Understanding the Importance of Cybersecurity Due Diligence

Organizations increasingly rely on third- and fourth-party vendors and service providers to carry out day-to-day operations, expanding their exposure to cyber threats.

After analyzing over 12 million companies’ security postures and supporting thousands of M&A transactions, SecurityScorecard has learned that traditional cybersecurity due diligence approaches miss 40% of critical risks. The reality? Cybersecurity risks from third-party vendors cause 63% of data breaches, yet most organizations rely on outdated methods that fail to predict which vendors will actually cause problems.

Cybersecurity due diligence is especially important in mergers and acquisitions, as it helps acquirers make better-informed decisions about cybersecurity and related responsibilities.

What is Cybersecurity Due Diligence and Why Does it Matter?

Cybersecurity due diligence is the systematic process of identifying and evaluating cybersecurity risks of third-party vendors and target companies. When conducting due diligence on a target company, organizations must collect insights into existing security posture, incident response capabilities, and incident response plans. This reveals the complete risk profile of potential threats and vulnerabilities, ensuring acquirers understand what they’re inheriting before accepting liability.

Cybersecurity due diligence should also reveal any issues that might be considered deal-breakers or that call for restructuring the price and terms of the acquisition. An acquirer needs to not only identify but quantify any issues so that the organization can remediate them or put a system in place to address the vulnerabilities moving forward.

Benefits of Cybersecurity Due Diligence

There are many benefits of conducting cybersecurity due diligence, as organizations are able to:

• Accurately assess risk before taking on liability in mergers and acquisitions
• Identify any issues that warrant a restructuring of the deal
• Understand the threat landscape and identify common threats
• Allow for the identification and quantification of a vendor’s cybersecurity posture

These benefits become particularly critical when security incidents occur within your vendor ecosystem. Organizations with robust due diligence programs are better positioned to respond quickly when cyber incidents affect third-party risk management operations, minimizing business risk and ensuring compliance with breach notification requirements.

Assessing Third-Party Cybersecurity Defenses

Cybersecurity due diligence gives acquirers a more precise look into a vendor’s existing security network, risk levels, vulnerabilities, and what it’s doing to mitigate said risks. The threat landscape varies by industry, so each potential acquisition should be evaluated on a case-by-case basis to identify potential risks using the following framework:

Measure the Cyberhealth of Acquisition Targets

The first step in the due diligence process is to measure and assess the cyberhealth of acquisition targets so you can understand each risk before you accept liability. Examine the vendor’s cybersecurity posture, compliance status, and ability to address cyber attacks quickly.

This assessment should specifically evaluate how the target organization protects its critical assets and maintains current security policies. Understanding which vendors qualify as critical vendors helps prioritize due diligence efforts and resource allocation based on potential vulnerabilities and impacts on business operations.

Compare the Target’s Performance Against Industry Competitors

Industry comparisons can uncover hidden security issues that may have otherwise gone undetected by analyzing trends and patterns in the industry and identifying outliers. Comparing a vendor’s cybersecurity posture to other industry players or competitors helps determine any potential holes in security coverage and highlights areas for improvement.

Establish a Centralized Management Platform

A cybersecurity management platform enables organizations to monitor their third-party vendors and get a holistic view of their network. With the ability to see cybersecurity quantified, security teams can more easily and efficiently manage risk. Consider a risk management platform that allows you to add vendors easily and makes it simple for them to report on the cyberhealth of their ecosystem, saving your team hours in review.

Provide Frameworks to Guide Future Cybersecurity Strategies

Provide vendors or potential targets with a cybersecurity framework to help guide the organization through the mitigation process. An example would be the NIST Framework, which acts as the first line of defense against cyber attacks by outlining the steps to identify, protect, detect, respond, and recover from them.

Identify any Necessary Additional Security Measures

After establishing a centralized platform, assess any vulnerabilities or threats identified through the due diligence process, and determine the next steps for the vendor to address and mitigate the issues. These include but are not limited to, multi-factor authentication, installing anti-malware mechanisms, software patches, and disk encryption.

Continuously Monitor Portfolio Risk

The integration of existing systems can open up new attack surfaces and vulnerabilities that may not have previously existed in the parent company’s network. Additionally, the threat landscape changes at a rapid rate, and new threats are constantly being generated. 

Continuous monitoring is crucial for identifying new issues in real-time, maintaining compliance and standard regulations, and ensuring that third-party vendors are consistently working to regulate their cybersecurity. While these general principles apply across all sectors, different industries face unique regulatory requirements and threat landscapes that demand specialized due diligence approaches.

Industry-Specific Considerations for Due Diligence

Different sectors face unique challenges in third-party risk management that require tailored approaches to vendor assessment and ongoing monitoring.

Healthcare Organizations:

• Ensure vendors protect patient data and comply with HIPAA breach notification requirements within mandated timeframes.
• Assess security policies for handling electronic health records and medical device integrations.
• Evaluate critical vendor relationships with medical equipment suppliers and cloud service providers.
• Review business continuity plans for maintaining patient care during cyber incidents.

Financial Services:

• Conduct critical vendor assessments that address regulatory oversight from multiple regulatory bodies including OCC, FDIC, and state banking authorities.
• Examine potential vulnerabilities in payment processing systems and customer data handling.
• Verify compliance with SOX, PCI DSS, and other financial regulations affecting critical assets.
• Assess incident response coordination between the target organization and financial regulatory agencies.

Manufacturing:

• Evaluate how potential vulnerabilities in operational technology (OT) and industrial control systems could impact production.
• Review business continuity plans that address both IT and OT security incidents.
• Assess critical vendor dependencies in supply chain operations and their business risk impact.
• Examine security policies governing the convergence of IT and OT environments.

This industry-specific framework helps organizations focus their due diligence efforts on the most relevant risks and regulatory requirements for their sector.

Legal and Technical Questions to Consider

Thorough due diligence requires addressing relevant legal or technical issues before working with third-party vendors.

Take a look at the types of questions you should be asking throughout the process:

• Is the organization subject to any specific industry standards or compliance regulations?
• What policies and systems are currently in place to mitigate cyber risk, prevent unauthorized access, and protect data across the organization?
• Does the organization have adequate cybersecurity insurance?
• Have employees been trained in the best cybersecurity practices?
• What is the process for responding to breaches or attacks? What has been done in the past?

Tailor these questions to your industry requirements and dig deeper based on initial responses to uncover critical security gaps.

How SecurityScorecard Transforms Cybersecurity Due Diligence

Traditional due diligence relies on point-in-time assessments and self-reported vendor data, but SecurityScorecard provides continuous, external validation of vendor security posture. Our security ratings give organizations comprehensive insight into vendor cybersecurity through standardized A-F letter grades, enabling security teams to understand risk across 10 distinct factor categories.

What sets SecurityScorecard apart is our ability to predict which vendors will most likely experience security incidents. Companies with ‘F’ ratings are 13.8x more likely to suffer breaches than those with ‘A’ ratings. This predictive capability transforms due diligence from reactive assessment to proactive risk management.

Our platform continuously monitors over 12 million companies, providing real-time updates rather than outdated annual assessments. SecurityScorecard customers report 75% faster due diligence processes and significantly improved vendor risk prediction accuracy. With automated external monitoring, organizations can focus their internal resources on strategic decision-making rather than manual data collection and validation.

Whether you’re conducting M&A due diligence, managing ongoing vendor relationships, or building a comprehensive third-party risk management program, SecurityScorecard provides the intelligence and automation needed to make confident, data-driven security decisions.