Modern organizations are more dependent than ever on third-party vendors for business-critical services—from cloud storage to supply chain logistics. The average company shares confidential information with 583 third-party vendors — and 98% of organizations have relationships with vendors that have experienced a breach. 

A single misstep by a third-party partner can lead to devastating consequences, including data breaches, compliance violations, and financial losses. Organizations must have effective measures in place to weigh the benefits of third-party relationships against the associated risks.  

In this article, we’ll explain why vendor risk assessments are so important for your business’ security posture, break down the steps of conducting one effectively, and provide specific questions and templates to help ensure your vendor relationships are as secure and reliable as possible. 

What is a vendor risk assessment and why are they important?

When you partner with a new vendor, they effectively become an extension of your business. If they experience a data breach, regulatory compliance violation, or even financial instability, it’s not just their problem — it becomes your problem too. It can disrupt your operations, customers may lose trust in your business, you could face legal issues, and it can significantly impact your bottom line.

For example, Bank of America recently suffered a major data breach when their third-party vendor Infosys McCamish exposed personal identifiable information including names, addresses, social security numbers, and dates of birth to a ransomware attack. Nearly 60,000 Bank of America customers were impacted by the breach, costing the company more than $10 million. 

A vendor risk assessment is a proactive step that helps you avoid potential threats like these and ensure smoother operations. This risk assessment is like a thorough background check to identify any potential risks or problems that could arise from partnering with the vendor by looking at things like how secure their systems are, whether they comply with relevant regulations or security best practices, how stable they are financially, and even how their reputation might impact yours. 

Let’s dive into a few reasons why vendor risk assessments are so important for your business:

1. Protects sensitive data: Many vendors have access to your business's sensitive data, such as customer information, financial details, or intellectual property. A risk assessment ensures that vendors have appropriate data security measures in place to protect this data from unauthorized access.
2. Ensures regulatory compliance: Different industries are subject to various regulations, such as GDPR, HIPAA, PCI DSS, CMMC, etc. Many of these frameworks have specific third-party risk assessment requirements. A third-party vendor risk assessment helps verify that your vendors comply with these regulations, reducing the risk of non-compliance fines, legal penalties, and reputational damage for your business.
3. Reduces operational risks: By assessing a vendor's financial health, business continuity plans, and service reliability, you can mitigate the risk of disruptions to your operations. This is particularly important if the vendor provides critical services or products essential to your business.
4. Improves decision-making: Conducting a risk assessment provides you with the necessary information to make informed decisions about whether to engage with a vendor, negotiate terms, or seek alternative solutions. It also allows you to prioritize which risks require immediate attention and which ones fall within your risk tolerance.
5. Strengthens vendor relationships: A thorough risk assessment can lead to stronger, more transparent relationships with your vendors. By addressing potential risks upfront, you can work collaboratively to mitigate them, ensuring a smoother and more secure partnership.
6. Protects brand reputation: If a vendor experiences a security breach or fails to deliver on their promises, it can reflect poorly on your company. A vendor risk assessment helps safeguard your reputation by ensuring you only work with reputable, reliable, and ethical vendors.

VRM and the vendor risk assessment process

A vendor risk assessment is a process where you evaluate and identify the risks associated with working with potential vendors. These risks could relate to cybersecurity, compliance, financial stability, operational reliability, and even the vendor’s overall reputation. The goal of this assessment is to ensure that the vendors you rely on aren’t exposing your business to unnecessary risks that could lead to costly security breaches, legal issues, or operational disruptions.

The vendor risk assessment is a foundational step in your overall vendor risk management strategy. VRM is a broader framework that encompasses the entire vendor lifecycle—from the initial procurement, due diligence, and vendor onboarding process to ongoing monitoring and review, and eventually, offboarding. VRM is an integral part of third-party risk management (TPRM) which is how organizations manage risk for all third parties including partners, contractors, consultants, etc. 

The vendor risk assessment is one of the first things you do within this framework to evaluate whether a vendor is a good fit for your company and what level of risk they might introduce.

After you’ve assessed vendor risks, the next steps in the VRM process is to set up controls to mitigate identified risks, establish monitoring procedures to keep an eye on the vendor’s performance and risk profile over time, and put contingency plans in place in case something goes wrong, like incident response and business continuity plans. 

A vendor risk assessment is crucial because it provides a clear understanding of the risks involved with each vendor, allowing you to make informed decisions and manage those risks effectively within the larger context of vendor risk management.

