According to the 2023 EY Global Third-Party Risk Management Survey, 90% of organizations are moving toward centralized third-party risk management, with a heavy focus on data-driven practices. Vendor risk assessments are an essential part of such efforts, especially when it comes to supporting bias-free decision-making and preventing conflict of interest with partners.
You may be aware that risk assessments call for identifying and addressing threats that can harm your business. But in the context of vendor relationships, they entail specific processes to account for every risk vendors expose you to and its potential impact on your organization.
In this guide, we’ll explain how vendor risk assessments work and explore the main scenarios where they’re useful. We’ll also discuss:
- Six steps to conducting comprehensive vendor risk assessments
- Relevant best practices to follow
What is a vendor risk assessment?
A vendor risk assessment (VRA) is the systemized process of identifying, scoring, prioritizing, and monitoring risks associated with doing business with third-party vendors like suppliers, agents, and software providers. VRA is integrated into your procurement, outsourcing, and security workflows and is typically conducted as part of a comprehensive vendor risk management (VRM) program.
The primary purpose of vendor risk assessments is to support your decision-making process in areas like vendor selection and negotiation, contractual safeguards, and performance monitoring. Let’s go over some of the key benefits you can expect:
- Better visibility of vendor risks: As you expand your vendor network, you need a standardized mechanism to understand vendor-related issues. Comprehensive VRAs provide visibility to such threats and can prevent them from going unnoticed.
- Proactive incident response planning: Vendor risks can emerge in different contexts, each requiring unique remediation strategies. Timely risk assessments let you come up with incident response plans tailored to a risk event.
- Reduced regulatory risks: Many regulatory frameworks and standards require VRAs, so conducting them becomes part of regular compliance.
- Enhanced stakeholder trust: In many industries, avoiding VRAs can lead to reputational damage. A demonstrable understanding of your risk landscape makes stakeholders like customers and investors more confident about your operations.
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When to conduct a vendor risk assessment
Vendor risk assessments are commonly performed in three scenarios:
- During the request for proposal (RFP) process: A risk assessment should be conducted as part of regular due diligence once a vendor responds to your RFP. It lets you immediately disqualify a vendor carrying an unacceptable level of risk.
- Throughout the vendor lifecycle: A vendor’s initial risk profile will change with time, so you’ll need to perform ongoing reassessments to stay on top of new threats.
- Whenever a risk event occurs: You need to assess a vendor’s risk profile following an undesirable or imminent incident. For example, if a vendor has been involved in a security incident, you’ll want to evaluate the incident's impact on your organization, as well as the security measures the vendor has in place to prevent its occurrence in the future.
The VRA process has to be intuitively adapted to your particular scenario; however, there is a general six-step framework you can work with.
6 steps to effective vendor risk assessments
To ensure comprehensive risk coverage and streamlined VRA workflows, follow these expert-vetted steps:
- Understand different risk types and define risk criteria.
- Create a vendor risk assessment questionnaire.
- Analyze questionnaire responses using risk assessment matrices.
- Profile and categorize vendors according to risk levels.
- Report risk assessments and develop an action plan.
- Set up continuous monitoring.
Step 1: Understand different risk types and define risk criteria
Action follows awareness—so start by listing the different types of risks that should be on your radar. Some of the most common categories are broken down in the following table:
After you’ve outlined the scope of risks, define your risk criteria and tolerance levels depending on how strict you want your vendor assessments to be. For example, if your vendor provides AI solutions, your risk criteria can be a 99.9% platform uptime and compliance with ISO 42001.
It’s good practice to keep your risk criteria standardized and applicable to all vendors in a specific industry. You can leverage tools like VRM software to ensure your risk team uses the same criteria and assessment processes.
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Step 2: Create a vendor risk assessment questionnaire
Risk assessment questionnaires are widely accepted as an effective method of gathering the data you need to assess vendor risks. They let you examine a vendor’s general risk posture with great accuracy, as well as understand their measures to defend against and respond to various threats.
