Bringing on a new partner without a deep background check is like handing your office keys to a stranger. This guide explains how to uncover the hidden risks in your supply chain to keep your sensitive data safe and your reputation intact.
Key Takeaways
- Effective vendor due diligence involves vetting every external entity that has access to company systems, including cloud storage providers, software developers, and IT support teams.
- Investigating a potential partner’s legal history and security audits before signing a contract allows a business to spot red flags like past fraud or weak data protection.
- Because business environments and threats change, companies must continuously review their suppliers’ security status to ensure they still meet safety standards long after the initial hiring process.
Virtually every enterprise-level organization utilizes third-party suppliers and service providers, and many companies have hundreds of different vendors. Outsourcing provides benefits for efficiency and scaling, but it can also introduce risks and vulnerabilities. To counter these dangers, it’s vital to have a robust vendor due diligence program.
What Is Vendor Due Diligence?
Vendor due diligence is the process of researching third-party service providers and suppliers to identify potential risks, issues, or challenges with the business relationship. In-depth vendor assessments focus on both the positives and the negatives. The process can help your organization choose between competing options during project bids, avoid high-risk partnerships, and select companies that align with organizational priorities and objectives.
When Do You Need Vendor Due Diligence?
No business would allow complete strangers to walk in from the street and access sensitive files. Similarly, any organization that outsources work or uses third-party products must first perform vendor due diligence. The more sensitive the systems or data, the more rigorous the process needs to be.
Software vendors, IT managed service providers, and third-party security personnel can help or hurt your business. Even platform-as-a-service infrastructure giants like AWS and Azure are considered vendors, and outages can cause damages worth billions of dollars.
What Does Vendor Due Diligence Involve?
Due diligence is part of the vendor management umbrella and closely related to risk management and cybersecurity. Vendor due diligence processes focus heavily on investigation, screening, and judgments, especially before the contracting and onboarding phases.
Screening
All vendors should undergo a preliminary screening process using background checks and high-level risk assessments based on your risk and security posture. Red flags such as repeated regulatory fines, fraudulent identity data, or refusals to share relevant information should result in immediate rejection to protect your company against bad actors.
Authentication
In today’s cybersecurity climate, enterprises need to take a “never trust, always verify” approach to vendor relationships. This extends to due diligence for vendors. Authentication includes:
- Anti-money-laundering investigations
- Beneficial ownership data
- Bankruptcy filings
- Past and current lawsuits
- Media reports (e.g., data breaches or negative consumer sentiment)
- U.S. and international sanctions
This phase requires combining research and analytics data with industry expertise. For example, past data breaches can indicate poor cybersecurity, but not always. A vendor with SOC 2 certification, a strong record of compliance, excellent emergency preparedness, and fast response times may still be a good partner.
Evaluation
Vendor due diligence is also about ensuring that vendors are a good fit for your organization. To properly assess third-party cybersecurity, compliance, and risk management practices, your team needs information. This phase includes reviewing security questionnaires, certification requests, and audit data.
Risk Assessment
The vendor risk assessment process provides insight into potential dangers from third-party service providers. Analyzing vendor policies, controls, and documentation can reveal:
- Compliance risks
- Cyber risks
- Financial risks
- Operational risks
- Geopolitical and supply-chain risks
- Reputational risks
Scoring vendors based on risk criteria can help you determine which companies to partner with and which to avoid. This level of enhanced scrutiny is especially important for critical services and high-risk data.
Formal Review
Strategic vendor decisions are driven by data, not one individual’s “instincts.” Enterprises should have a standardized review process that combines research findings with input from expert stakeholders.
Integration, Optimization, and Monitoring
Contract approval isn’t the end of vendor due diligence. Important vendor relationships benefit from ongoing monitoring, both to detect unexpected compliance failures and to optimize integration and performance.
Why Perform Vendor Due Diligence?
Performing in-depth due diligence requires personnel, resources, tools, and time. But the benefits for enterprise-level organizations far outweigh the costs. No information security management system is complete without effective vendor oversight.
Stronger Cybersecurity
SaaS platforms, applications, and managed service providers can introduce system vulnerabilities. Due diligence ensures you only partner with companies that follow cybersecurity best practices. It also helps you identify where and how to mitigate vendor-specific risks, such as authentication standards, access controls, and real-time vulnerability scanning.
Compliance Consistency
Regulatory compliance requirements often extend to vendor products and practices. Vendor due diligence reveals the truth about third-party compliance, not just marketing speak.
Audit trails, independent assessments, security certifications, internal reports, and compliance frameworks build an accurate picture of vendor practices. Armed with this information, your organization can address concerns and specific compliance requirements before signing a contract.
Strategic Vendor Decisions
Consistently choosing the right vendors can streamline your operations, improve efficiency, increase service quality, and contribute to enhanced productivity. On the other hand, poor choices lead to friction, errors, compliance problems, and wasted resources. High-quality due diligence and data-driven decisions are often the difference between successful partnerships and costly failures.
Improved Risk Management
Comprehensive supplier research can help your organization manage risk at every stage of the vendor relationship:
- Initial: Avoid exposing key systems to dangerous third- and fourth-party risks in the first place. Implement safeguards during onboarding.
- Ongoing: Quickly flag contract violations and suspicious contractor activity.
- Renewal: Verify ongoing vendor compliance, cybersecurity controls, and performance standards.
- End of life: Alert stakeholders in advance to potential risks and vulnerabilities when contract termination becomes necessary.
All vendor relationships have inherent risks and company-specific risks to take into account. Due diligence is the driving force behind accurate vendor risk profiles.
Smarter Contract Negotiations
Knowledge is power. The better your team understands vendor risks, security controls, and compliance practices, the more you can tailor contract terms to your benefit. Put simply, due diligence allows you to extract more value from vendor strengths and reduce the impact of weaknesses.
Enhanced ROI
Despite legal obligations, some MSPs don’t live up to their promises. Ongoing vendor due diligence improves detection of substandard service and contract performance problems. By addressing issues early, you can avoid serious problems like data breaches and platform failures. Vendor analytics can also reveal opportunities for improvement and productivity gains, maximizing your ROI per contract.
Compyl Improves Vendor Due Diligence and Risk Management Processes
There’s no realistic way for enterprises with thousands of vendors to perform effective due diligence by hand. Fortunately, today’s AI-powered analytics platforms are more than up to the task. With Compyl’s targeted metrics, compliance tracking, cybersecurity workflow automation, and risk mapping features, your company can speed up vendor due diligence processes and improve accuracy at the same time.
Choose a comprehensive vendor risk management solution and request a demo of Compyl today.