How to assess different types of vendor risk

When managing vendor relationships, it's crucial to understand that different types of risks require different approaches. In this section, we’ll walk you through practical steps to assess specific risks like cybersecurity threats, financial stability, geopolitical factors, and more. By tailoring your risk assessment to each area, you can ensure that your business is fully protected from potential vulnerabilities in your vendor partnerships.

Cybersecurity risks

Assessing cybersecurity risk is a critical component of the larger vendor management process. As businesses increasingly rely on third-party vendors for essential services, the potential for cyber threats originating from these external business partners has grown significantly. Evaluating a vendor’s cybersecurity posture is not just about protecting data — it’s about safeguarding the entire business ecosystem from potential vulnerabilities.

Step 1. Evaluate security policies

Review the vendor’s security policies and procedures to gain insight into how seriously the vendor takes cybersecurity and whether their approach aligns with your organization’s standards. A comprehensive review will reveal if the vendor has documented protocols in place for managing security risks, ensuring data protection, and responding to incidents and cyber attacks.

Step 2. Assess technology stack

Ensure that the vendor uses up-to-date technologies and follows industry best practices for security. By understanding the tools and platforms the vendor relies on, you can gauge the effectiveness of their security measures and identify any outdated or potentially vulnerable technologies that might pose a cyber risk.

Step 3. Conduct a security review

Request recent security audits, penetration test reports, and vulnerability assessments to verify their security posture. These assessments provide an independent evaluation of the vendor’s defenses against cyber threats, highlighting any weaknesses that could be exploited.

Step 4. Review access controls

Determine how the vendor manages access to sensitive data, including authentication and authorization protocols, to ensure that only authorized personnel have access to critical information. Strong access controls are a key defense against unauthorized access and potential data breaches.

Step 5. Assess incident response plans

Examine the vendor’s plan for responding to data breaches or cybersecurity incidents for assurance that they are prepared to act quickly and effectively in the event of a security breach. A well-defined incident response plan indicates that the vendor can minimize damage and recover swiftly, reducing the potential impact on your business.

Vendor risk assessment questions:

• Which security frameworks or standards do you adhere to?
• Have you experienced any data breaches or security incidents in the past 12 months? If so, what measures have you implemented to prevent future incidents?
• What encryption methods do you use to protect data in transit and at rest?
• What access control measures do you have in place?
• How do you monitor and respond to cybersecurity incidents or data breaches?
• What is your process for patch management and updating systems against new vulnerabilities?
• Can you provide results from recent penetration testing and vulnerability assessments?
• What training do you provide to your employees on cybersecurity best practices?
• Which IT security policies and procedures has your organization defined and implemented?

Operational risks

Assessing operational risk is a crucial element of the vendor management process, as it directly impacts your business’s ability to maintain continuity and reliability in its operations. When working with third-party vendors, you are entrusting them with aspects of your business that can significantly affect your overall performance. If a vendor experiences an operational failure, it could disrupt your services, harm your customer relationships, and ultimately affect your bottom line.

Step 1: Evaluate business continuity plans

Assess the vendor’s ability to maintain services during unexpected disruptions, such as natural disasters, technical failures, or other emergencies. A robust business continuity plan demonstrates the vendor’s preparedness to handle crises without significant downtime, ensuring that your business operations can continue with minimal impact. Ensure the vendor’s RPO & RTO are sufficient for your organization. By assessing these plans, you can gauge the vendor’s ability to respond effectively to unforeseen challenges and maintain the level of service your business requires.

Step 2: Review Service Level Agreements (SLAs)

SLAs define the expectations for service delivery, including performance metrics, response times, and availability standards. Ensure that these agreements align with your business needs and provide clear accountability for the vendor. Additionally, SLAs should include penalties or remedies for non-performance to protect your business if the vendor fails to meet the agreed-upon standards.

Step 3: Assess dependency on fourth parties

Many vendors rely on other suppliers, partners, or subcontractors to deliver their services. Understanding these dependencies is crucial because the performance of these fourth parties can directly affect the vendor’s ability to meet your expectations.

If a vendor is heavily reliant on other entities, any issues within that supply chain could cascade down and impact your business. By identifying and evaluating these dependencies, you can better understand the potential risks and take steps to mitigate them, such as requiring the vendor to have contingency plans for their own supply chain.