When it comes to structuring the questionnaire, your aim should be to collect information on the key risk drivers you outlined in Step 1. Typically, the questionnaire can request data on the following:
- Data security policies
- Internal controls
- Compliance posture
- Financial reports
- Business continuity plans
If your vendor uses subcontractors (who are not contractually obligated to you), you may also want to collect data on the fourth (or nth) parties in the transaction. In such cases, your questionnaire should assess the vendor’s approach to third-party risk management (TPRM), so you have the awareness necessary to minimize your potential attack surface.
While you’re free to create questionnaires from scratch, you can also use established ones like the Shared Assessments SIG questionnaire—or pull from recognized frameworks like the NIST Cybersecurity Framework. These questionnaires are drafted by security experts and incorporate regulatory guidelines and standards for a wide range of industries.
Step 3: Analyze questionnaire responses using risk assessment matrices
Once you have your vendor security questionnaires answered, the next step is to analyze the responses on a tactical level. Although not mandatory, the best practice here is to create a risk assessment matrix to visually represent the risk landscape of each vendor against your predetermined criteria and tolerance levels.
Risk matrices can give you a clear, high-level overview of vendor risks, enabling you to compare each vendor's relative risk profile. The end goal is to quantify and score vendor risks using a repeatable and predictable process.
Creating the matrix is an analytical task. You’ll have to read through security questionnaires with your team, assign numerical values to each risk based on its likelihood and impact, and then multiply the two to get the final composite risk score. Then, you can define risk ranges and color-code them for easy visual interpretation. For example, your risk ranges can look as follows:
- Low; green: 1–7
- Moderate; yellow: 8–13
- High; orange: 14–21
- Extremely high; red: 22–25
Risk scoring can be laborious if done manually. The good news is that there are risk management tools that can help automate the process of scoring vendors and creating corresponding risk matrices.
Bonus: Read our risk assessment matrix guide for a more detailed overview of the process.
Step 4: Profile and categorize vendors according to risk level
After you’ve analyzed the questionnaire (with or without a matrix), it’s time to turn the data into actionable insights and fine-tune your VRM strategy. Your top priority should be to tier vendors according to their risk levels. If you’re using risk assessment matrices, it would be easier to do a visual scan and segregate vendors into critical-, high-, moderate-, and low-risk tiers.
However, even without risk matrices, you can still categorize vendors on a basic level according to your appetite. In other words, you’ll examine the access and/or data you provide the vendor and see if there are any unacceptable risks associated and what you can do about them. For critical risks, you can think of mitigation or remediation strategies before you partner with the vendor—if that’s not doable, you’ll most likely decline their proposal.
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Step 5: Report risk assessments and develop an action plan
Once you move past the analytical work, the focus shifts toward intent-based reporting to procurement officers and vendor managers, among other relevant members of your risk team. The aim is to have a crisp summary of the assessment not only to support procurement outcomes but also to establish a document trail for future reference.
Typically, the report’s contents will depend on the decision-making scope and whether you are:
- Onboarding a new vendor
- Conducting a quality control
- Reconsidering current partnerships
In any case, the report should inform the right course of action depending on the vendor’s risk level and specific threats. It’s worth noting that no vendor is ever 100% risk-free, so it’s wise to develop contingency plans for prominent risk events. For example, if a vendor has access to your systems, you likely want to have a two-factor authentication process to protect your sensitive information from breaches and unauthorized access.
Step 6: Set up continuous monitoring
A vendor’s risk profile continues to evolve—even after onboarding. As a result, there will be several situations in which you’ll want to revisit the initial assessment. It’s best to do so regularly, with the exact cadence, depending on the vendor’s risk tier.
Due to the many complexities of risk assessments, continuous monitoring of vendors might seem daunting and time-consuming. A simpler alternative is to use a risk management solution that eliminates the need for manual processes.
The right software should automate repetitive tasks, such as:
- Risk data analysis
- Real-time risk scoring
- Vendor categorization
You may also want to review your VRA workflows periodically to acknowledge any lessons learned or modify current practices.
