Vendor assessment: Why & How to do Risk Assesment Audit

Businesses depend on reliable vendors and partners to keep things running smoothly and help them grow. Vendor risk assessment enables businesses to make informed decisions for long-term success.

When you handle your vendor relationships efficiently, it leads to several benefits:

1. Building long-term relationships with vendors

2. Getting supplies and services delivered quickly and efficiently

3. Gaining a competitive edge in your industry

4. Securing better financing terms

5. Staying in line with corporate rules and regulations

To improve how you choose and work with vendors, this blog post will dive deep into vendor management risk assessment.

What is vendor risk assessment?

Vendor risk assessment evaluates the potential risks posed by vendors to ensure they align with business standards. By checking factors like reliability, quality, and cost-effectiveness, companies can mitigate risks, select trusted partners, and ensure compliance with organizational goals.

Vendor assessment is the process of evaluating potential vendors or partners for your business. It helps you make sure they are the right fit for your needs.

You gather information, evaluate their abilities, and decide whether to onboard them based on specific criteria. This ensures they can provide what you require, such as  quality, reliability, and cost-effectiveness.

Vendor assessment prevents you from teaming up with the wrong partners, which can lead to issues. It also helps ensure you work with reliable and capable partners.

The process typically involves various steps, from checking their qualifications to closing the deal.

Why is vendor risk assessment essential?

Vendor security assessments matter because they help you deal with the risks linked to working with third-party partners. These risks can result in data breaches and legal issues.

A recent report by Security Scorecard and Cyentia reveals that 98.3% of organizations worldwide have partnered with third parties who experienced data breaches in the past two years. If you don’t evaluate how secure your vendors are, it can open the door for cyber attackers and the consequences can be financially devastating, often costing millions of dollars.

Here's why you should prioritize vendor security assessments:

1. Specialization

Some tasks, like accounting, auditing, or marketing, are better handled by specialized companies than doing them in-house. Smaller firms may find it impractical to handle every function themselves. Outsourcing allows businesses to focus on what they do best, streamlining their operations.

2. Risk evaluation

Every organization has a limit to the risks it can handle, known as risk appetite. Vendor assessments ensure that a vendor's risk profile aligns with this appetite. These assessments identify and analyze various risks, such as compliance, financial, operational, and data security risks, aiding in risk management decisions.

Related Read: Security risks your business cannot afford to ignore

3. Cost savings

Outsourcing to vendors can be cost-effective due to economies of scale. Vendors can often provide goods or services at a lower cost than doing it internally, leading to cost savings for your organization.

4. Globalization

To compete internationally, businesses may need local expertise. Vendors can provide services like legal support, translations, or knowledgeable sales representatives in other countries, facilitating global expansion.

5. Business continuity

Vendor due diligence is essential for business continuity management (BCM). It ensures that a third party's failures don't disrupt your operations or lead to legal issues. Vendor assessments help assess a vendor's security capabilities, strengthening your overall defenses.

6. Compliance reporting

Some regulations, such as GDPR and HIPAA, require vendor security assessments. Even when not mandatory, due diligence reports demonstrate your commitment to managing vendor risks and ensuring compliance. Linking these reports to overall compliance reporting enhances transparency.

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When to perform a vendor risk assessment

Timing is very important when it comes to vendor management risk assessments. 

Here's a breakdown of when you should conduct them:

1. Initial assessments during vendor onboarding

1. When you're considering partnering with a new vendor, that's the starting point for your vendor management risk assessment.

2. Think of it as a "getting to know you" phase. You want to ensure this potential partner meets your quality, security, and reliability standards from the beginning.

3. This initial assessment helps you avoid unpleasant surprises down the road and sets the foundation for a successful partnership.
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2. Regular ongoing assessments

1. Vendor relationships aren't set-and-forget; they require ongoing monitoring.

2. Regular assessments, performed at planned intervals, ensure that your vendors continue to meet your expectations and maintain their standards.

3. This proactive approach helps you promptly detect and address any issues, reducing the risk of disruptions to your operations.
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3. Special assessments triggered by significant changes

1. Change is a constant in the business world. When significant changes occur within your vendor's operations or your own, it's time for a special assessment.

2. These assessments are like check-ups when something important changes. For example, if your vendor's ownership changes or they experience a data breach, you'll want to reevaluate the situation.

3. Special assessments help you adapt to new circumstances and ensure your vendor relationships align with your requirements.
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How to conduct a vendor risk assessment and audit in 5 steps

Vendor security assessments happen at every stage of the vendor relationship, from before you sign a contract to working together and even when you stop. 

Each stage has its own risks, and here are a few steps on how you can deal with them step by step.

1. Assess vendor risks

When it comes to partnering with external entities, understanding the risks involved is important. You need to figure out what things could go wrong. These issues can be things like problems with computer security, money, or how things are done.
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2. Create a vendor management risk assessment framework

You need a proper framework to check for problems. This framework is like a roadmap. It involves qualitative and quantitative evaluations, providing a comprehensive view of the risks. 

Qualitative assessments delve into the qualitative aspects of risks, such as reputation and compliance, while quantitative assessments involve numerical measurements, helping in precise risk analysis.
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3. Manage the vendor lifecycle

Vendor relationships are dynamic and go through several stages. Think of it like meeting new people. You first check if they are what you're looking for. Then, you talk and agree on how things will work. 

