How to Conduct a Vendor Risk Assessment [5 Step Checklist]

Organizations conduct due diligence into the third-party ecosystem but to truly protect themselves, they must perform regular vendor risk assessments to ensure vendors are properly managed and monitored over time. Not only do organizations audit their vendors, but standards and regulations often require audits of the company's vendor management program. Organizations need efficient vendor risk management audit processes that feature assessments that allow for complete and secure third-party vendor management.

What Is Vendor Risk Assessment?

A vendor risk assessment is the process of identifying and evaluating any potential risks that stem from a vendor’s operations. This assessment identifies hidden risks that otherwise may have been overlooked during M&A or vendor onboarding. The types of vendor risks include those related to compliance, reputation, finances, operations, and strategy, as well as an organization’s cybersecurity. Performing a vendor risk assessment is a part of the due diligence process and ensures that your business doesn’t begin to work with a vendor that could potentially harm or have a negative impact on business operations.

When to Perform a Vendor Risk Assessment

An organization should not engage with a third-party vendor until they have performed a vendor risk assessment. Once an assessment has been conducted and the vendor is approved, then the third-party can be deemed safe to work with. A business should then perform regular risk assessments on an ongoing basis and make checks when red flags occur. Regular assessments help to maintain business standards and provide visibility into vendor security. In our opinion, the more frequent, the better.

How to Conduct a Vendor Risk Assessment and Audit in 5 Steps

Here are the steps your business should follow when conducting a vendor risk assessment and auditing vendor risks. Use this as a checklist to ensure you’ve covered all of your bases.

Step 1: Assess vendor risks

Internal audit managers know that in order to assess a vendor’s risk, they must perform a vendor management audit. Successful audits begin by establishing an audit trail. The operating model, or living documents that guide the process, includes vendor categorization and concentration based on a risk assessment that uses an approved methodology. Next, organizations must supply vendor report reviews providing ongoing governance throughout the vendor lifecycle.

Additionally, businesses should evaluate the different risks associated with third-party vendors within their audit.

Identify Types of Vendor Risk

__ Cybersecurity Risks

__ Operational Risks

__ Compliance Risks

__ Reputational Risks

__ Financial Risks

__ Strategic Risks

Step 2: Create vendor risk assessment framework

Before reviewing third-party vendors or establishing an operating model, companies need to create a vendor risk assessment framework and methodology for categorizing their business partners. This process includes aligning business objectives with vendor services and articulating the underlying logic to senior management and the Board of Directors.

When auditors review risk assessments, they need documentation proving the evaluative process as well as Board oversight. For example, organizations choosing a software vendor for their quality management system need to establish risk tolerances. As part of the risk assessment methodology, the auditor will review the vendor categorization and concentration.

Risk Assessment Qualitative Documentation

__ Vendors are categorized by service type

__ Access needed to internal data

__ Nature of data categorized by risk (client confidential, private data, corporate financial, identifiers, passwords)

__ Data and information security expectations

Risk Assessment Quantitative Documentation

__ Financial solvency baselines

__ Contract size

__ Beneficial owners of third-party's business

__ Location of headquarters

__ IT Security Ratings

Step 3: Manage the vendor lifecycle

Traditionally, vendor lifecycle management incorporates five primary categories: qualifying, engagement, managing delivery, managing finances, and relationship termination. However, as data breach risk increases, companies need to include reviewing information security as a sixth category in the life cycle. Due diligence during the qualification step incorporates information security management. However, threats evolve continuously meaning that organizations need to review information security over the entire lifecycle, not just at a single point.

Before documenting activities, companies need to plan their supplier relationship management process from start to finish. As regards the audit, companies need to ensure that their supplier relationship management policies, procedures, and processes address each step in the lifecycle.

Qualifying

__ Process for obtaining and determining cybersecurity insurance, bonding, and business license documentation

__ Benchmarks for reviewing financial records and analyzing financial stability

__ Review process for staff training and licensing

__ Benchmarks for evaluating IT assets

Engagement

__ Contracts include a statement of work, delivery date, payment schedule, and information security requirements

Information Security Management

__ Baseline identity access management within the vendor organization

__ Baseline privileged access management for the vendor

Managing Delivery

__ Scheduling deliverables

__ Scheduling receivables.

__ Organization defines stakeholders responsible for working with the vendor

__ Establishing physical access requirements

__ Defining system access requirements

Managing Finances

__ Establish invoice schedule

__ Establish payment mechanism

Terminating Relationship

__ Revoking physical access

__ Revoking system access

__ Definitions of causes for contract/relationship termination

Step 4: Create a vendor risk management plan

Creating a risk management plan primarily means policies, procedures, and processes that guide vendor management. These documents act as the skeleton for any third-party management program as well as the assessment.