{{cta_testimonial5="/cta-modules"}}
Vendor risk assessment best practices to follow
Besides the general steps we’ve discussed, here are some additional VRA best practices worth considering:
- Maintain a centralized vendor inventory: Ideally, you should be able to access and monitor all VRAs through a centralized inventory, as vendor tracking through spreadsheets and disparate systems isn’t efficient.
- Document your VRA workflow: Recording your risk assessment processes helps you formalize them and avoid miscommunication, inefficiencies, and data loss within cross-functional teams.
- Review the applicable standards and regulations: See that your risk appetite isn’t only determined by internal goals but also by the regulations applicable to your organization.
- Focus resources on high-risk vendors: Vendors categorized in higher risk tiers may require more resources in terms of frequent VRAs and extensive incident response planning.
- Seek comprehensive input: From defining your risk criteria to outlining response plans, activities throughout the VRA process should involve relevant stakeholders and departments, possibly even external experts.
Streamline vendor risk assessments with Vanta
Vanta brings together numerous features to give you a comprehensive solution for vendor onboarding, evaluation, and monitoring. Its Vendor Risk Management solution can streamline many of your VRM workflows—including risk assessments.
Here are some features that you can leverage to simplify your VRA processes:
- Auto-scoring: Vanta auto-scores inherent vendor risks with predefined (and customizable) parameters. It also creates color-coded risk assessment matrices, which can inform your vendor selection processes.
- Centralized vendor inventory: Manage all vendors through a unified hub, which enables a bird’s-eye overview of key threats at all times.
- Comprehensive dashboard: You can monitor useful vendor data (category, status, etc.) through a robust dashboard to avoid hunting for information across disparate systems.
- Shadow IT discovery: Vanta automatically detects unaccounted-for third-party software used by your organization to help you uncover shadow IT effortlessly.
You can learn more about these features and see them in action by watching our free webinar. Or schedule a custom demo today.
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Vendor risk assessment
Vendor risk assessment: A practical guide to clear and consistent evaluations
Vendor risk assessment
According to the 2023 EY Global Third-Party Risk Management Survey, 90% of organizations are moving toward centralized third-party risk management, with a heavy focus on data-driven practices. Vendor risk assessments are an essential part of such efforts, especially when it comes to supporting bias-free decision-making and preventing conflict of interest with partners.
You may be aware that risk assessments call for identifying and addressing threats that can harm your business. But in the context of vendor relationships, they entail specific processes to account for every risk vendors expose you to and its potential impact on your organization.
In this guide, we’ll explain how vendor risk assessments work and explore the main scenarios where they’re useful. We’ll also discuss:
- Six steps to conducting comprehensive vendor risk assessments
- Relevant best practices to follow
What is a vendor risk assessment?
A vendor risk assessment (VRA) is the systemized process of identifying, scoring, prioritizing, and monitoring risks associated with doing business with third-party vendors like suppliers, agents, and software providers. VRA is integrated into your procurement, outsourcing, and security workflows and is typically conducted as part of a comprehensive vendor risk management (VRM) program.
The primary purpose of vendor risk assessments is to support your decision-making process in areas like vendor selection and negotiation, contractual safeguards, and performance monitoring. Let’s go over some of the key benefits you can expect:
- Better visibility of vendor risks: As you expand your vendor network, you need a standardized mechanism to understand vendor-related issues. Comprehensive VRAs provide visibility to such threats and can prevent them from going unnoticed.
- Proactive incident response planning: Vendor risks can emerge in different contexts, each requiring unique remediation strategies. Timely risk assessments let you come up with incident response plans tailored to a risk event.
- Reduced regulatory risks: Many regulatory frameworks and standards require VRAs, so conducting them becomes part of regular compliance.
- Enhanced stakeholder trust: In many industries, avoiding VRAs can lead to reputational damage. A demonstrable understanding of your risk landscape makes stakeholders like customers and investors more confident about your operations.