You also ensure that your information and data are safe when working together. If everything goes well, you start doing business together. But, if it doesn't work out, you need to end the partnership in a way that doesn't cause problems.

4. Create a vendor risk management plan

A strong vendor risk management plan serves as a shield against potential threats. It comprises well-defined policies and procedures meticulously crafted to address various contingencies. 

By having a detailed plan in place, you can respond promptly and effectively to any unforeseen challenges, ensuring minimal disruptions and maintaining the integrity of operations.

5. Stay up-to-date with ongoing governance

The process of vendor assessment doesn't end once the partnership is established. Continuous monitoring and documentation are key to ensuring a secure and fruitful collaboration. 

Ongoing governance involves actively tracking the vendor's performance, evaluating their agreement adherence, and promptly addressing any deviations. Vendor reports documenting these vendor risk evaluations provide valuable insights. This way, you always know what's happening and can make good decisions.

Free vendor risk assessment template for 2023

Here's a vendor risk assessment template you can use: 

1. Information security and privacy questions

• Data handling: How does the vendor handle sensitive data and what measures are in place to safeguard it?
• Access control: How are access permissions managed to prevent unauthorized access to sensitive information?
• Data encryption: Does the vendor encrypt data both in transit and at rest to protect it from unauthorized access?
• Incident response: What is the vendor's protocol for responding to data breaches or security incidents?
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2. Physical and data center security questions

• Data center location: Where are the vendor's data centers located, and what security measures are implemented at these facilities?
• Physical access: How does the vendor control physical access to its data centers, including visitor policies and surveillance?
• Redundancy and disaster recovery: What steps are taken to ensure data availability and recovery in case of unexpected events?
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3. Web application security questions

• Application security: How are the vendor's web applications tested for vulnerabilities, and how frequently are these tests conducted?
• Authentication: What authentication methods are in place to verify user identities and protect against unauthorized access?
• Security patching: How does the vendor stay up-to-date with security patches and updates for its web applications?
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4. Infrastructure security questions

• Network security: What network security measures are implemented to protect against cyber threats and attacks?
• Firewalls and intrusion detection: Are firewalls and intrusion detection systems in place to monitor and safeguard network traffic?
• Employee training: How does the vendor educate its staff about security best practices and potential risks?
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What are the benefits of a vendor risk assessment?

The fact that many business owners are looking at external risk assessments highlights how important they are. 

Doing an external risk assessment has benefits such as:

1. Compliance

Poor risk management can lead to challenges with government regulations. This not only exposes your business to fines and penalties but can also harm your reputation with customers and partners.

Read Also: Understanding vendor compliance and its importance in SaaS businesses

2. Risk reduction

Understanding the specific risks associated with each vendor allows you to establish a consistent standard across all vendor relationships. This enables you to negotiate contracts that ensure all vendors align with your company's policies, reducing potential risks at scale.

3. Defensibility 

In a data breach, your organization may face legal action from regulators and consumers. Even if a third party was responsible for the breach, your organization could be held accountable if it lacks a vendor risk management (VRM) program that demonstrates due diligence.

4. Visibility

Companies often work with many vendors, making it easy to overlook a vendor during assessments due to sheer volume or routine practices. Implementing a formal assessment system by a third party ensures an unbiased and comprehensive evaluation of all your business connections.

What to look for in a vendor risk assessment tool

When it comes to selecting a vendor management risk assessment tool, it's important to consider your specific needs. 

Here's what to look for:

1. Automation

Look for tools that streamline the process by automating security questionnaires. This not only saves time but also ensures consistency and accuracy in your assessments. Spendflo's vendor trust hub helps you speed up vendor security reviews by bringing everyone on board. Your team, stakeholders, and sales executives can all work together seamlessly in one place. You can share documents, spot issues, and solve them quickly.

2. Ease of use

The tool should be user-friendly. You want to spend time on something other than figuring out complex software. It should be intuitive and easy to navigate.

3. Identifying gaps

A good tool should be able to pinpoint areas where your vendor might fall short in meeting your security or compliance requirements. This helps you address vulnerabilities proactively.

4. Standardized templates

The tool should provide standardized templates for vendor risk assessments. These templates often align with industry best practices and can save you the effort of creating assessments from scratch.

5. Customization

While standardized templates are useful, the tool should also allow for customization. Your business is unique, and your assessment needs may vary. A tool that lets you tailor assessments to your specific requirements is a valuable asset.

Vendor risk assessment with Spendflo

Managing vendors can be a bit tricky, but it's super important for your business. When you get along well with your vendors, you give your customers great results, save money, and avoid problems.

And speaking of efficiency, Spendflo helps you accelerate your vendor security reviews with seamless collaboration. With null back-and-forths between stakeholders and vendors, streamline communication on a single platform and never miss sensitive compliance documents like SOC2.

Stay on top of security reviews with real-time notifications to track progress at every step. To discover more about optimizing your vendor management and how it can benefit your business, get a free saving analysis from our experts. 

Your third-party risk management program can be efficient and simple with the right tools and practices in place.

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