Supply chain and external dependency risk

“Supply chain and external dependency risk” is where good cybersecurity programs fail in operations: critical services depend on software publishers, cloud providers, MSPs, OEMs, integrators, data suppliers, and niche contractors you do not control. C2M2 treats this as a capability you must manage, not a one-time vendor review. The requirement-level expectation is simple: you understand which third parties and external dependencies matter, you evaluate the cyber risk they introduce, and you put enforceable controls around them ¹.

For a CCO or GRC lead, operationalizing this quickly means defining scope (what counts as a third party and what counts as a dependency), building a defensible tiering model, and implementing a repeatable process that gates onboarding and renewals. You also need a practical way to handle reality: inherited vendors, sole-source providers, emergency procurements, and “business says no” moments. This page translates the C2M2 requirement into a set of steps, artifacts, and audit-ready talking points you can implement without turning third-party risk into a months-long academic exercise.

Regulatory text

C2M2 requirement excerpt: “Manage cyber risks from third parties and supply chain dependencies.” ¹

Operator meaning: you need a managed process that (1) identifies third parties and upstream dependencies that could affect confidentiality, integrity, availability, or safety, (2) evaluates risk in a way tied to business/operational impact, and (3) reduces that risk with enforceable requirements and ongoing oversight. C2M2 is a capability model, so assessors will look for consistent execution and evidence, not a single policy document ¹.

Plain-English interpretation (what “good” looks like)

You satisfy the supply chain and external dependency risk requirement when all three conditions are true:

1. You know your dependency chain for critical services. Not just “top vendors,” but what actually underpins operations: SaaS, cloud, managed security, OT service providers, remote access tooling, firmware providers, and data feeds.
2. You treat third-party cyber risk as lifecycle work. Onboarding due diligence, contract controls, and continuous monitoring/refresh are all present.
3. You can prove decisions are made and enforced. Approvals, exceptions, compensating controls, and follow-up remediation are documented and traceable to risk.

Who it applies to (entity and operational context)

This requirement is most relevant where third-party compromise could materially affect service delivery or safety, including:

• Critical infrastructure operators and energy sector organizations using C2M2 as a maturity benchmark ¹.
• Organizations with outsourced IT/OT operations, managed services, cloud-hosted critical workloads, or complex software supply chains.
• Environments where remote access by third parties is common (field maintenance, integrators, OEM support).

Operationally, it applies to teams that onboard, manage, or rely on third parties:

• Procurement and vendor management
• IT/security (including IAM and SOC)
• OT/engineering teams (where applicable)
• Legal/contracting
• Business owners of the service (the “risk owner”)

What you actually need to do (step-by-step)

Step 1: Define scope and ownership (make it executable)

• Define “third party” and “external dependency.” Include affiliates, contractors, consultants, cloud providers, MSP/MSSPs, software publishers, OEMs, and data suppliers.
• Assign clear owners:
  • Program owner (GRC)
  • Risk owner (business/service owner)
  • Control owners (security, IAM, procurement, legal)
• Set decision rights: who can approve onboarding, who can accept risk, and who can approve exceptions.

Deliverable: a one-page RACI plus a written scope statement tied to critical services.

Step 2: Build an inventory that maps to critical services

You need an inventory that answers: “Which third parties could break our most important services?”

• Start from critical services/systems, not from the vendor master list.
• For each service, identify:
  • Third parties with network access, admin access, or data access
  • Dependencies that affect availability (hosting, DNS, CDN, telecom, data pipelines)
  • Suppliers that influence integrity (software updates, firmware, build pipelines)

Practical tip: if you can’t complete the inventory in one pass, start with “top dependencies for top services” and expand.

Deliverable: a dependency register mapped to services and data types.

Step 3: Tier third parties by criticality using a simple model

Create tiers that drive depth of diligence and contract requirements. A workable tiering approach uses:

• Impact: what happens if the third party fails or is compromised (service outage, safety impact, regulatory reporting triggers).
• Access: privileged access, persistent connectivity, ability to change configurations, data sensitivity.
• Replaceability: switching cost and concentration risk (sole-source, long lead times).

