What is a Vendor Risk Assessment?
Outsourcing is a necessary component of running a business today. It not only saves your business money, but it’s a simple way to take advantage of expertise you might not currently have in house. The downside is that if proper cybersecurity procedures aren’t in place using third-party vendors can also leave your business vulnerable.
Third-party security breaches aren’t uncommon. In fact, more than half of the breaches that have occurred over the past two years happened because of third-party vendors.
Hundreds of other organizations fall victim to third-party data breaches. If it can happen to them, it can happen to you. However, if you do your due diligence, it’s significantly less likely.
The Vendor Risk Assessment Process
A vendor risk assessment, or third-party risk assessment, is a process companies use to monitor and vet their current and future business partners. This process includes, but isn’t limited, to:
- Identifying and evaluating the potential risk of working with vendors.
- Weighing the rewards and risks of working with a partner.
- Assessing your third parties’ values, goals, policies, procedures, and missions.
- Conducting third-party onboarding and screening.
- Assessing results as the relationship progresses.
Conducting this process isn’t a once-and-done job. It requires constant oversight, monitored processes, and adjustments as needed.
The Step-by-Step Process for Running a Vendor Risk Assessment
Third-party management is another investment critical to the success of your business. Failure to make that investment could result in reputational damages, lost revenue, legal fees, and fines. To help you avoid these harsh penalties and get your third-party risk management up and running faster, we’re laying out the step-by-step process for running a vendor risk assessment.
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Step 1: Understand the Risk of Each of Your Vendors
Before you begin evaluating your vendors, get familiar with the different types of risk each could potentially expose you to. There are 10 main types of risk of which to be aware:
- Strategic Risk
This is the risk of your vendor having the ability to obtain or expose your trade secrets, ideas, or intellectual property.
- Financial Risk
If a vendor isn’t financially stable, it could be a financial risk. This is especially a risk during the COVID-19 pandemic. Are your vendors doing okay? Now is the time to check in on this potential risk.
- Compliance Risk
If your third-party partners aren’t compliant with laws and regulations, they’re putting you at compliance risk. Here is a great checklist for monitoring third-party risk management compliance.
- Geographic Risk
If your vendor operates in a risk location, take it into consideration.
- Technical Risk
Does your vendor have sound IT and data management processes in place? If not, they might be a technical risk.
- Subsequent Risk
If your vendors also use third-party partners, make sure those processes won’t affect you in any way.
- Resource Risk
Ensure the vendor has the proper resources to complete the job you’re paying them to do.
- Replacement Risk
Evaluate how easy it would be to replace a vendor if it were to go out of business.
- Operational Risk
Take a look at the vendor’s day-to-day processes and policies. Could any put your business at risk?
- Reputational Risk
Does the vendor come with any baggage, and if so, could that affect the reputation of your business if you work with the vendor?
Not all of these risks will apply for each vendor. But it’s important to be aware of them to ensure you have a complete picture when evaluating your third-party vendors.
Step 2: Determine Your Risk Criteria
The next step is to develop risk criteria for each of your third-party assessments. These will depend on the type of business you’re conducting with each of your vendors. If your business collects a lot of personal data, you might evaluate your vendors on how they share, store, and manage sensitive information. On the flip side, if your business relies on vendors for inventory and supply chain technology, you might evaluate their financial and operational risk a bit more heavily. Determine which risks are most important to you. Benchmark your vendor evaluations around those core risks.
Step 3: Asses Your Vendor’s Products and Services
After evaluating the risk of the third-party business operations, you will want to take a look at the risk of your vendor’s specific products and services. A few questions to consider asking are:
- Is the software secure?
- Will there be a learning curve for my employees to learn it? If so, what does that timeline look like?
- How much does the product or software cost?
- Is this software compliant with relevant global and regional laws?
This evaluation will help your business to have a more holistic picture of the potential risks at play.
Step 4: Hire an Expert
Vendor risk management is a job all in itself. If you aren’t an expert yourself, but you’re planning to manage the risk assessment process, you’re exposing your business vulnerable to gaps an expert wouldn’t miss. Instead of adding yet another task to your to-do list, we advise you enlist people in other departments of your organization to help or outsource an expert. These people will be responsible for assessing a vendor’s risk at a deeper level. Create a vendor risk assessment team consisting of leaders from the following departments:
Step 5: Asses All Vendors & Separate Them by Risk Level
No matter how big or small, you need to assess every vendor. If they have access to your files, data, or physical space, they could put your company at risk. After you assess your vendors, separate them by their risk levels. This process will help you quickly determine whether you should work with them or not, speeding up the risk management process. Score vendors as high, medium, or low risk based on your risk criteria. Then give the vendor a business impact score. This helps you determine how important the vendor’s product or service is to your organization. Lastly, decide the level of due diligence your business will complete for vendors at each risk level. This will streamline the process, improve efficiency, and eliminate any bias along the way.
Step 6: Create a Risk Management Plan
You’ve selected the vendors you want to work with. The next step is to create a unique risk management plan. This is a plan for how your organization can manage or mitigate each potential risk posed to it by the third party. If disaster strikes, you can respond fast and reduce any damages. Your risk management plan should include:
- Risk scenarios and specific response tasks including the names, roles, and employees responsible for each one.
- Frequent monitoring of your vendors’ processes.
- Annual, in-depth due diligence to stay updated on your vendors’ processes.
- A review of contractual obligations, including data storage requirements and subcontractors.
Be sure to enlist the help of experts in other departments when creating your risk management plan. They will be helpful in providing insight into how to prevent and handle these risks.
Step 7: Conduct Yearly Assessments
Your organization likely has numerous changes every year. From new technology implementations, updated standard operating procedures, and new employees, change is constant. Your vendors aren’t any different. It’s your job to monitor the changes happening within your vendors’ businesses to ensure your bottom line is safe from risk. An annual assessment will help ensure you’re keeping your business protected from potential risk. And depending on a vendor’s risk level, you may want to monitor it monthly or quarterly.
Technology Can Help
Vendor risk management requires a human element to ultimately make the best decision for your business. However, the right tools can make vendor management and the vendor risk assessment process more streamlined. That’s where OneTrust Vendorpedia comes in handy. Try it free today! The platform offers technology for you and your vendors to help simplify vendor risk management with faster onboarding, real-time monitoring and unprecedented vendor visibility.