To protect your organization’s operations, data, and finances, an enterprise risk management framework must go beyond internal vulnerabilities and take vendor relationships into account. One-fifth of data breaches involve third-party companies. The vendor risk assessment process is a critical part of effective ERM or GRC.
What Does the Vendor Risk Assessment Process Involve?
Vendor risk assessments are designed to evaluate potential suppliers, contractors, and other third-party associates before entering into a business relationship. This process is also known as third-party risk management.
Security reviews are an essential part of managing vendors, but only one area. Vendor risk assessments look at all types of vendor risk, including legal, financial, operational, and regulatory impacts.
What Are the Steps in the Vendor Risk Assessment Process?
You may think that vendor risk assessments start with questionnaires, but successful programs lay a lot of groundwork first.
1. Determine Your Risk Posture
Before you can accurately assess third-party risks, you must determine what your company considers acceptable and unacceptable in terms of regulatory compliance, privacy, data security, and similar areas. What risk mitigation strategies do you have in place, and where is the go/no-go line?
2. Select a Vendor Risk Assessment Framework
You also need to decide how your organization will calculate and categorize vendor risks. Quantitative risk frameworks offer greater precision, especially when dealing with financial impacts. Monte Carlo simulations are popular and comprehensive, but you can also choose an EMV or fault-tree approach.
Choosing a framework matters because it provides a standardized process. Every regional hub, oversight committee, and department can follow the same data-driven approach when evaluating potential vendors.
3. Create a Vendor Database
Categorizing suppliers and contractors by risk level is another important part of vendor risk assessments, but before you can do that, you need a centralized database to store vendor information. This third-party “inventory” helps you manage vendors throughout the contract lifecycle, from onboarding to renewal or termination.
At this stage, you should also create broad vendor categories based on anticipated risks:
- Data: Any vendors that process or store sensitive data, financial information, or network traffic need extra scrutiny.
- Privacy: Any vendors that gather, analyze, transmit, or otherwise process the data of EU residents must meet strict GDPR standards.
- Compliance: Any vendors that impact your regulatory compliance posture (e.g., HIPAA Business Associates) should automatically require a more in-depth risk assessment.
- Region: Vendors that operate in some areas of the world may have unique cybersecurity, operational, financial, or supply chain risks that you need to track carefully.
Organizing third parties this way before performing assessments helps streamline the process, focusing your personnel on the areas that have the largest impact on your overall security, financial health, and operations.
4. Prepare a Vendor Questionnaire
Third-party risk assessments rely on questionnaires and certifications to ensure that vendors meet the required risk controls. What you include in your vendor risk questionnaires depends on the information in your database, likely risks in the category, regulatory requirements, and your organization’s standards.
For example, healthcare organizations might ask the following questions:
- What data security certifications does your company have? (HITECH, ISO 27001, SOC 2, etc.)
- How do you process patient data, and where do you store it? Do you use encryption? What employees or subcontractors have access?
- What data loss prevention safeguards do you have, and how often do you perform backups?
- How often do you conduct internal audits for cybersecurity, privacy, and HIPAA compliance?
- What endpoint security measures and access controls do you have? Is multifactor authentication required for your employees? What is your device policy?
For all of these questions, you would also request documentation, such as proof of the most recent SOC 2 Type 2 report, ISO 27001 certification, or HITECH validation assessment. These independent audits reduce the number of questions you have to include on your questionnaire because they cover many security and compliance guidelines.
5. Evaluate the Vendor Response
Once you receive the completed vendor risk questionnaire, you need to review the responses and check supporting documentation. Note any red flags, missing information, or evasive answers. Asking follow-up questions takes time, but it may be necessary for critical suppliers.
6. Schedule an Independent Audit (Optional)
If you outsource critical data storage or cybersecurity tasks, you may need to arrange for an independent audit to validate the initial assessment. Whether you take this step depends on the vendor’s reputation and size. Large vendors may already schedule third-party audits to satisfy clients.
7. Conduct the Risk Assessment
Ideally, you would upload the questionnaire data to a vendor risk management platform. This allows you to quickly organize, evaluate, and track your entire third-party ecosystem. Next, analyze the data using your chosen risk assessment matrix and create a report with the findings.
Depending on your industry, how you perform vendor risk assessments is influenced by regulatory frameworks such as PCI DSS, HIPAA, GDPR, or NIST SP 800-171. Many organizations follow the VRM guidelines in ISO 27001, ISO 27036, or NIST SP 800-161 for cybersecurity supply chain risks.
8. Categorize Vendors
Based on the results of the risk assessment, place each vendor in a risk category, such as level one for low-risk suppliers and level five for high-risk organizations. Depending on your risk appetite, you may reject vendors above a certain level, require corrective actions, or implement risk mitigation measures.
9. Perform Follow-Up Assessments
Vendor risk categories should also influence your ongoing relationship. Suppliers with access to critical data may need to report quarterly network scans and annual security audits. For other vendors, you would conduct a follow-up assessment before renewing the contract. Any vendor security incidents or risk events should trigger an automatic evaluation.
10. Implement Continuous Monitoring
Cybersecurity frameworks like NIST require continuous network monitoring as part of the Zero Trust approach to vendor risks. Any third parties involved in your software supply chain should allow system monitoring to minimize the risk of internal threats, bad actors, and malware.
Improve Your Vendor Risk Assessment Process
Automation tools can improve the accuracy of your vendor risk assessment process and reduce the resources needed for managing third-party risks. Compyl builds on that foundation with AI-guided insights, continuous monitoring, and automated workflows that surface issues early and streamline follow-up.
Cutting-edge tech helps enterprises coordinate thousands of vendors cost-effectively while maintaining consistency and accountability across the supply chain. Learn how Compyl’s vendor risk monitoring tools can strengthen your workflow, compliance, and security posture.
