8 Effective Vendor Due Diligence Best Practices

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

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. Here are some of the best practices we will explore in this blog:

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 2024 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.

Improve vendor due diligence with security ratings

Third-party risk management, or TPRM, is the process of vetting your vendors to understand the risk they may pose to your organization and your supply chain. Organizations with strong vendor risk management programs systematically identify, assess, and mitigate threats to their assets and data that might be caused by the organization’s supply chain.

Traditional risk management programs use questionnaires and other static methods of assessing a vendor’s risk. Security ratings can improve this process in a few key ways:

1. Ratings automate the due diligence process

Due diligence can be a huge drain on internal resources; large organizations can have hundreds or even thousands of third parties. In fact, Gartner found that 60% of organizations work with more than 1,000 third parties. That’s a lot to keep track of with the same level of attention, particularly for organizations that use spreadsheets and other manual tools to track vendor risk. A manual process that takes a lot of time and, as with any other manual data-entry process, can be prone to human error.

Security ratings are automated tools that reduce busywork by offering a way to easily monitor vendors without having to manually create questionnaires, hunt down information or update spreadsheets.

2. Ratings collect consistent data

Often, when presented with a questionnaire, third parties may answer a question in different ways. Some might answer yes or no, some might attach a screenshot, and some may simply copy and paste what they answered on the last 10 questionnaires. Discrepancies in the provided data make it difficult to understand because you won’t be comparing apples to apples – vendors vary in their level of importance to the organization and in their security levels. A tool cannot automatically process all those different kinds of data — instead, someone will have to manually review it.

Ratings, however, always collect the same kind of data, structured in the same way, so you can easily compare scores — whether you’re comparing two vendors, or seeing how the same vendor’s security posture has changed recently.

3. Easily compare vendors

Comparing your potential vendors’ security postures is simple when using ratings. At a glance, you’ll be able to see which third parties present the biggest risks to your organization, and assign a risk rating of high, medium, or low. These criticality ratings can help your organization target resources for the vendors that merit the most attention.

4. Trust but verify

When assessing your third parties with questionnaires, you must take your vendor’s word that the questionnaire is accurate. While you don’t need to assume that your vendors are lying to you, know that the information used by security ratings platforms allows you to gain an accurate, up-to-date, external view of security. Take a “trust but verify” approach to objectively assess vendors in your due diligence processes.

5. Monitor continuously

Questionnaires and surveys are static tools that can only capture a vendor’s security at one point in time. They provide snapshots of their security posture, but rarely give the full picture. A vendor may be secure today but fall out of compliance tomorrow.

Ratings providers, however, monitor your vendors continuously; you’ll receive a notification whenever a vendor falls out of compliance, and be able to scan for problems the vendor might not know about, like an Amazon Web Services bucket that has been misconfigured, chatter on the dark web about breached assets, or other undetected vulnerabilities. Pairing security ratings with an automated TPRM solution enables you to make these data-driven decisions about risk more efficiently.

How can SecurityScorecard and ProcessUnity help?

While it’s impossible to eliminate risk entirely, you can proactively manage risk by staying aware of your vendors’ security controls. To reduce the resources expended managing third-party relationships, consider an intelligent tool that automates your organization’s third-party management process.

SecurityScorecard enables organizations to drive a scalable and automated third-party risk management program. SecurityScorecard is the only omni-directional security ratings provider of cyber risk ratings, questionnaires, a marketplace of integrations and attack surface intelligence.

By leveraging ProcessUnity Vendor Risk Management, your organization can integrate security ratings into an automated third-party risk management platform. ProcessUnity’s pre-built connector embeds SecurityScorecard’s overall security risk rating and individual domain ratings into the solution. This integration lets you view risk-related information in one centralized location without having to manually enter data, continually update information, or move back and forth between your security rating solution and third-party risk management platform.

To learn more about how ProcessUnity Vendor Risk Management and SecurityScorecard can help your organization gain a single, comprehensive view of third-party risk, schedule a live demonstration today.

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.