8 Effective Vendor Due Diligence Best Practices

By Phoebe Fasulo

Posted on Jul 14, 2020

Across industries, vendors are becoming essential assets to many organization’s day-to-day operations. However, it’s important to note that when an organization decides to work with or acquire a vendor, they are agreeing to take on any potential threats or drawbacks posed by the company, as well as its digital operations.

Threats to an organization’s cybersecurity are rising both in popularity and potential cost which is why these threats must be identified at the beginning of the due diligence process. This way, the proper programs can be put in place to mitigate them. While effective vendor due diligence is unique to each organization, there are some universal best practices to keep in mind when carrying out the process.

How is vendor due diligence conducted?

Vendor due diligence is often carried out using extensive questionnaires that act as a holistic audit of a vendor’s ecosystem. Questionnaires and surveys are used to identify potential threats to the company’s financial stability, reputation, cybersecurity network, and other issues related to organizational assets. The process should be thorough so that any problem areas can be addressed before beginning a business relationship with a vendor, or so that prices and contracts can be renegotiated if needed. The requirements for a comprehensive process will vary depending on each organization’s access to information and its criticality to business operations.

8 effective vendor due diligence best practices

Vendor due diligence is not a “one-size-fits-all” process, but there are common pieces of information that will help create a solid foundation of understanding for an organization’s risk profile.

Consider these 8 best practices when assessing a vendor:

1. Collect business information

Begin the process by collecting basic company information to confirm the organization’s legitimacy and ensure that all compliance requirements and standards are being met. Reference credible sources from those provided by the organization as well as any public information that might influence your organization’s ability to acquire or work with a particular vendor. This is also an opportunity to evaluate employee conduct and understanding of cyber risks to identify any vulnerabilities that may exist, either from disgruntled or negligent employees.

2. Review financial information

Prior to working with a vendor, it’s important to review an organization’s financial information to ensure it is financially stable and up-to-date on any relevant licensing fees or taxes. Additionally, having a solid understanding of an organization’s growth pattern can help predict future costs for working with third and fourth-party vendors over time.

3. Note operational risks

If a vendor in your supply chain experiences a breach, your organization will also assume responsibility for any valuable customer information that may have been compromised as a result. This is why all organizations in your network need to have a plan in place if they experience a data breach, otherwise known as a business continuity and disaster preparedness plan.

This plan outlines the strategies that an organization will utilize to resume normal operations and ensure efficient and transparent communication with the proper individuals. It’s also important to consider the vendor’s role within your organization so you can have a full understanding of the operational impact that a third-party data breach would have, and can prepare accordingly.

4. Assess legal risk

Some third-party vendors will have access to highly sensitive information about your company, clients, and employees. Therefore, a crucial step in the due diligence process is to thoroughly assess the legal risk posed by an organization. If a third-party vendor experiences a data breach or scandal, the legal and reputational risk will fall to your organization to repair. This is why it’s important to ensure compliance and identify any potential legal risks at the start of the process.

5. Evaluate cybersecurity risk

According to Ponemon’s 2019 Cost of a Data Breach Report, third-party related breaches can cost an average of more than $370,000. It’s important to manage partner, supplier, and vendor cybersecurity risk so that threats can be identified and mitigated before a breach occurs. Organizations should analyze the vendor’s cybersecurity posture, their compliance status, and the programs that have been put in place to address attacks.

6. Prioritize risk profiles

As previously mentioned, some third-party vendors will have more access to your organization’s network than others and will require an additional level of scrutiny. Vendors or potential mergers & acquisitions targets should be prioritized based on their amount of access, the type of information being shared with them, and the importance of the service or product being provided by the organization. This will help guide the rest of the due diligence process, as well as help the IT security know what vulnerabilities need to be addressed immediately to make the biggest impact in risk mitigation.

7. Continuously monitor vendor risk

Third-party vendor risk management is an ongoing tactic that goes beyond the due diligence process. The threat landscape is constantly changing, and companies are continuing to build out their networks as the digital transformation carries on. An effective third-party risk management program should regularly monitor for evolving threats and ensure that the vendor is maintaining a healthy cybersecurity network.

8. Automate the questionnaire process

The due diligence questionnaire process can be resource-intensive and take up valuable time from IT security teams that would be better spent on more important tasks. Many hours can be spent on back-and-forth communications and determining the next steps for risk mitigation. With the right third-party risk management software, the process can be automated to streamline operations, ensure consistency, and provide comprehensive visibility into a vendor’s cybersecurity network.

How SecurityScorecard can help organizations make financial decisions with confidence

Instantly assess the cybersecurity posture of any company within your organization’s supply chain with SecurityScorecard’s unmatched risk assessment and security ratings platform, which empowers users to make financial decisions with confidence. Atlas, the leading cybersecurity questionnaire exchange and validation solutions, can also help accelerate vendor due diligence with SecurityScorecard Ratings that provide a quick snapshot of a company’s cyber risk profile.

Vendor due diligence should provide an accurate assessment of a vendor’s cybersecurity posture, and should highlight critical issues in M&A transactions, private equity deals, credit underwriting, and financial sales and trading. With a full view of a vendor or acquisition target’s cyberhealth, your organization can confidently make informed decisions about things like potential risks, future costs, and how to efficiently manage and mitigate risks on an ongoing basis.

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