As the use of third-party suppliers grows, it is increasingly imperative to be diligent with vendor risk assessment practices. Vendors and other third-party suppliers are essential for keeping most organizations running smoothly. But these relationships can be fraught with perils that can negatively impact your finances, performance, and reputation.
Consider these risks: a disruption in your supplier’s supply chain that delays deliveries, weak security measures that result in a data breach, or noncompliance with important regulations that impacts finances. Through no fault of your own, your organization can be held accountable for missteps made by third parties, which can lead to lawsuits, fines, and damage to your reputation – all a high cost to your organization.
A vendor risk assessment is an integral part of an effective third-party risk management (TPRM) program. Conducting vendor risk assessments enables you to determine the risks and risk levels a third party poses to your organization. Assessments gather critical information and documentation from your suppliers. That information can reveal vulnerabilities that could expose your organization to harm. Then you can decide whether to move forward with that supplier, require changes to meet your requirements, or end your relationship.
How to Begin the Process
Start with a list of all your suppliers, the products and/or services they provide, and the potential risks they present. Categorize each vendor as high risk, moderate risk, or low risk.
Create customized vendor questionnaires. One size does not fit all. Tailor your questionnaires to collect critical information from each supplier, including financial status, operational practices, security controls, and regulatory compliance.
For low-risk vendors, you may have fewer, more standardized questions. For high-risk vendors (e.g., those with access to your internal networks, systems, and confidential data), you will want to probe more deeply. In all cases, keep the questions direct, concise, and pertinent to avoid misinterpretation. Questions can be structured in formats for yes/no answers, multiple choice, and written responses.
For example, an initial question might be: Does your organization have an information security and procedures policy? Under this question, you may ask a follow-up questions about where and how sensitive information is stored. Another sample assessment question might ask if the organization has an incident response policy, followed by questions about how incidents are handled and the mitigation process.
As part of your assessment, ask vendors to submit relevant policies, certificates of insurance, contracts, and agreements they have with their own third-party suppliers (which become fourth-party risks for you). The
vetting process also includes performing background checks, requesting references, and gathering customer reviews. Make sure you request complete business continuity plans from any third party classified as high risk.
Frequency of Vendor Risk Assessments
Conduct an initial risk assessment before entering into a relationship with any third-party vendor. Then reassess vendors periodically to:
- Reveal changes in vendor operations, leadership, and new/emerging risk areas.
- Identify new developments that may affect the vendor’s ability to fulfill their contractual obligations.
- Confirm that vendor practices still align with your organization’s values and goals.
Reassessments are typically conducted annually but may be scheduled more frequently for high-risk vendors. As your relationships with third-party vendors mature, you may feel you can relax your assessment frequency. Don’t make that mistake. Protect your organization by remaining vigilant with conducting ongoing assessments.
Before embarking on a reassessment, review your questionnaire, and make revisions as needed. Be sure all questions are still relevant. Questions about compliance with new laws/regulations that apply to your organization need to be added. And address any unexpected developments like the COVID pandemic, which required organizations to quickly set up a whole new set of internal protocols and processes to protect customers, employees, and other stakeholders.
With each reassessment, evaluate the third-party’s risk level and your relationship. If there are significant changes to the vendor’s answers, inquire when and why the changes were made. These steps will determine whether you wish to continue working with the vendor or end your relationship.
The Benefits of Technology for Vendor Risk Assessment
Even smaller organizations can have dozens of suppliers. Large organizations may work with tens of thousands. Keeping tabs on that many third parties manually (think spreadsheets) is cumbersome, time-consuming, and prone to errors – at best.
TPRM software automates and standardizes the vendor risk assessment process. It offers questionnaire templates that can be easily customized. Vendors can submit answers via portal, and the software can automatically score and rate responses. You can also bring in external data feeds to help rate risks. Built-in analytics, along with flexible reporting tools, allow you to slice and dice data any way you like.
Software also can send automatic alerts for expiring vendor documents and contracts so you can be assured outdated information does not put you at risk. Finally, software allows you to create, email, and get contracts signed right from the platform.
All vendor risk information – including agreements, contracts, policies, and access credentials – is compiled in one platform with shared access across departments. You can update stored data and documents in real time, so reports are always complete and accurate. You can feel confident about the quality and timeliness of third-party data and documents housed in your system. And you have all the information at your fingertips for analysis and decision-making.
Vendor risk assessment gives your organization the ability to thoroughly examine third-party practices, reputations, and risk levels even before contracts are signed. The process is well worth the time and effort so you can plan, prepare, and make vendors accountable throughout your entire relationship.
If you are searching for third-party risk management software, download this RFP template with the most critical TPRM-related questions, and check out Riskonnect’s Third-Party Risk Management software.