{{cta_withimage20="/cta-modules"}}
When to conduct a vendor risk assessment
Vendor risk assessments are commonly performed in three scenarios:
- During the request for proposal (RFP) process: A risk assessment should be conducted as part of regular due diligence once a vendor responds to your RFP. It lets you immediately disqualify a vendor carrying an unacceptable level of risk.
- Throughout the vendor lifecycle: A vendor’s initial risk profile will change with time, so you’ll need to perform ongoing reassessments to stay on top of new threats.
- Whenever a risk event occurs: You need to assess a vendor’s risk profile following an undesirable or imminent incident. For example, if a vendor has been involved in a security incident, you’ll want to evaluate the incident's impact on your organization, as well as the security measures the vendor has in place to prevent its occurrence in the future.
The VRA process has to be intuitively adapted to your particular scenario; however, there is a general six-step framework you can work with.
6 steps to effective vendor risk assessments
To ensure comprehensive risk coverage and streamlined VRA workflows, follow these expert-vetted steps:
- Understand different risk types and define risk criteria.
- Create a vendor risk assessment questionnaire.
- Analyze questionnaire responses using risk assessment matrices.
- Profile and categorize vendors according to risk levels.
- Report risk assessments and develop an action plan.
- Set up continuous monitoring.
Step 1: Understand different risk types and define risk criteria
Action follows awareness—so start by listing the different types of risks that should be on your radar. Some of the most common categories are broken down in the following table:
After you’ve outlined the scope of risks, define your risk criteria and tolerance levels depending on how strict you want your vendor assessments to be. For example, if your vendor provides AI solutions, your risk criteria can be a 99.9% platform uptime and compliance with ISO 42001.
It’s good practice to keep your risk criteria standardized and applicable to all vendors in a specific industry. You can leverage tools like VRM software to ensure your risk team uses the same criteria and assessment processes.
{{cta_webinar4="/cta-modules"}}
Step 2: Create a vendor risk assessment questionnaire
Risk assessment questionnaires are widely accepted as an effective method of gathering the data you need to assess vendor risks. They let you examine a vendor’s general risk posture with great accuracy, as well as understand their measures to defend against and respond to various threats.
When it comes to structuring the questionnaire, your aim should be to collect information on the key risk drivers you outlined in Step 1. Typically, the questionnaire can request data on the following:
- Data security policies
- Internal controls
- Compliance posture
- Financial reports
- Business continuity plans
If your vendor uses subcontractors (who are not contractually obligated to you), you may also want to collect data on the fourth (or nth) parties in the transaction. In such cases, your questionnaire should assess the vendor’s approach to third-party risk management (TPRM), so you have the awareness necessary to minimize your potential attack surface.
While you’re free to create questionnaires from scratch, you can also use established ones like the Shared Assessments SIG questionnaire—or pull from recognized frameworks like the NIST Cybersecurity Framework. These questionnaires are drafted by security experts and incorporate regulatory guidelines and standards for a wide range of industries.
Step 3: Analyze questionnaire responses using risk assessment matrices
Once you have your vendor security questionnaires answered, the next step is to analyze the responses on a tactical level. Although not mandatory, the best practice here is to create a risk assessment matrix to visually represent the risk landscape of each vendor against your predetermined criteria and tolerance levels.
Risk matrices can give you a clear, high-level overview of vendor risks, enabling you to compare each vendor's relative risk profile. The end goal is to quantify and score vendor risks using a repeatable and predictable process.
Creating the matrix is an analytical task. You’ll have to read through security questionnaires with your team, assign numerical values to each risk based on its likelihood and impact, and then multiply the two to get the final composite risk score. Then, you can define risk ranges and color-code them for easy visual interpretation. For example, your risk ranges can look as follows:
- Low; green: 1–7
- Moderate; yellow: 8–13
- High; orange: 14–21
- Extremely high; red: 22–25
Risk scoring can be laborious if done manually. The good news is that there are risk management tools that can help automate the process of scoring vendors and creating corresponding risk matrices.
Bonus: Read our risk assessment matrix guide for a more detailed overview of the process.
