evaluate vendor security, compliance, and operational maturity. We tailor assessments to your industry and regulatory requirements, incorporating frameworks such as ISO/IEC 27001, SOC 2, APRA CPS 234, and the ASD ISM. Our assessments provide actionable findings and risk ratings to inform vendor selection and ongoing monitoring.

GRC platform deployment and management enables scalable vendor risk programmes. CyberPulse deploys and manages leading GRC platforms, automating questionnaire distribution, remediation tracking, and reporting. We integrate GRC platforms with procurement systems to embed vendor risk management in business workflows.

Policy and framework development establishes governance and standardises processes. CyberPulse develops vendor risk management policies, vendor tiering models, and assessment methodologies aligned with your risk appetite and regulatory obligations. Our policies provide clear guidance for procurement, IT, and security teams, reducing ambiguity and ensuring consistency.

Ongoing monitoring and reporting maintains visibility into vendor risk. CyberPulse provides continuous monitoring services, including security scorecard tracking, compliance certification reviews, and vendor incident monitoring. We deliver executive dashboards and board-level reporting to keep leadership informed of vendor risk trends and material changes.

CyberPulse also integrates vendor risk management with broader security and compliance programmes, including ISO 27001 compliance, SOC 2 audit, and managed compliance. For organisations requiring strategic guidance, our virtual CISO services provide fractional leadership to oversee vendor risk programmes and align them with enterprise risk management.

To learn more about how CyberPulse can support your vendor risk management programme, contact us.

Frequently Asked Questions

What is vendor risk management?

Vendor risk management is the process of identifying, assessing, and mitigating security, compliance, operational, and financial risks introduced by third party suppliers and service providers. It encompasses the entire vendor lifecycle, from due diligence and onboarding through ongoing monitoring and offboarding.

Why is vendor risk management important?

Vendor risk management protects organisations from third party breaches, regulatory non-compliance, operational disruptions, and reputational damage. As organisations increasingly rely on external vendors for critical functions, vendor security directly impacts organisational resilience. In addition, Australian regulations such as APRA CPS 234 and the Privacy Act 1988 mandate vendor risk management practices.

What is the difference between vendor risk management and third party risk management?

The terms are largely interchangeable. However, some organisations use “vendor” to refer specifically to commercial suppliers and “third party” to encompass a broader set of external entities including contractors, consultants, and joint venture partners. In practice, the principles and processes are the same.

How often should vendor risk assessments be conducted?

Assessment frequency depends on vendor risk tier. Critical vendors should be reassessed quarterly or semi-annually. High-risk vendors should be reassessed annually. Medium-risk and low-risk vendors may be reassessed every two to three years. In addition, organisations should conduct event-driven reassessments following security incidents, compliance failures, or significant changes in vendor services.

What are the key components of a vendor risk management programme?

A comprehensive vendor risk management programme includes: a governance structure and policy, vendor inventory and classification, due diligence and onboarding processes, risk assessment methodologies, ong

Useful Links

• Vendor Risk Management Solutions: How Australian Organisations Reduce Third-Party Cyber Risk at Scale
• Vendor Risk Management Platforms Explained

Related Services

• Vendor Risk Management Services

External Resources

• APRA CPS 234 Information Security
• ASD Information Security Manual
• NIST Cybersecurity Framework
• Office of the Australian Information Commissioner