Vendor risk assessments are critical for any organization that relies on third-party vendors. Third-party risk can negatively affect an organization’s security, compliance, and performance, resulting in devasting security breaches or disruptions in its supply chain that halt business operations.
Organizations use vendor risk assessments to evaluate and manage third-party vendor risks associated with outsourcing business operations or procuring goods from external suppliers. By conducting a thorough vendor risk assessment, organizations can determine whether a vendor has implemented the necessary controls and safeguards to manage these risks effectively and mitigate any potential impact on their operations.
This blog covers the core components of vendor risk assessments, including when to perform them and best practices for implementing these security assessments. Also included is a step-by-step process for conducting vendor risk assessments that you can customize to suit your organization’s unique needs and goals.
Upgrade your organization’s vendor risk assessment process with UpGuard >
What is a vendor risk assessment?
A vendor risk assessment is a process that organizations use to evaluate and manage the risks associated with outsourcing services or procuring goods from external suppliers. Vendor risk assessments ensure that engaging with these third-party entities does not negatively impact the organization's data privacy, financial stability, regulation compliance, or operational performance.
While vendor risk assessments can differ in detail, they typically include the following key components:
- Vendor identification
- Risk assessment criteria
- Information gathering processes
- Risk evaluation guidelines
- Mitigation strategies
- Monitoring and review processes
- Documentation and reporting workflows
Vendor risk assessments help organizations carefully select and manage their vendors while minimizing potential risks, protecting their interests, and ensuring business continuity.
Purpose of vendor risk assessments
Vendor risk assessments are vital to an organization's overall risk management and governance strategy. These assessments help identify and manage potential risks associated with third-party vendors (and also fourth-party vendors) and suppliers that the organization relies on to conduct its operations. Third-party risks include financial, operational, and reputational risks that can significantly impact an organization.
Vendor risk assessments serve a variety of critical purposes, which include:
- Risk identification and management
- Compliance and regulatory adherence
- Security assurance
- Operational reliability
- Cost efficiency and resource allocation
- Enhanced decision making
- Building trust and reputation
Vendor risk assessments are critical to strategic risk management, helping organizations safeguard their assets and maintain compliance.
When to perform vendor risk assessments
Organizations can perform vendor risk assessments at several crucial points throughout a vendor relationship or lifecycle. Security personnel commonly use vendor risk assessments during vendor procurement as part of an organization’s overall due diligence and vendor onboarding program. However, there are also other instances when vendor risk assessments are useful, including:
- During contract renewals
- Following significant vendor changes
- As part of regular review or audit cycles
- After security incidents or data breaches
- In response to regulatory changes
Organizations can effectively manage and mitigate vendor-associated risk by conducting periodic vendor risk assessments and after security incidents.
6 steps to perform a vendor risk assessment
A vendor risk assessment process is crucial for organizations to identify, evaluate, and mitigate the risks associated with third-party vendors. This process helps ensure that the organization’s third-party business relationships align with the organization's overall risk management strategy and compliance requirements.
Adopting a comprehensive approach to vendor risk management, organizations can collaborate with external entities throughout the entire vendor lifecycle to maintain secure and robust operations.
1. Determine risk appetite and risk tolerance
The foundation of a vendor risk assessment should directly relate to an organization’s risk appetite and risk tolerance. These two factors help calibrate the content of a vendor risk assessment, identifying factors that may influence whether an organization will work with a specific vendor.
- Risk appetite: The levels of risk a company is willing to accept at an organizational level to meet business objectives
- Risk tolerance: The degree of acceptable deviation from the risk appetite. For example, the maximum amount of permissible website downtime following a cyberattack.
Risk tolerance and appetite are set based on strategic objectives and regulatory requirements. Every organization will have a unique amount of inherent risk, level of risk appetite, and risk tolerance. Defining these values involves understanding the potential impact on the organization’s operations, reputation, and finances should a vendor-related risk materialize.
Organizations can calculate their risk appetite and tolerance using the following three steps:
- Define business objectives and values: Define the organization's objectives and values to align the risk appetite with them. Engage with stakeholders from various levels to understand organizational strategic priorities.
- Assess risk appetite: To determine an organization's risk appetite, review its financial health, resources, and risk exposures. This process can involve quantitative analyses such as scenario planning, stress testing, and financial impact analysis.
