Comprehensive Guide to Conducting Effective Supplier Risk Assessments
When choosing a supplier to partner with, organizations need to perform their due diligence and assess the cyber risks associated with each particular supplier using risk assessment evaluations. Part of the supplier lifecycle management process includes ensuring that these third parties are meeting minimum security requirements, maintaining strong cybersecurity programs, and adhering to all relevant compliance regulations.
Especially during the procurement phase, organizations need to determine whether or not to work with a specific supplier or if their risks are worth taking on. Over the entire supplier lifecycle, organizations will need to continue conducting supplier risk assessments to ensure that they are upkeeping their security postures and have not introduced new risks to their IT infrastructure.
This post will examine how organizations can perform a supplier risk assessment and prevent data breaches from happening and how to mitigate the risks involved.
Take a tour of UpGuard's risk assessment features >
What is a supplier risk assessment?
Supplier risk assessments enable organizations to understand and prioritize the various cyber risks associated with a particular supplier. It’s an essential part of a broader supplier risk management strategy that assesses the level of risk the supplier poses and whether there could be potential issues down the line from partnering with them.
Using the information gained from the risk assessment, top-level executives and shareholders can make necessary business decisions about the supplier’s security posture and a potential partnership. Whether it’s a potential new supplier or an existing one, supplier risk assessments must be conducted regularly throughout the supplier lifecycle to minimize potential business disruptions, supply chain attacks, and reputational damages.
Some major considerations that need to be answered in the risk assessment phase are:
- What are the main threats affecting the supplier?
- What is the likelihood of a cyber attack successfully occurring?
- What is the potential impact of a successful cyber attack?
- How much risk is my organization willing to accept?
- Will the identified risks affect business operations?
- Which critical data or assets will the supplier require access to?
Refer to this example of a vendor risk assessment to understand how it's structured and the data it contains.
Download your vendor risk assessment template >
Why is supplier risk assessment essential for modern businesses
Suppliers form the backbone of your organization's supply chain, making systematic supplier oversight a cornerstone of business continuity, given the interconnected nature of the global economy. By shifting from a reactive approach to a proactive one, you can anticipate and mitigate potential problems before they escalate into major disruptions.
- Preventing Disruptions: A comprehensive assessment helps identify vulnerabilities and single points of failure, which prevent costly supply chain shocks. By assessing a supplier's business continuity and disaster recovery plans, you ensure operations can be maintained even during unforeseen external events.
- Reducing compliance and regulatory risk: Assessments ensure that third-party vendors adhere to all relevant laws and industry standards, which is critical for avoiding hefty fines, legal liabilities, and reputational damage. Continuous monitoring is crucial for demonstrating compliance with regulations such as GDPR, CCPA, and HIPAA.
- Building stronger vendor relationships: Proactive risk management isn't just about vetting; it's about collaboration. By working closely with critical suppliers on remediation and sharing clear expectations upfront, organizations can foster long-term, trusted partnerships that enhance the overall resilience of the extended enterprise.
Suppliers vs. vendors
Although suppliers and vendors can sometimes be used interchangeably, there is a small difference between the two, based on the nature of the relationship between the organization and the third party.
Suppliers are direct third parties that provide services or goods to an organization and are often the first link in the supply chain. Vendors (or service providers) are often the last link in the supply chain and provide goods and services to the end consumer.
In the context of cybersecurity, both suppliers and vendors are critical components of the third-party supply chain risk management process and overall business operations. The risk assessment process for both is the same, as the end goal is to identify, assess, and mitigate all potential risks associated with these external parties.
How to perform a supplier risk assessment
Before starting a supplier risk assessment, you’ll want to first prepare by designating an individual or group of individuals to take the lead on the process. Appointing someone to take charge of the assessment phase, it allows for better communication and a more streamlined process.
Second, you’ll want to identify where the designated individual can access all relevant data pertaining to the risk assessment and potential roadblocks that could constrain the assessment process. In some cases, the designated individual is on the IT team and can easily access all of this data through manual spreadsheets or dedicated cyber solutions.
If you're new to risk assessments, refer to this overview of performing a third-party risk assessment.
Types of supplier risks
A comprehensive assessment must identify and evaluate various categories of risk, as a failure in one area can quickly cascade into others, causing operational or financial disruption.
Step 1: Identify critical assets and critical suppliers
Although the goal of every risk management program is to secure each risk and minimize its impact, it may be a costly endeavor to do so. Consequently, organizations should focus on their most critical assets in areas of high risk. Assets classified as critical for business continuity, compliance, or legal and handled by the suppliers should be prioritized first.
