A vendor risk assessment is a critical element of performing due diligence, helping you vet potential vendors effectively and efficiently during the procurement process and throughout the vendor lifecycle. A thorough risk assessment should help you identify, mitigate, and manage the risks associated with your vendors to ensure you remain compliant, maintain a strong security posture, and avoid a costly third-party data breach.
This article covers what a vendor risk assessment is, why it’s important for your organization’s overall risk management strategy, and best practices for assessing your vendors.
What is a vendor risk assessment?
A vendor risk assessment is a critical process for all modern organizations. It involves identifying and assessing the risks associated with your third-party vendors by determining the criticality of these risks and their potential impact on your organization.
Why is a vendor risk assessment important?
IT vendor risk assessments are an essential part of the due diligence process for potential vendors as they ensure that any risks associated with a third-party vendor are accounted for and considered before moving forward with the business relationship. Risk assessments also allow you to review the level of risk a vendor poses to your organization at any given time, which is essential given the volatile nature of the cyber threat landscape.
When you onboard a new business partner, you take on all the risks associated with that vendor. This exposure extends to several types of risks, such as cybersecurity, operational, reputational, financial, and compliance risks. Left unaccounted for, these risks can prove deadly for your organization.
Learn how to create a vendor risk assessment matrix >
Consider the following scenario:
Your organization has implemented a new CRM platform that handles sensitive data. The CRM platform provider answers a generic security questionnaire during the procurement process and is quickly integrated into the existing tech stack.
A few months later, you see headlines that the CRM platform has fallen victim to a data breach. The cause? A cybercriminal exploited a software vulnerability affecting the CRM platform, which already existed at the time of onboarding.
The security breach exposes your customer data publicly, putting company operations to a standstill to contain the breach. Share prices plummet as disgruntled customers take their business elsewhere. Your organization also faces costly fines for non-compliance with data privacy regulations.
How could the breach have been prevented? By identifying and remediating the vulnerability that existed in the platform during the procurement process. Performing a vendor risk assessment is more than just sending out a security questionnaire – it combines several relevant information sources, including questionnaires, vulnerability and risk scanning, compliance documentation, and additional evidence documents, to give you a complete picture of the risk posed by a potential vendor.
When to perform a vendor risk assessment
You should perform vendor risk assessments as part of the initial due diligence process before onboarding new vendors and then at a regular cadence as part of an ongoing risk management process. The frequency of your risk assessments depends on various factors, including:
- Vendor criticality: High-risk or high-impact vendors (those that handle sensitive data or critical business operations) must be assessed most frequently (typically bi-annually).
- Regulatory changes: When cybersecurity regulations change or come into effect, you must reassess your vendors to ensure compliance.
- Security incident or breach occurrence: Following a security incident or data breach, whether internal or from a third party, it’s time to reassess your vendors to help prevent future incidents. Other significant events, such as natural disasters or geo-political conflicts, should also trigger a re-assessment as they leave businesses more susceptible to targeted cyber attacks and identity fraud attempts in the aftermath.
- Contract renewal: Before signing a new vendor contract, perform a risk assessment to ensure the vendor remains compliant and meets your organization’s other security requirements.
How to perform the vendor risk assessment process
As part of your vendor risk assessment program, ensure a dedicated leader or team is responsible for the end-to-end risk assessment and management process.
Step 1: Identify critical assets and vendors
Focus your assessments on your most critical assets and vendors, including those essential for business continuity and compliance requirements. Prioritizing these vendors allows you to address your most significant cyber risks while managing costs and resources effectively.
Step 2: Determine risk tolerance and appetite
Define the level of risk your organization is willing to accept across all areas of cybersecurity, such as network security and website security. Calculating risk appetite involves setting thresholds across different areas of risk, depending on the criticality of each vendor.
Step 3: Generate security ratings
Use a security ratings platform to assess your vendor’s overall security posture objectively. Security ratings also help you identify which vendors require immediate risk mitigation.
Step 4: Send out security questionnaires
Send out security questionnaires to collect detailed information about your vendors’ cybersecurity practices and identify any areas that may need further attention or put you at risk of non-compliance. Questionnaires can be mapped to various frameworks or standards to better assess the vendor’s compliance levels and security posture.