- Determine risk tolerance: After determining risk appetite, organizations need to determine the level of risk that they are willing to accept. Financial position, market conditions, and regulatory environment influence risk tolerance. Decision-makers must align on how much risk is acceptable while considering stakeholder expectations and organizational culture.
2. Define assessment scope and risk criteria
Defining the assessment scope and risk criteria is a foundational step in vendor risk assessment. By clearly identifying assessment scope and risk criteria, organizations ensure consistency in their assessments, making it easier to compare different vendors and make informed decisions based on a standardized set of benchmarks.
The assessment scope determines which parts of the vendor's operations the assessment will examine and which types of risks are most relevant. Start by identifying the services or products the vendor provides and how these integrate into your organization's operations. Consider the importance of each vendor in your operational continuity, prioritizing those critical to your business processes. Consider the following factors which may impact a vendor’s importance in your third-party ecosystem:
- Vendor’s access to sensitive data
- Geographical location of the vendor
- Regulatory compliance requirements based on the industry or service provided
On the other hand, risk criteria define what types of risks your organization needs to assess and what constitutes an acceptable or unacceptable risk level. Your organization should align these criteria with its overall risk management framework and risk appetite. Common categories include:
- Cybersecurity risk
- Compliance risk
- Operational risk
- Financial risk
- Reputational risk
Each category should have clear, measurable criteria for evaluating the risk level, such as the likelihood of a risk event occurring and the potential impact on the organization. Establishing these criteria involves internal policies, industry standards, regulatory requirements, and past security risk data.
3. Utilize a vendor risk management framework
Organizations often structure and streamline their vendor risk assessment process using a vendor risk management framework. A robust framework serves as a blueprint to guide the organization through systematically identifying, evaluating, and mitigating risks associated with third-party vendors.
Standardized frameworks allow organizations to conduct assessments consistently across all vendors, making it easier to compare and manage vendor risks. Framework integration typically outlines vendor selection, risk assessment, risk mitigation, and ongoing monitoring. A robust framework will also define roles and responsibilities within the organization for overseeing and executing each step, ensuring that the process is transparent and accountable.
Popular vendor risk management frameworks include:
- ISO 31000
- NIST SP 800-53
- COSO Enterprise Risk Management (ERM) Framework
- Shared Assessments Standard Information Gathering (SIG) Questionnaire
- Shared Assessments Vendor Risk Management Maturity Model (VRMMM)
Effective vendor risk management frameworks need to be adaptable to different types of vendor relationships and risk exposures while being comprehensive enough to cover critical risk areas. Additionally, utilizing technological solutions within the framework, like automated risk assessment and monitoring tools, can improve efficiency and accuracy, enabling real-time risk management and faster responses to potential threats.
4. Continuously monitor vendors and track vendor performance
The core of vendor risk assessments is continuous monitoring of vendors while tracking their performance over time. This ongoing process helps to ensure that all vendors comply with contractual obligations and adhere to established security controls and performance standards throughout their relationship with your organization. Continuous monitoring and tracking aim to foster a dynamic and responsive vendor management process that aligns with the organization's overall risk management framework and business strategy.
Continuous vendor monitoring includes a variety of strategies, including:
- Regular audits
- Performance reviews
- Key performance indicators (KPIs)
- Identifying changes in business operations
Additionally, regular vendor security ratings and dashboards can provide a clear and ongoing view of each vendor's performance against their contractual obligations and the organization's expectations. This level of transparency helps manage current high-risk vendors but also assists in making informed decisions when renewing contracts or selecting new vendors.
Automated software platforms can provide real-time vendor performance, compliance, and risk exposure data. Your organizations can configure these systems to send alerts when performance metrics fall below a certain threshold or when compliance lapses are detected, enabling prompt corrective actions. Automated platforms streamline vendor risk management, simplifying the processes for users.
UpGuard Vendor Risk is the premier vendor risk management software that allows you to monitor the Internet-facing risk posture of existing or potential vendors, send and analyze security questionnaires, and request and follow up on risk remediation requests.
Check out all of UpGuard Vendor Risk’s features here >
5. Conduct routine vendor risk assessments
After performing an initial vendor risk assessment, identify a regular cycle for conducting them again. Organizations can utilize routine vendor risk assessments to ensure ongoing compliance and performance standards across their entire vendor library, even during operational or industry regulatory changes. Routine vendor risk assessments facilitate a proactive approach to risk management, allowing organizations to address potential issues before they have a negative impact.