The scope of the risk assessment should initially focus on the most critical suppliers that have a more direct impact on your business or handle extremely sensitive data. Those suppliers should be labeled as “critical suppliers” and assessed and managed before all others.
Step 2: Determine risk tolerance and risk appetite
Next, your organization needs to determine its risk tolerance and risk appetite for new and existing vendors. This means that for each risk category (information security, email security, network security, incident response, regulatory compliance, etc.), your organization must determine how much risk it is willing to accept per category and aggregately.
For larger organizations, this is also known as enterprise risk management, which takes a more structural and metric-based approach to determine their risk exposure and risk acceptance levels.
For other organizations, determining risk acceptance levels may be as simple as limiting the number of high or critical risks in the supplier’s overall risk profile or gauging the severity of each critical risk against asset values and business continuity requirements.
Learn how to create a vendor risk assessment matrix >
Step 3: View security ratings
Security ratings are useful risk assessment criteria that objectively measure supplier performance using a single risk score. Ratings are calculated using various methods of aggregate risk categories. The goal is to gain further visibility into a supplier’s security posture by categorizing each risk by criticality to determine risk mitigation and remediation prioritization.
For an overview of the top features of an ideal risk assessment solution, read this post comparing the top third-party risk assessment software options.
How UpGuard Can Help
UpGuard scans billions of data points daily to collect data at scale and feeds that data into a proprietary scoring algorithm that measures a company’s security performance instantly through a single, easy-to-understand score out of 950. The algorithm is updated over time to reflect the most accurate in-class security posture.
Using a Gaussian weighted mean, each organization’s security rating is weighted over various risk categories, with a heavy weight towards the weakest areas. Security ratings can also be broken down by risk factors and their severity classification for a high-level overview of the supplier’s overall cyber resiliency.
Learn more about UpGuard’s Security Ratings >
Step 4: Send out security questionnaires
Security questionnaires are a crucial part of the vendor risk management process, gathering information about a supplier’s current state of cybersecurity, including the security controls they use, the frameworks they are currently mapped to, their incident response plans, and more.
Questionnaires also help identify whether an existing or new vendor is at risk of non-compliance and failing to meet regulatory standards. Non-compliance is especially critical because failure to comply can potentially lead to significant supply chain disruptions and massive penalties by governing bodies.
For an example of the information you need to collect, refer to this Vendor Risk Assessment Questionnaire Template.
How UpGuard Can Help
UpGuard Vendor Risk helps organizations gain deeper insights into their third parties’ security posture using an automated vendor risk assessment process. Through the UpGuard platform, organizations can monitor and track their supplier questionnaire responses to automatically assess their security posture based on identified risks. Set regular reminders to ensure your suppliers complete their questionnaires promptly, saving time by eliminating the need to chase them individually.
Using a comprehensive library of over 20 prebuilt, customizable questionnaires, businesses can now map industry-specific or globally recognized frameworks and regulations to their suppliers’ security controls. Organizations will also have the ability to request remediation from their vendors and suppliers or waive them completely.
Learn more about UpGuard’s security questionnaires >
Step 5: Tier vendors and suppliers by criticality level
Using both instant security rating and security questionnaire responses, one of the final steps in the third-party risk assessment process is to tier vendors and suppliers by their criticality level. Vendor criticality levels are typically classified into four main groups:
- Critical risks - Risks or vulnerabilities that place the business in immediate threat of data breaches or leaks.
- High risk - Severe risks that need to be addressed immediately to protect the business.
- Medium risk - Unnecessary security risks that can potentially lead to more serious vulnerabilities.
- Low risk - Areas of improvement to reduce risk and improve cybersecurity ratings.
The goal of vendor/supplier tiering is the help streamline the risk management process so that security teams can begin prioritizing risk remediation in a sequenced, more logical manner.
How UpGuard Can Help
UpGuard allows you to customize vendor tiers based on their importance to the business and the level of risk that they hold. Suppliers and vendors that handle more critical information can be classified into a higher tier to help you prioritize and allocate adequate resources during the risk assessment and management process.
Learn more on how to tier vendors and other third parties >
Step 6: Track for data leaks
Data leaks are a significant operational risk because it means employee credentials, sensitive data, or internal classified information has been exposed somewhere on the web. Organizations need a way to detect data leaks quickly to identify the source of the leak, especially if it’s from a third or fourth party.
How UpGuard Can Help
UpGuard uses a proprietary data leak detection engine to scan hundreds of millions of pages and billions of records online to find every potential leak. Combined with an expert team of cybersecurity analysts, UpGuard can quickly filter out false positives and provide better actionable intel to begin working with vendors and suppliers to remediate the issue.