Example tier definitions you can defend in audits:

• Tier 1 (critical): admin access and/or supports a critical service; outage or compromise would materially disrupt operations.
• Tier 2 (significant): sensitive data access or important business process; disruption is manageable but painful.
• Tier 3 (standard): low access/low impact; basic controls.

Deliverable: tiering standard + documented tier assignment per third party.

Step 4: Run risk-based due diligence before onboarding (and at renewal)

For Tier 1 and Tier 2 third parties, implement a due diligence package that aligns to your risk factors:

• Security questionnaire tailored to your environment (cloud, OT, data processing)
• Evidence review for key controls (incident response, vulnerability management, access control, logging)
• Dependency-specific questions:
  • Subprocessors and fourth parties
  • Build and update practices for software suppliers
  • Remote access tooling and support processes for service providers

Avoid check-the-box: require remediation plans for gaps that matter.

Deliverable: completed assessment, gap log, and approval record.

Step 5: Enforce security obligations in contracts (make it enforceable)

C2M2’s expectation (“manage cyber risks”) is difficult to prove without contractual controls ¹. For Tier 1 (and often Tier 2), contract clauses should cover:

• Security control requirements (baseline standards, secure access, encryption where relevant)
• Incident notification requirements and timing expectations (use your internal requirement; document it)
• Right to audit or right to request independent assurance (for example, summaries of relevant reports)
• Subcontractor/subprocessor controls (flow-down requirements)
• Data handling, retention, and secure disposal
• Service availability and support expectations for critical dependencies
• Termination assistance and exit (data return, transition support)

Deliverable: contract addendum template + executed agreements or documented exceptions.

Step 6: Implement onboarding gates and technical controls

Policy and contracts do not reduce risk unless onboarding is gated:

• No production access until:
  • Tier assigned
  • Due diligence completed (or exception approved)
  • Contract obligations executed (or exception approved)
• Enforce technical controls aligned to third-party access patterns:
  • Unique identities (no shared accounts)
  • Least privilege and time-bound access for privileged work
  • Logged remote access paths and session review for high-risk access
  • Segmentation where third parties connect to sensitive environments

Deliverable: onboarding checklist embedded into procurement and access provisioning workflows.

Step 7: Monitor and reassess (prove it’s “managed”)

Ongoing oversight should match tier:

• Track material changes: ownership, service scope, access method, breach notifications, new subprocessors.
• Reassess on renewal and when risk changes (major incidents, new integrations, expanded data scope).
• Maintain an exceptions process with compensating controls and expiry dates.

Deliverable: monitoring log, renewal reassessments, exception register.

Step 8: Test failure scenarios for critical dependencies

For Tier 1 dependencies, run tabletop exercises that include third-party failure:

• Provider outage
• Compromised remote access credentials
• Supplier security incident affecting your environment
• Emergency vendor replacement / manual processing workaround

Deliverable: exercise plan, results, action items, and remediation tracking.

Required evidence and artifacts to retain (audit-ready)

Keep artifacts that show the process exists and is followed:

• Third-party and dependency inventory mapped to critical services
• Tiering methodology and tier assignments
• Due diligence packets (questionnaires, evidence reviewed, gap analysis)
• Risk acceptance records (approvals, rationale, compensating controls, expiration)
• Contract templates and executed security addenda (or exception approvals)
• Access control evidence for third-party accounts (provisioning approvals, least privilege, logs)
• Ongoing monitoring records (renewal reviews, change notices, incident communications)
• Exercises and dependency failure test documentation

If you use Daydream to run third-party workflows, exportable audit trails (intake, tiering, approvals, exceptions, and evidence requests) reduce “process narrative” risk because you can show what happened, when, and who approved.

Common exam/audit questions and hangups

Expect assessors to probe for operational reality:

• “Show me your inventory of third parties tied to critical services. How do you know it’s complete?”
• “How do you decide which third parties are ‘critical’?”
• “Walk me through one Tier 1 onboarding: diligence, contract terms, access provisioning, monitoring.”
• “How do you handle inherited vendors that never went through diligence?”
• “Show exceptions. Who approved them? What compensating controls exist? Do exceptions expire?”
• “How do you manage fourth parties/subprocessors for critical providers?”

