How to Conduct a Vendor Risk Assessment

Business professional conducting a vendor risk assessment using a digital checklist to evaluate third-party risks and vendor security.

A vendor risk assessment helps you identify and evaluate the risks a third party could introduce before and throughout a business relationship such as:

Determine which vendors require assessment and how critical they are to your operations.
Identify the types of risk associated with each vendor and the services they provide.
Gather documentation and evaluate the vendor’s controls, practices, and risk posture.
Address unacceptable risks before approving or continuing the relationship.
Reassess vendors periodically. .
Reassess vendors when significant changes occur.

These days, working with third-party vendors is something that’s almost impossible to avoid. And there are numerous benefits to doing so, but working with vendors also introduces risks that aren’t entirely within your control, and that you might not have considered before.

Think about it. Any given vendor you use during the course of normal business operations is likely handling sensitive information, providing technology your organization relies on, and supporting critical business processes.

That’s why vendor risk assessments are so crucial. They provide a structured way to identify your organizational exposure, determine whether the associated risks are acceptable, and decide what controls or other actions may be necessary.

What is a Vendor Risk Assessment?

Vendor risk assessments identify and evaluate the risks you incur while doing business with a third-party vendor.

Depending on the relationship, risk could come in many forms, including:

Cybersecurity: Could weaknesses in the vendor’s security expose your organization to an attack or data breach?
Compliance and privacy: Does the vendor meet applicable regulatory, contractual, and data-handling requirements?
Operational: What happens if the vendor experiences an outage or cannot deliver its services?
Financial: Is the vendor financially stable enough to meet its obligations?
Reputational: Could the vendor’s actions damage your organization’s reputation?
Supply chain: How dependent are you on the vendor, and what third parties does that vendor depend on?

Note: Vendor risk assessments are one very important component of a broader Third-Party Risk Management (TPRM) program, which addresses third-party risks throughout the relationship lifecycle.

Is a Vendor Cyber Risk Assessment the Same as a Risk Assessment?

No, but they’re related.

A cyber risk assessment focuses specifically on cybersecurity threats, vulnerabilities, and their potential impact.

Cybersecurity is one of the most important parts of a vendor risk assessment, to be sure, particularly in an information security vendor risk assessment or vendor cyber risk assessment, but it’s not the only important part.

Operational, financial, compliance, and other risks may also need to be considered in a vendor risk assessment, and as part of a broader third party risk management program.

Why do Vendor Risk Assessments Matter?

Outsourcing a product or service doesn’t outsource the associated risk, because, at the end of the day, a vendor is still a partner that enables your business operations in some way, and is, therefore always linked to your organization, its products or services, and its data.

Vendors with access to particularly sensitive data could, therefore, create security or privacy exposure. Meanwhile, what about a vendor that provides mission-critical capabilities? A vendor outage or supplier failure could, in that case, disrupt your operations and create financial losses.

A good assessment of your organizational vendor risk doesn’t just identify exposure; it also helps to determine whether your current level of risk in various areas fall within acceptable levels. It also establishes controls or remediation requirements when they don’t.

Last but not least, a good vendor risk assessment exposes risks that extend beyond the vendor itself, including subcontractors and other providers. When critical suppliers are involved, these assessments can support a broader supply chain risk management strategy.

How to Conduct a Vendor Risk Assessment

You should always tailor the vendor risk assessment process to reflect each vendor’s unique role and potential impact on your organization. Here’s how you can do that.

1. Identify and Classify the Vendor

First, establish what the vendor provides and how important that product or service is to your organization. Consider the following:

What products or services does the vendor provide?
Will it access your systems or sensitive information?
Which business processes depend on it?
What would happen if its services became unavailable?
Does it rely on subcontractors or other third parties?

Next, use these answers to classify vendors according to risk level, allowing higher-risk relationships to receive greater priority and deeper assessment.

2. Determine Which Risks Need to be Assessed

Avoid the temptation to use the same assessment for every vendor. You should define risk categories differently for each vendor, depending on the relationship and its impact on your business.

For instance, a SaaS provider processing customer information will require greater scrutiny of cybersecurity, privacy, availability, and compliance. A supplier of a critical component, on the other hand, may warrant more attention to financial stability, operational resilience, and supply chain dependencies.

Each vendor presents different risks. It is the job of a good vendor risk assessment to uncover what they are and their impact.

3. Gather Information and Documentation

Once you know what the risks are, you need to evaluate them. Depending on the vendor, this may include:

Security policies and procedures.
Independent audits, certifications, or assessment reports.
Data handling and privacy practices.
Incident response procedures.
Business continuity and disaster recovery plans.
Compliance documentation.
Financial information and insurance coverage.
Subcontractor or fourth-party information.
Previous security or operational incidents.

For ICT vendors, CISA’s Vendor Supply Chain Risk Management Template provides standardized questions that can help inform this process.

4. Evaluate and Document the Risk

Review the findings based on factors such as likelihood, business impact, existing controls, and the importance of the vendor relationship.

Whereas vendor risk may vary, and you shouldn’t use the same assessment for each vendor, you should apply a consistent scoring methodology such as low, moderate, and high risk for all vendors.

For ICT suppliers, NIST’s Cybersecurity Supply Chain Risk Management Due Diligence Assessment Quick-Start Guide provides additional guidance for structuring and documenting due diligence assessments.

5. Address Identified Risks

Do the risks you’ve identified for each vendor fall within your organization’s risk tolerance levels? This something you’ll need to assess. When they don’t you’ll also need to figure out what action is required.

Potential responses include:

Requiring the vendor to remediate a weakness.
Implementing additional internal controls.
Restricting access to systems or data.
Adding contractual security, compliance, or service requirements.
Formally accepting residual risk.
Selecting another vendor when risk cannot be adequately addressed.

Do you know which vendor risks deserve the most attention?Talk with Quest about assessing risk against business impact.

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6. Continue Monitoring and Reassessing the Vendor

The vendor risks you are susceptible to today will likely not be the same ones you’ll be susceptible to tomorrow. Assessments shouldn’t end at approval. Establish reassessment schedules based on vendor risk and criticality, with higher-risk vendors typically receiving more frequent review.

Reassessment may also be appropriate following a significant change in services or access, a security incident or outage, new regulatory requirements, organizational changes, or newly identified risks.

Vendor Risk Assessment Checklist

As mentioned, you should tailor specific assessment criteria to your organization and its relationship with each vendor.

That being said, you should compare your assessment criteria to a basic vendor risk assessment checklist such as the following to ensure you’re covering these critical areas, when applicable:

Business relationship: What does the vendor provide, and how critical is it?
Data: What information can the vendor access, process, store, or transmit?
Systems: Does the vendor have access to internal systems or infrastructure?
Cybersecurity: What controls protect systems and information?
Compliance: Which regulatory, contractual, or industry requirements apply?
Resilience: How will services continue or recover following a disruption?
Financial stability: Can the vendor continue meeting its obligations?
Third parties: Which subcontractors or other providers does the vendor depend on?
Incident history: Has the vendor experienced significant security, compliance, or operational incidents?
Risk treatment: Which risks must be mitigated, transferred, accepted, or avoided?
Monitoring: How and when will the vendor be reassessed?