UpGuard’s team of analysts also provides assistance for building remediation workflows as part of the vendor management process. Each data leak comes with in-depth context on where the leak has been found, when it was discovered, which part of the business has been impacted, where the leak likely came from, and the type of data that was exposed.
Learn more about UpGuard’s data leak detection tool >
Step 7: Conduct annual risk assessments
The ongoing supplier and vendor relationship management process involves assessing security postures and compliance over time. Vendors and suppliers need to be reviewed regularly (typically on an annual basis) for critical risks or other potential security gaps. This also gives organizations a chance to proactively adjust their security programs in relation to new business processes, new regulation compliance standards, external attack surface management, and changing business environments.
How UpGuard Can Help
UpGuard helps organizations build stronger supplier relationships through its user-friendly, comprehensive platform that scales with the business's growth. With potentially hundreds of vendors to manage, UpGuard Vendor Risk streamlines that workflow so businesses can quickly scan through their vendors and ensure they are all meeting minimum security requirements and compliance standards. Everything can be managed from a single, centralized dashboard to help businesses save time and resources.
Learn more about the entire vendor risk assessment process >
Tools and best practices for ongoing supplier risk management
The modern risk landscape is dynamic, making a shift from periodic, annual assessments to continuous monitoring essential for maintaining a strong security posture and avoiding compliance breaches.
Technology tools for automation
- Risk assessment platforms: Dedicated Third-Party Risk Management (TPRM) platforms like UpGuard, ProcessUnity, and OneTrust automate the entire vendor lifecycle. These tools distribute questionnaires, track responses, integrate with threat intelligence, and provide centralized dashboards for analysis.
- AI and machine learning: Advanced platforms leverage AI to analyze unstructured data from security documents (like SOC 2 reports), automatically classify and prioritize risk alerts, and even simplify the due diligence process for security and compliance teams.
Standardized frameworks and certifications
Leveraging industry-standard frameworks and certifications helps standardize your security expectations across all vendors.
- Security frameworks: The ISO 27001 standard requires organizations to include key suppliers in their scope and risk assessment processes to ensure security alignment. The NIST Cybersecurity Framework (CSF) offers a flexible, outcomes-based approach to managing and mitigating cybersecurity risks across the enterprise and its supply chain.
- Compliance reports: Requiring suppliers to provide reports, such as SOC 2 (Type 2 is preferred, as it demonstrates operating effectiveness over time), provides an external attestation of their security controls.
Repeatable and Continuous Practices
- Continuous monitoring: Unlike annual audits that offer only a snapshot, continuous monitoring tracks a vendor's security posture in real-time, providing immediate insights into emerging risks. This dynamic risk assessment enables you to identify and address issues promptly, before they escalate.
- Tiered audits and reviews: The frequency of your reviews should always match the supplier's risk level. Implement quarterly audits or reviews for your most critical suppliers, while less frequent (e.g., annual) reviews may suffice for low-risk vendors.
- Automated risk scoring: Using automated risk scoring based on objective criteria—such as security ratings or performance metrics—gives you a rapid, data-driven measure of a vendor's risk level, enabling security teams to prioritize remediation efforts quickly.
Frequently asked questions (FAQ)
What is the purpose of a supplier risk assessment?
The core purpose of a supplier risk assessment is to proactively identify, analyze, and mitigate potential threats posed by third-party vendors. The ultimate goals are to minimize the likelihood of operational and supply chain disruptions, avoid financial and reputational damage, and ensure compliance with all applicable legal and industry regulations.
How often should supplier risk assessments be conducted?
Assessments are split into two phases:
- Initial assessment: A thorough risk assessment should be conducted on every new vendor before they are onboarded to evaluate their capabilities and compliance.
- Ongoing monitoring: Due to the dynamic nature of the risk landscape, relying solely on an annual review is insufficient. Critical suppliers should be subject to continuous monitoring and frequent internal check-ins, such as quarterly reviews. Less critical vendors may be reviewed on an annual basis.
What tools can help with supplier risk assessments?
Tools for supplier risk assessment fall into two main categories:
- Manual tools: These typically involve using standardized risk assessment questionnaire templates (like those from SIG or CAIQ) that are distributed and tracked via spreadsheets or basic GRC systems. While low-cost, this approach is time-consuming and labor-intensive.
- Automated third-party risk management (TPRM) platforms: These dedicated solutions, such as UpGuard, ProcessUnity, and OneTrust, automate the entire third-party risk management process. They provide automated risk scoring, distribute and track questionnaires, and offer continuous real-time monitoring of a vendor's external security posture.
