What is a Vendor Risk Assessment?Published February 6, 2020 • 3 min read
A vendor risk assessment helps organizations understand the risks that exist when they use third-party vendors’ products or services. Conducting a risk assessment is particularly important when a vendor handles a critical business function, accesses sensitive customer data, and/or interacts with customers.
The key to successful third-party vendor relationships is prevention. Consequently, organizations should exercise due diligence to ensure that their third-party vendor relationships are productive and risk-free.
A company should always conduct a vendor risk assessment when bringing on a new third-party vendor. However, an organization should also perform periodic vendor risk assessments to ensure its third-party vendors are keeping up with its quality standards and not introducing risks to the company, its customers, and investors.
When a company gives its third-party service providers access to its network, it also gives them access to sensitive corporate, employee, and customer data.
A vendor risk assessment is important because it allows an organization to better understand the risks posed by its third-party vendor relationships as any third-party risk is also the organization’s risk. Common risks associated with third-party vendors include financial, cybersecurity, information security, operational, reputational and compliance risks.
If the networks of an organization’s third-party service providers aren’t secure, they can put that sensitive corporate information at risk. In that case, the company will be held accountable for whatever happens to that information.
Although a company can’t entirely eliminate all the risks associated with its third-party service providers, vendor risk assessments help minimize the impact on the business.
An organization’s goals for a vendor risk assessment should be to:
- Identify any risks a third-party vendor may pose.
- Evaluate whether third-party service providers can eliminate those risks.
- Monitor the risks that can’t be eliminated.
- Assess the extent of the outstanding risks.
- Determine whether it can accept those outstanding risks.
An organization’s management should also establish a third-party vendor risk management program in conjunction with its third-vendor risk assessment program.
A third-party vendor risk management program is an organization-wide plan outlining the types of behaviors, access, etc., that an organization and its third-party service providers agree on. A third-party risk management plan should include information about the testing and insurance necessary to maximize the third-party vendor’s ability to do its job.
The third-party risk management plan should also include a checklist of all the steps a third-party service provider has to follow. And the entire company has to buy into the third-party risk management process. In addition, management should perform due diligence to validate and verify that its third-party vendors meet the company’s requirements.
The vendor risk assessment helps organizations vet their third-party vendors and enables them to continue to perform due diligence on those service providers.
To craft successful vendor risk assessments, management should:
- Compare the list of third-party vendors from their accounts payable departments to their vendor lists to ensure they haven’t left out any third-party vendors.
- Once they have the lists from accounts payable, they should sort the third-party service providers into different groups based on the types of vendors they are, e.g., cloud storage providers, marketing agencies.
- Understand the regulatory risk and business impact the third-party vendors present. The regulatory risk determines whether a third-party service provider is low, moderate or high risk. The business impact determines whether a third-party vendor is critical or non-critical to the company.
- Rate each third-party vendor according to risk.
- Assess third-party vendor relationships at the service or product level. To fully understand all the risks third-party service providers present, it’s critical to complete a risk assessment on every service and every product each vendor offers.
- Determine the due diligence requirements for the more high-risk and critical third-party vendors. For example, if a third-party service provider is high risk, consider performing more frequent monitoring and doing more in-depth due diligence.
- Stay current with governmental and industry regulations and implement new guidance into third-party vendor risk assessments as needed.
- Update senior executives and board members on any significant changes to the third-party risk assessments.