Step 5: Tier vendors by criticality level
Classify vendors based on the level of risk they pose to your organization, using a tiering system, such as low-risk, medium-risk, and high-risk. Your organization likely has hundreds of vendors to assess. Using vendor tiering to sort them by their level of criticality helps you better allocate resources and prioritize your risk remediation efforts.
Step 6: Track for data leaks
Use a data leak detection tool to monitor your vendors for data leaks. An ‘always-on’ solution like UpGuard allows you to identify and resolve vendor data leaks quickly.
Step 7: Conduct regular risk assessments
You should perform annual risk assessments to ensure your vendors remain compliant, and so your security team is aware of any new security risks. Highly regulated industries like healthcare and finance need to assess vendors more frequently. Routine risk assessments allow you to adapt to new business processes, regulations, and external threats while maintaining stronger vendor relationships.
Why you need a vendor risk assessment framework
Your organization needs a robust vendor risk assessment framework to ensure your assessment process considers your regulatory requirements, risk tolerance, broader risk management strategy, and overall business objectives.
Meeting these needs requires collating several pieces of information from disparate sources, such as automated scanning, questionnaires, and additional evidence documents. Individually compiling all of this information is difficult to track and manage, and critical information is often lost.
A third-party risk assessment framework provides a systematic approach to working through all the steps involved in a comprehensive vendor risk assessment, such as evidence gathering, risk identification, and risk remediation. It should allow you to perform routine risk assessments consistently and at scale.
A risk assessment framework forms part of a comprehensive third-party risk management framework, covering all aspects of risk across all stages of the vendor lifecycle. Additional components of a third-party risk management framework include:
- Compliance gap detection
- Third-party vulnerability detection
- Security questionnaire automation
- Remediation program
- Report generation feature for keeping stakeholders informed of TPRM efforts
Common third-party risk management frameworks include NIST CSF, ISO 27001, ISO 27002, ISO 27019, ISO 27036, and NIST RMF 800-37.
Related: How to implement a vendor risk assessment process.
Vendor risk assessment questionnaire template
Vendor risk assessment questionnaires are a critical part of the information-gathering step of a risk assessment. They help you understand the potential risks and cybersecurity measures of new vendors. Vendor questionnaires provide insights into how well a service provider has implemented information security practices, including incident response planning and disaster recovery.
There are several third-party risk assessment examples you can use to assess your vendors, such as CIS Critical Security Controls, Consensus Assessments Initiative Questionnaire (CAIQ), NIST 800-171, Standardized Information Gathering Questionnaire (SIG / SIG-Lite), and VSA Questionnaire (VSAQ).
NIST vendor risk assessment questionnaire
The NIST CSF risk assessment questionnaire is a popular assessment tool for gaining an initial understanding of a vendor’s security posture. The questionnaire covers the five key components of NIST:
- Identify: Covers Asset Management, Business Environment, and Governance, including inventory policies for information systems, documentation, tracking processes, policy adherence for software and information system categorization, and alignment with risk strategies and objectives.
- Protect: Covers Access Control, Awareness and Training, and Data Security, including access policies, password management, penetration testing, data protection, encryption standards, and information protection processes, to ensure vendors have limited access to information.
- Detect: Covers Anomalies and Events, Security Continuous Monitoring, and Detection Processes, including the strength of network defenses, anomalous activity detection, and the maintenance of detection processes, to ensure vendors can detect risks and vulnerabilities quickly.
- Respond: Covers Response Planning, including establishing and maintaining incident response processes and business continuity plans in the event of a cyberattack.
- Recover: Covers Recovery Planning and Improvements, including fast recovery following a security incident, updating recovery plans to include lessons learned, and ensuring vendors have overall resilience and communications post-breach.
SIG questionnaire risk assessment
The Standardized Information Gathering (SIG) Questionnaire is a vendor risk assessment that maps to various cybersecurity reguations and frameworks, such as ISO 27002, HIPAA, GDPR, PCI DSS, and NIST CSF. Given its broad coverage for compliance mapping, the SIG Questionnaire is a popular risk assessment questionnaire during the vendor onboarding process. SIG maps evaluates risks across 19 domains, such as Security Policy, IT Operations Management, Cybersecurity Incident Management, and Network Security.
