What is Inherent Risk in Vendor Management?

inherent risk

As organizations expand their digital supply chains and adopt new technologies to be more efficient, third-party risk goes up. In the context of vendor risk management (VRM), inherent risk is a useful tool to measure and manage the risk associated with each third-party vendor.

What is Inherent Risk?

Inherent risk is the threat a certain element, such as a third party vendor, poses to the organization before executing any mitigation activities or doing anything to reduce the likelihood of a mishap.

How Do You Measure Inherent Risk?

The Bitsight VRM solution measures inherent risk based on custom risk categories defined by our users, which automate the scoring and prioritization of third-party vendors.

It takes into account how a company is using their vendors, including but not limited to the levels of engagement, the amount, and types of data shared with them.

Why is Inherent Risk Relevant to Third-Party Risk Management?

Companies can have hundreds or thousands of third-party vendors in ever-growing supply chains. They need to be able to focus on the highest risks, as opposed to subjecting every vendor to the same scrutiny. 

Inherent risk is a practical tool to differentiate and categorize each one of them, analyzing how a company is using their vendors, suppliers, and providers, and what risk they pose to the organization.  

Different companies engage with vendors in different ways, and that’s why measurement is unique to each organization. The inherent risk of a third-party vendor that handles sensitive data and network access, such as a cloud provider, will be much higher than that of a janitorial services provider. Therefore, it will need a much more thorough assessment and deliberate third party risk management.

How to Calculate Inherent Risk

It is very important to put a framework in place. The first step is to understand what categories are important to you, as well as the way you want to weigh them — is one more important than the other? How?

You must take into account the following questions:

  • What type of information are you sharing? (i.e. PHI, PII, Financial and Proprietary data)
  • How much data are you sharing with the vendor?
  • Is this data in scope for legal or regulatory concern? (i.e. GDPR, CCPA, NYDFS, etc.)
  • How large is your engagement with the vendor and how important is it for your business operation?
  • How easy is it to replace the vendor with another one?

After you create your framework, you will be able to map your inherent risk measurement and then gather data to actually perform your measurements. Those two things should be done early on in the risk management process, because they will make it easier on the backend.

How Can Bitsight Facilitate Measuring Inherent Risk?

Bitsight VRM allows you to use your custom risk categories to measure and score inherent risk on each third-party vendor across your supply chain, helping you simplify and automate the process.

From a reporting perspective, this allows for unparalleled visibility and metrics around inherent risk of vendors for the following reasons:

  • It allows you to tie your inherent risk framework to your entire vendor due diligence process.
  • It makes it very easy to see what third parties have high and low inherent risk, and to report on that specific score across a number of different types of filters.

Organizations using Bitsight VRM are more readily addressing their inherent risks and are working in a more efficient and strategic way. Inherent risk will definitely grow in importance because it is a much more strategic way to segment third-party vendors and to perform due diligence.