Hangup: teams produce a policy and a questionnaire, but cannot show gating, approvals, or follow-up remediation.

Frequent implementation mistakes (and how to avoid them)

1. Starting from AP’s vendor list. That list misses external dependencies and often includes low-risk suppliers. Start from critical services and work outward.
2. Tiering based on spend instead of impact/access. Spend is not a cyber risk driver. Use access, data sensitivity, and service criticality.
3. Contract language without enforcement. If you cannot show executed addenda or documented exceptions, auditors treat the requirement as unmet.
4. No path for “must-use” vendors. Create an exception path with compensating controls and a deadline to remediate gaps.
5. Ignoring fourth parties. You may not assess every subprocessor, but you must know when a critical provider depends on them and require transparency and flow-down controls.

Enforcement context and risk implications

No public enforcement cases were provided in the source catalog for this requirement. Practically, the risk is still high: third-party incidents frequently create regulatory reporting, operational disruption, contractual disputes, and board-level scrutiny. Your strongest defense is a provable program: risk-based due diligence, enforceable contracts, and monitored performance tied to critical services ¹.

Practical 30/60/90-day execution plan

Days 0–30: Establish control points and get to “minimum viable governance”

• Name program owner, risk owners, and approvers; publish RACI.
• Define tiers and the minimum diligence/contract controls per tier.
• Identify your top critical services and map their top third parties/dependencies into a starter register.
• Implement an onboarding gate: no new Tier 1 without GRC review and security addendum (or exception).

Deliverables: tiering standard, starter dependency register, onboarding checklist, exception template.

Days 31–60: Expand inventory and make contracting real

• Expand the register beyond the initial critical services until coverage is defensible.
• Roll out contract addendum language with legal and procurement.
• Triage existing Tier 1 providers:
  • “Compliant”
  • “Needs remediation”
  • “Exception required”
• Establish a monitoring cadence: renewal triggers, change notifications, incident intake routing.

Deliverables: executed addenda for prioritized providers, remediation tracker, monitoring procedure.

Days 61–90: Prove operation and close audit gaps

• Run end-to-end tests on multiple third parties:
  • onboarding simulation
  • renewal reassessment
  • exception approval and expiry tracking
• Conduct at least one dependency failure tabletop for a critical service with third-party participation where feasible.
• Produce an audit packet: inventory, tiering, sample assessments, contracts, exceptions, monitoring evidence.

Deliverables: tabletop report, audit packet, metrics dashboard (counts and status without unsupported statistics).

Frequently Asked Questions

Do we have to assess every third party to meet the supply chain and external dependency risk requirement?

No. You need a risk-based method to identify which third parties and dependencies matter and then apply deeper diligence to higher tiers ¹. Document why lower-tier providers get lighter treatment.

How do we handle a sole-source provider that won’t accept our security addendum?

Use a formal exception approved by the risk owner, document compensating controls (access restrictions, monitoring, segmentation), and set a remediation or renegotiation trigger. Keep the exception time-bound and revisited at renewal.

What counts as an “external dependency” besides vendors?

Any outside service or component your operations depend on, even if it is embedded in a product or delivered through a prime provider (for example, cloud hosting, remote access tooling, update channels, DNS, or subprocessors). Track it where failure or compromise would impact critical services.

We already collect SOC reports. Is that enough?

A report can be one input, but you still need tiering, explicit risk decisions, contract obligations, and monitoring that match the service’s criticality. Auditors will ask how the report results changed onboarding decisions or remediation.

Who should approve third-party cyber risk acceptance: Security or the business?

Security should advise and set minimum control requirements, but the business/service owner typically owns operational impact and should accept residual risk. Document the approval chain so it is consistent and auditable.

How should we prove ongoing monitoring without buying a new tool?

Start with operational signals you already have: renewal calendars, access reviews, incident intake workflows, and change notifications from providers. Keep a simple monitoring log and show that issues generate tickets, follow-up, and decisions.

Related compliance topics

• 2025 SEC Marketing Rule Examination Focus Areas
• Access and identity controls
• Access Control (AC)
• Access control and identity discipline
• Access control management

Footnotes

1. DOE C2M2