During these assessments, organizations should review the compliance and performance data and discuss any operational changes, upcoming challenges, or improvements with vendors. Security personnel can also assess high-risk vendors more often than low-risk vendors. Organizations should re-assess vendors with the same risk assessment scope for comparison or create new versions based on those challenges or improvements.
Organizations can complete routine vendor risk assessments via methodologies such as:
- Self-assessments
- Third-party audits
- Vendor scorecards
- Vendor risk assessment questionnaires
Additionally, incorporating feedback mechanisms within the assessment process can provide insights into improvement areas and help foster a collaborative relationship with vendors.
6. Report on vendor performance
The last step in the vendor risk assessment process is to report findings from risk assessments and monitoring activities to relevant stakeholders, which may include executive management or a governance board. Vendor performance reporting is essential for assessing risks and ensuring vendor accountability during their entire lifecycle.
Standardized formats allow easy comparison across an organization’s vendors, but personnel can also tailor reports to a specific audience, such as security departments, stakeholders, or risk management personnel. The goal is to use the results of a vendor risk assessment for transparent and actionable communication.
Important information to include in a vendor risk assessment report includes:
- Performance metrics
- Compliance status
- Vulnerabilities identified
- Current level of risk
- Vendor criticality
- Risk mitigation actions
It is essential to schedule reports regularly and as part of routine vendor reviews. However, reports should also be triggered by significant events, such as a breach or a major change in the vendor's operations. This approach to reporting allows all relevant parties to remain well-informed and react quickly to any changes in the vendor landscape.
UpGuard’s reporting and dashboard functionality allows organizations to gain visibility into their security posture and that of third-party vendors with easily customizable reporting. Whether you’re interested in executive-level reporting for key decision-making or custom reporting tailored for stakeholders, UpGuard efficiently streamlines the executive reporting process.
Learn more about UpGuard’s reporting functionality here >
Vendor risk assessment best practices
Vendor risk assessments are the foundation of protecting an organization from potential threats from third-party relationships. However, many best practices can elevate your organization’s third-party risk assessments while mitigating risks, ensuring vendor compliance, and maintaining trust in vendor relationships.
Below are the top three best practices to strengthen vendor risk management strategies, leading to more secure and reliable vendor partnerships.
Automate your vendor risk assessments
The vendor risk assessment process can be lengthy and complicated depending on an organization's number of vendors and the security standards included in the assessment. Instead of manually tracking assessments via spreadsheets, one best practice to optimize your organization’s vendor risk management program is to automate your vendor risk assessments utilizing specialized software or tools.
Automated risk assessment tools enhance efficiency and accuracy while standardizing your assessments across all vendors. Trigger alerts for re-assessment with these tools, such as when a vendor’s profile changes or when new threats are identified. This process ensures that assessments remain current and relevant, providing more accurate and up-to-date information for decision-making. Incorporate organization-specific risk factors or industry-specific regulations by customizing automated assessments.
One example of automated vendor risk assessments is UpGuard Vendor Risk. UpGuard’s VRM platform streamlines your organization’s vendor security assessment process to give you a comprehensive view of your vendor’s security posture. Additional automated risk assessment features include:
- Vendor users: UpGuard customers' vendors can create a free account to answer questionnaires, complete risk assessments, and create a shared vendor profile.
- Vendor comparison: Compare the security posture of up to four vendors side-by-side and dive into the details to see which vendor represents the lowest risk.
- Vendor risk waivers: Waive vendor risks identified by automated scanning, security questionnaires, and additional evidence.
- Vendor risk matrix: Visualize your vendor portfolio risk by security rating and vendor tier to quickly focus on the most impactful areas of your vendor risk management program.
- Remediation request: Specify the evidence reviewed, document findings based on this evidence, record who conducted the assessment, and more.
- Additional evidence: Capture and store security and compliance-related documentation and identify new risks
Learn more about UpGuard’s automated vendor risk assessment features here >
Utilize a managed vendor risk assessment service
Organizations may also benefit from outsourcing vendor risk management to a managed vendor risk assessment service. This approach offers many benefits, such as access to a team of experts specializing in vendor risk management and advanced technologies that may only be available externally.
Managed vendor risk assessment services provide comprehensive solutions for vendor risk management, including continuous monitoring, detailed reporting, and expert analysis. These services can help organizations identify potential risks, evaluate vendor performance, and ensure compliance with regulatory requirements.