Vendor risk assessment questions:

• What are your business continuity and disaster recovery plans, and how often are they tested?
• What is the RTO and RPO noted in those plans?
• What is your process for managing and mitigating supply chain disruptions?
• How do you manage dependencies on other third-party vendors, and what are your contingency plans if they fail?
• Can you provide details on your Service Level Agreements (SLAs) and how you handle service disruptions?
• How do you ensure operational stability and reliability?

Reputational risks

When you partner with a vendor, their actions and public perception become closely tied to your brand. If a vendor is involved in unethical practices, negative publicity, or fails to deliver on their promises, it can reflect poorly on your business, potentially leading to a loss of customer trust and damaging your brand’s image.

Step 1: Conduct background checks

Research the vendor’s reputation in the industry and among customers. Look for feedback from current and past clients, industry reports, and any other relevant sources that can provide insights into how the vendor is perceived. Understanding the vendor’s reputation in the marketplace gives you a clearer picture of their reliability, professionalism, and ability to maintain positive relationships with their partners and clients.

Step 2: Gauge public perception

Look at recent news, customer reviews, and any public controversies involving the vendor. Public perception can be shaped by a variety of factors, including how the vendor handles customer complaints, their response to crises, and their overall public image. By examining recent media coverage and customer feedback, you can identify any red flags that may indicate potential risks. For example, if a vendor has been involved in a recent scandal or has a history of negative reviews, it could signal deeper issues that might affect your partnership.

Step 3: Assess ethical practices

Ensure the vendor adheres to ethical business practices. Investigate whether the vendor adheres to ethical standards in areas such as labor practices, environmental responsibility, and corporate governance. Vendors who prioritize ethical practices are more likely to engage in transparent, fair, and responsible business activities, reducing the risk of reputational harm to your company.

Vendor risk assessment questions:

• Can you provide references or testimonials from current or past clients?
• Have you been involved in any public controversies or negative media coverage? If so, how did you address them?
• How do you handle customer complaints and feedback?
• How do you ensure your business practices align with industry ethics and standards?
• What steps do you take to maintain a positive brand reputation?

Financial risks

Assessing financial risk is a crucial part of the vendor management process because a vendor’s financial health directly impacts their ability to deliver consistent, reliable services. If a vendor is financially unstable, they may struggle to meet their obligations, which can lead to service interruptions, delays, or even complete business failure. These issues can have significant repercussions for your own business, particularly if you rely heavily on that vendor for critical services. By thoroughly evaluating a vendor’s financial stability, you can mitigate these risks and ensure that you are partnering with a vendor who is capable of sustaining their operations over the long term.

Step 1: Review financial statements

Analyze the vendor’s financial health by reviewing their balance sheet, income statement, and cash flow statement to gain insights into the vendor’s financial health, including their assets, liabilities, revenue streams, and how they manage cash flow. A vendor with a strong financial foundation is more likely to sustain operations and fulfill obligations, while any signs of financial distress—such as declining revenue or high liabilities—can be red flags indicating potential risks.

Step 2: Assess profitability and stability

Evaluate key financial metrics such as profit margins, debt levels, and overall financial stability. A profitable vendor with low debt and stable income is more likely to weather economic downturns or other financial challenges, making them a safer choice for long-term partnership. On the other hand, a vendor with thin profit margins, high debt, or fluctuating revenues may be at greater risk of financial distress, which could negatively impact their ability to deliver on their promises.

Step 3: Check for financial dependencies

A vendor that depends heavily on a few large customers or funding sources may face significant risks if any of those relationships falter. Such dependencies can lead to cash flow issues or disruptions in service if the vendor’s key clients or investors withdraw their support. By identifying these dependencies, you can better assess the vendor’s resilience and ability to weather financial challenges.

Vendor risk assessment questions:

• Can you provide recent financial statements or annual reports?
• What is your company’s credit rating?
• How do you manage financial risks, such as currency fluctuations or economic downturns?
• How diversified are your revenue streams? 
• What steps have you taken to ensure long-term financial stability and growth?
• Are there any financial stipulations in place that would provide a refund if the service is not provided or satisfactory? 

Geopolitical risks

Vendors often operate in various regions around the world, and the political and economic conditions in those areas can significantly influence their ability to provide consistent and reliable services. Geopolitical instability, such as political unrest, economic sanctions, or trade restrictions, can disrupt supply chains, increase costs, or even lead to the termination of business relationships. Therefore, understanding and mitigating these risks is crucial to ensuring that your vendor partnerships remain secure and that your business operations are not adversely affected by external factors.