The SIG questionnaire can be used in various different ways depending on an organization’s requirements and the type of vendor being assessed. Common use cases include: replacing multiple vendor risk assessments, evaluating vendor security controls, responding to a requirest for proposal (RFP), and performing a self-assessment.
ISO 27001 risk assessment questionnaire
ISO 27001 is a leading international standard for data security and information security management. The ISO 27001 questionnaire consists of several standards covering information security management systems, information technology, information security techniques, and information security requirements. As ISO 27001 is a world-class standard, vendors who comply with its requirements are regarded as adhering tothe highest standard of security.
ISO 27001 certification is a common piece of evidence provided during the risk assessment process to demonstrate the strength of a vendor’s security posture. As a risk assessment framework, organizations can also map a vendor’s responses to other risk assessment questionnaires to ISO 27001 to evaluate their overall security controls.
Vendor risk assessment checklist
A vendor risk assessment checklist helps you ask the right questions to identify all potential risks and vulnerabilities affecting your third-party vendors during the due diligence process.
UpGuard offers a free downloadable vendor risk assessment questionnaire template broken into a checklist across four sections:
- Information security and privacy
- Physical and data center security
- Web application security
- Infrastructure security
What to include in a vendor risk assessment report
A vendor risk assessment report gives you a complete picture of risk for vendors that have completed risk assessments. Internally, a comprehensive vendor risk assessment report helps drive strategic decision-making, speed up vendor due diligence, and highlight high-risk vendors that should be terminated. Sharing a risk assessment report with vendors helps guide the remediation process by fostering stakeholder communication and giving vendors more visibility over their security posture.
A standard vendor risk assessment report should include the following:
- Vendor profile: Include the vendor’s history, business model, service level agreements (SLAs), and market gauge to give an overview of reliability.
- Compliance overview: An outline of a vendor’s compliance with regulatory requirements and industry standards, such as GDPR and HIPAA.
- Cybersecurity measures: What defenses does the vendor have to protect against cyber threats? E.g., firewalls, encryption
- Data management and privacy practices: How does the vendor handle data security and what privacy practices are in place to prevent a cyberattack?
- Risk assessment methodology: How does the vendor identify and mitigate risks?
- Third-party audits: Overview of all external audits and security certifications relating to the vendor, ensuring the vendor follows industry best practices.
- Access control and identity management: Outlines policies for identity access management and data protection.
- Supply chain risks: Maps out the vendor’s own third-party relationships to identify your fourth-party vendors and determine your level of concentration risk.
- Ongoing monitoring: What continuous monitoring and reporting practices and metrics are in place to ensure decisions about vendor relationships are based on up-to-date information?
Vendor risk assessment criteria
The larger your vendor inventory grows, the more critical it is to establish clear vendor risk assessment criteria. One typical process for prioritizing your risk assessments is vendor tiering. Vendor tiering allows you to define the level of risk and potential impact a vendor has on your organization, depending on the type of vendor. For example, you’d classify a vendor that handles sensitive information like personal data as Tier 1 and a vendor that only stores publicly available information as Tier 3.
Using this criteria allows you to better allocate time and resources to performing risk assessments and determine what level of assessment is required for each tier. For example, a Tier 1 vendor would likely require routine assessments involving in-depth questionnaires and ongoing remediation planning. A Tier 3 vendor may only need to meet a predefined threshold, like a minimum security rating requirement.
Vendor risk assessment matrix
A vendor risk assessment matrix enables you to focus on the most impactful areas of your vendor risk assessment program by visualizing your vendor risks by security rating and level of criticality. By understanding how your vendor risk is distributed, you can understand its overall impact on your business and report on this information clearly and effectively.
Vendor risk assessment process best practices
Vendor risk assessments are critical for understanding your vendors’ security measures and associated risks. When setting up a vendor risk assessment for the first time, it’s crucial to get the basics right to get the most out of your vendor risk assessment procedure as part of a robust vendor risk management program.