In addition, managed service providers may offer specialized expertise in particular industries, such as healthcare or finance, which can be particularly useful for organizations operating in those sectors. By leveraging the expertise of these providers, organizations can make more informed decisions and reduce their risk exposure.
UpGuard offers managed vendor risk assessment services, partnering your organization with an UpGuard analyst and automating vendor assessments. We provide a designated analyst who manages vendor assessments, collects critical documentation, and performs in-depth risk assessments. You receive an easy-to-understand report detailing key risks and how they were identified. Additional features include:
- Expertise you won’t find elsewhere: Deeply experienced in cyber risk, your UpGuard analyst brings a wealth of knowledge to your assessments, bolstering your team’s analytical prowess.
- Best-in-class security reporting: UpGuard’s actionable reports lead the industry in quality, reliability, and ease of use, bringing a new level of precision to your vendor assessments.
- Critical risk insights twice as fast: UpGuard analysts manage every aspect of vendor communication and analysis, ensuring you get insights—and can take action—sooner.
Learn more about UpGuard’s managed vendor risk assessment services here >
Stay up-to-date with the latest security trends
As organizations continue to optimize their vendor risk assessment process, staying up-to-date and adapting to the latest security trends and threats is essential. Keeping abreast of new threats and technologies helps organizations anticipate potential vulnerabilities in vendor relationships and adjust their risk assessments accordingly.
There are various ways organizations can stay up-to-date with the latest security trends, including attending industry conferences, participating in relevant webinars, subscribing to security bulletins, and engaging with professional networks. By keeping up-to-date with the latest security trends and threats, organizations can ensure they are well-versed in data security and protecting their organizational assets.
UpGuard offers an Incident and News feed that allows organizations to evaluate their specific risk related to publicly disclosed security incidents like breaches, ransomware attacks, and data exposures. The Incidents & News feed is a chronological feed that you can filter and search for news most relevant to your organization's security needs. Additional features include:
- Dark web posts: Security incidents from dark web ransomware groups (limited to groups who have demonstrated they pose a credible threat and are used by information security practitioners)
- Pairing with identity breaches: When a third-party data breach impacts your organization's users, UpGuard will notify you within the Identity Breaches module, complementing the Incident & News feed
- Data leaks: Managed service to detect exposed information proactively to prevent your organization’s leaks from becoming a breach
Learn more about UpGuard’s Incident & News feed here >
Take advantage of always-on vendor risk management with UpGuard
UpGuard Vendor Risk is a third-party risk management platform designed to automate and streamline the vendor risk management process, including helping organizations conduct vendor risk assessments within a TPRM program.
By leveraging technology to simplify the often complex and time-consuming task of evaluating vendor risks, UpGuard Vendor Risk helps organizations efficiently assess, monitor, and mitigate risks associated with their vendors and suppliers. Additional Vendor Risk features include:
- Customizable templates: UpGuard provides customizable questionnaire templates that users can tailor to meet specific industry standards, regulatory requirements, and organizational risk profiles.
- Bulk distribution and tracking: Vendor Risk enables the distribution of questionnaires to multiple vendors simultaneously and tracks the progress of each questionnaire, sending reminders and updates as necessary.
- Centralized vendor information: UpGuard centralizes all vendor information, including questionnaire responses, in a single platform, making it easier for organizations to access, review, and analyze vendor data.
- Automated risk scoring: UpGuard automatically scores vendors based on their questionnaire responses and other relevant data, which helps organizations quickly assess vendor risk levels and prioritize follow-up actions.
- Continuous monitoring: Vendor Risk monitors vendors’ cybersecurity postures and alerts users to changes or emerging vulnerabilities. Real-time visibility into vendor risks helps organizations respond swiftly to potential threats before they become incidents.
- Compliance management: UpGuard Vendor Risk helps vendors reach regulatory compliance with relevant regulations and standards (like GDPR, HIPAA, and SOC 2), tracking vendors’ certification statuses and identifying gaps or issues that need addressing.
- Collaborative features: Vendor Risk facilitates collaboration between internal teams and vendors, enabling seamless communication and efficiently resolving identified issues or risks.
- Comprehensive reporting: UpGuard provides detailed reports and dashboards that offer insights into the organization’s overall vendor risk landscape, which can be used for internal risk management purposes and to demonstrate compliance to stakeholders, auditors, and regulators.