Step 4: Profile and categorize vendors according to risk level
After you’ve analyzed the questionnaire (with or without a matrix), it’s time to turn the data into actionable insights and fine-tune your VRM strategy. Your top priority should be to tier vendors according to their risk levels. If you’re using risk assessment matrices, it would be easier to do a visual scan and segregate vendors into critical-, high-, moderate-, and low-risk tiers.
However, even without risk matrices, you can still categorize vendors on a basic level according to your appetite. In other words, you’ll examine the access and/or data you provide the vendor and see if there are any unacceptable risks associated and what you can do about them. For critical risks, you can think of mitigation or remediation strategies before you partner with the vendor—if that’s not doable, you’ll most likely decline their proposal.
{{cta_withimage5="/cta-modules"}}
Step 5: Report risk assessments and develop an action plan
Once you move past the analytical work, the focus shifts toward intent-based reporting to procurement officers and vendor managers, among other relevant members of your risk team. The aim is to have a crisp summary of the assessment not only to support procurement outcomes but also to establish a document trail for future reference.
Typically, the report’s contents will depend on the decision-making scope and whether you are:
- Onboarding a new vendor
- Conducting a quality control
- Reconsidering current partnerships
In any case, the report should inform the right course of action depending on the vendor’s risk level and specific threats. It’s worth noting that no vendor is ever 100% risk-free, so it’s wise to develop contingency plans for prominent risk events. For example, if a vendor has access to your systems, you likely want to have a two-factor authentication process to protect your sensitive information from breaches and unauthorized access.
Step 6: Set up continuous monitoring
A vendor’s risk profile continues to evolve—even after onboarding. As a result, there will be several situations in which you’ll want to revisit the initial assessment. It’s best to do so regularly, with the exact cadence, depending on the vendor’s risk tier.
Due to the many complexities of risk assessments, continuous monitoring of vendors might seem daunting and time-consuming. A simpler alternative is to use a risk management solution that eliminates the need for manual processes.
The right software should automate repetitive tasks, such as:
- Risk data analysis
- Real-time risk scoring
- Vendor categorization
You may also want to review your VRA workflows periodically to acknowledge any lessons learned or modify current practices.
{{cta_testimonial5="/cta-modules"}}
Vendor risk assessment best practices to follow
Besides the general steps we’ve discussed, here are some additional VRA best practices worth considering:
- Maintain a centralized vendor inventory: Ideally, you should be able to access and monitor all VRAs through a centralized inventory, as vendor tracking through spreadsheets and disparate systems isn’t efficient.
- Document your VRA workflow: Recording your risk assessment processes helps you formalize them and avoid miscommunication, inefficiencies, and data loss within cross-functional teams.
- Review the applicable standards and regulations: See that your risk appetite isn’t only determined by internal goals but also by the regulations applicable to your organization.
- Focus resources on high-risk vendors: Vendors categorized in higher risk tiers may require more resources in terms of frequent VRAs and extensive incident response planning.
- Seek comprehensive input: From defining your risk criteria to outlining response plans, activities throughout the VRA process should involve relevant stakeholders and departments, possibly even external experts.
Streamline vendor risk assessments with Vanta
Vanta brings together numerous features to give you a comprehensive solution for vendor onboarding, evaluation, and monitoring. Its Vendor Risk Management solution can streamline many of your VRM workflows—including risk assessments.
Here are some features that you can leverage to simplify your VRA processes:
- Auto-scoring: Vanta auto-scores inherent vendor risks with predefined (and customizable) parameters. It also creates color-coded risk assessment matrices, which can inform your vendor selection processes.
- Centralized vendor inventory: Manage all vendors through a unified hub, which enables a bird’s-eye overview of key threats at all times.
- Comprehensive dashboard: You can monitor useful vendor data (category, status, etc.) through a robust dashboard to avoid hunting for information across disparate systems.
- Shadow IT discovery: Vanta automatically detects unaccounted-for third-party software used by your organization to help you uncover shadow IT effortlessly.
You can learn more about these features and see them in action by watching our free webinar. Or schedule a custom demo today.
{{cta_simple5="/cta-modules"}}
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