Vendor Risk Management Policy

__ Does it include human resources security?

__ Does it discuss physical and environmental security?

__ Does it establish baseline requirements for network and system security?

__ Does it establish baseline requirements for data security?

__ Does it establish baseline requirements for access control?

__ Does it establish baseline requirements for IT acquisition and maintenance?

__ Does it require vendors to document their vendor management program?

__ Does it define the vendor's incident response management responsibilities?

__ Does it define the vendor's business continuity and disaster recovery responsibilities?

__ Does it outline the vendor compliance requirements?

Procedures

__ Is there a workflow for engaging in vendor management review?

__ Does the organization designate a stakeholder to track vendors, relationships, subsidiaries, documents, and contacts?

__ Does the organization designate a stakeholder responsible for vendor due diligence?

__ Does the organization designate a stakeholder who delivers and collects surveys and risk assessments?

__ Does the organization designate a stakeholder to manage contract review and renewal?

__ Does the organization outline a process for coordinating with legal, procurement, compliance, and other departments when hiring and managing a vendor?

__ Does the organization outline metrics and reports needed to review vendors?

Step 5: Stay up-to-date with ongoing governance

Vendor report reviews are one part of ongoing vendor management governance. Proving continuous monitoring includes reviewing reports and questionnaires attesting to security.

Vendor Report Documentation

__ Audit Reports (SOC audits, ISO audits)

__ Security questionnaires

__ Financial reports

__ Financial controls documentation

__ Operational controls documentation

__ Compliance controls documentation

__ Data breach reports

__ Access control management documentation

__ Control change management documentation

How SecurityScorecard enables better VRM audit and assessment outcomes

Creating an audit trail requires extensive documentation. As vendors become more integral to business operations, companies need to focus on building streamlined documentation processes that enable efficient governance.

In today's world, information security impacts several areas of vendor management for which audits require documentation. Poor information security programs leave vendors at risk for data breaches that impact their financial security, an integral part of risk evaluation and qualification. A vendor's authorization management also affects upstream clients because it places them at risk for internal actors to inappropriately access systems and databases. Vendors must monitor their downstream suppliers, but supply chain risks arise when upstream companies trust without verifying.

Organizations can use SecurityScorecard's platform to create an audit trail for their vendor management program in several ways.

1. Use quantitative benchmarks - First, as part of the risk assessment analysis, companies can use quantitative benchmarks for reviewing vendors. Companies can document a vendor's security rating, relate it to their risk tolerance, and use it as a qualitative metric that links to both data controls and financial stability. Additionally, the easy-to-digest grades of A through F ease the pain of explaining risks to the Board and ensure proper oversight documentation.
2. Access the same information - Second, SecurityScorecard's SaaS platform allows multiple stakeholders to access the same information. For example, the payroll department focuses on a vendor meeting PCI compliance requirements while the legal department focuses on Sarbanes-Oxley compliance. A shared vocabulary across the enterprise eases the burden of documenting stakeholder responsibilities across the enterprise.
3. Identify leaked data - Third, SecurityScorecard identifies leaked credentials and factors related to social engineering that provide insight into the effectiveness of a vendor's employee security awareness training. Training documentation shows that the vendor provided education, SecurityScorecard provides insight into how well the employees apply the information.
4. Track security rating changes - Fourth, with SecurityScorecard companies can define cohorts that allow them to group vendors and track security rating changes within the groups. This functionality provides documentation supporting the categorization and classification of vendors when an auditor reviews a risk assessment methodology.
5. Verify reports - Fifth, cybersecurity ratings allow companies to verify reports and questionnaires that vendors provide. For example, a SaaS vendor can submit a SOC 2 report attesting to the effectiveness of their controls at the time of the report. However, threats evolve, and controls fail. SecurityScorecard's ratings incorporate network security, DNS health, patching cadence, endpoint security, IP reputation, and web application security. Since our threat reconnaissance capabilities continuously monitor the IT ecosystem, we update our security ratings regularly. Tracking vendors in the platform, therefore, allows organizations to verify the trust they place in their vendors.

Companies know how to manage their vendor risks. Documenting the supply management process can be more difficult. With SecurityScorecard, organizations can streamline both processes by documenting as they manage.