1. Know your business
Identify the types of data your business stores and is sharing with third-party vendors. Keep the volume and level of criticality of your vendor relationships in mind to help visualize the full scope of your risk exposure.
2. Clarify your goals
Establish clear objectives for vendor risk assessments to ensure their scope and purpose align with your broader security needs and business goals.
3. Good artists borrow
Rely on existing resources and industry standards to establish a robust vendor risk assessment framework based on cybersecurity best practices.
4. Personnel and resources
Determine who and what is available to perform risk assessments to ensure you create a feasible process, given your capabilities and limitations. Look for opportunities for automation where possible to drive efficiency.
5. Process for administering the document lifecycle
Outline the end-to-end risk assessment process, from distributing to logging risk assessments. Ensure this process meets compliance requirements and is adaptable to ever-changing security and business needs.
The exact requirements of your vendor risk assessment process depend on your organization’s industry. Each industry has specific regulations, standards and key focus areas to consider when vetting potential vendors.
Healthcare vendor risk assessment
Healthcare vendor risk assessments are crucial for ensuring patient care and continuity in the event of a security incident. Healthcare providers must ensure their critical vendors comply with industry regulations like HIPAA or risk hefty fines. Vendor risk management frameworks, like NIST and HITRUST provide a more structured approach to industry-specific risk assessments, highlighting the need for regular risk assessments, continuous monitoring, and clear contractual terms for security and data management.
Vendor risk assessment for banks
Banks and other financial institutions must take particular care when performing vendor risk assessments due to their heavy reliance on external services that handle personally identifiable information (PII), such as technology, payment processing, and customer data management solutions.
Finance companies must comply with a number of finance industry regulations, including GDPR, SOX, PCI DSS, BSA, GLBA, PSD 2, and FFIEC, and their vendors must also comply. Finance vendors should undergo regular risk assessments to ensure they remain compliant and avoid harsh legal repercussions, fines, and reputational damage.
Technology vendor risk assessment
In the technology and telecommunications industries, IP protection, data privacy, and system availability are crucial factors. As such, organizations engaging with vendors in these sectors should focus on assessing cybersecurity measures, data handling practices, and the overall resilience of IT infrastructure. Risk assessments across these industries should also check adherence with industry standards like ISO 27001 and NIST CSF.
Vendor risk assessment software, tools, and services
The more comprehensive your vendor risk assessments are, the better your chances of avoiding a third-party data breach. But manual, spreadsheet-based risk assessments drain valuable time and resources better spent on more meaningful risk management processes.
Reliable vendor risk assessment tools streamline the entire risk assessment process with automation. Faster risk assessments enable security teams to perform due diligence consistently and track ongoing vendor performance at scale.
Vendor risk assessment software often forms part of a complete vendor risk management platform, with full visibility of the third-party attack surface.
Essential features/integrations of top vendor risk management solutions include:
- Attack surface monitoring
- Vendor risk assessment management
- Security questionnaire automation
- Risk remediation workflows
- Regulatory compliance tracking
- Vendor security posture tracking
- Cybersecurity reporting workflows
Managed vendor risk assessment services alleviate the burden on your security team by placing your vendor risk assessment process in the hands of dedicated analysts.
Get automated vendor risk assessments with UpGuard
Establishing a vendor risk management process isn’t a set-and-forget endeavor. Business needs change constantly, and emerging threats arise daily. You need a vendor risk assessment framework that’s adaptable and efficient across all stages of the vendor lifecycle.
UpGuard offers a complete vendor risk assessment framework, neatly packaged in a single workflow, which allows you to compile all your risk assessment activities and information, assess the level of risk a vendor poses to your organization, and save point-in-times assessment for future reference and comparison.
Save time with UpGuard Managed Vendor Assessments
With UpGuard Managed Vendor Assessments, our team of global expert analysts manage the end-to-end risk assessment process for you, drastically cutting down assessment completion time.
Whether you’re implementing a new TPRM program or an enterprise looking to scale, Managed Vendor Risk Assessments is the ideal solution for teams with limited capacity and resources.
You’ll receive actionable reports aligned to industry standards to drive risk mitigation strategies and decision-making.