Step 1. Evaluate geographic location

Assess the political and economic stability of the regions where the vendor operates. Countries with stable governments, strong legal systems, and healthy economies generally pose lower risks to vendors and their partners. In contrast, regions experiencing political turmoil, economic instability, or conflict can present significant challenges. By understanding the geopolitical landscape, you can assess how these factors might affect the vendor’s ability to deliver services and determine whether additional precautions are necessary

Step 2. Consider regulatory environments

Different countries have varying regulations that can impact business operations, particularly in areas such as data protection, labor laws, and environmental standards. Additionally, potential trade restrictions, tariffs, or sanctions imposed by other countries can affect the vendor’s ability to conduct business internationally. Ensure the vendor is in compliance with any specific required regulatory requirements. 

Step 3. Monitor global events

The global landscape is constantly evolving, and events such as natural disasters, pandemics, or geopolitical tensions can have far-reaching consequences. Staying informed about these developments allows you to anticipate potential disruptions and work with the vendor to develop contingency plans.

For example, if a key supplier is located in a region experiencing heightened geopolitical tensions, you may need to explore alternative suppliers or adjust your inventory levels to mitigate the risk of supply chain interruptions.

Vendor risk assessment questions:

• In which countries do you operate, and what are the key political and economic risks associated with those regions?
• How do you manage risks related to political instability, regulatory changes, or trade restrictions?
• Are you in compliance with all local and national regulations? 
• Have you been impacted by geopolitical events in the past, and how did you respond?
• What is your strategy for mitigating risks related to geopolitical changes?
• How do you monitor and adapt to changes in the geopolitical landscape?

Environmental, Social, and Governance (ESG) risks

Vendors play a significant role in your company’s broader ESG footprint, and any misalignment can have repercussions not just for compliance but also for your brand’s reputation and long-term viability. By evaluating ESG risks, you ensure that your vendors adhere to practices that are consistent with your company’s values and contribute positively to the overall sustainability and ethical integrity of your business operations.

Step 1. Assess environmental impact

Evaluate the vendor’s practices related to sustainability and environmental stewardship. Key factors to consider include their resource use, waste management, carbon footprint, and efforts to reduce environmental impact.

Vendors that prioritize sustainability not only help you meet regulatory requirements but also support your business’s commitment to reducing its environmental impact. By partnering with environmentally responsible vendors, you can enhance your company’s sustainability credentials and contribute to global efforts to combat climate change.

Step 2. Review social responsibility

Consider the vendor’s approach to labor practices, human rights, and community impact. A vendor’s treatment of employees, adherence to fair labor practices, and commitment to ethical sourcing are critical indicators of their social responsibility.

Additionally, consider how the vendor contributes to the well-being of the communities where they operate, whether through job creation, community development programs, or other social initiatives. Vendors who demonstrate strong social responsibility are more likely to be reliable partners who align with your company’s values and enhance your brand’s reputation as a socially conscious business.

Step 3. Evaluate governance structures

Assess the vendor’s governance policies, including the composition of their board and their overall approach to corporate governance. Transparency in decision-making, ethical business conduct, and a governance structure that supports accountability are key factors that contribute to the vendor’s long-term stability and trustworthiness.

By ensuring that your vendors have strong governance practices in place, you can mitigate the risks associated with unethical behavior, corruption, or poor management, thereby safeguarding your business’s reputation and operational integrity.

Vendor risk assessment questions:

• What are your policies and practices regarding environmental sustainability?
• How do you ensure fair labor practices and respect for human rights within your operations and supply chain?
• What community engagement or social responsibility initiatives do you participate in?
• What governance structures do you have in place to ensure ethical business conduct?
• How do you ensure transparency and accountability in your ESG efforts?
• Can you provide any reports or certifications related to your ESG efforts?

Fourth-party and downstream risks

While primary vendors are often the focus of third-party risk assessments, the network of subcontractors and partners they rely on can introduce additional vulnerabilities. These Nth party risks can cascade down the supply chain, affecting your business in unexpected ways if not properly managed. Understanding and mitigating these risks ensures that your business is protected not just from the immediate vendor relationship but from the entire ecosystem that supports it.

Step 1. Identify key subcontractors

Gain a clear understanding of who the vendor’s subcontractors or key partners are, what roles they play in the vendor’s operations, and how integral they are to the services provided to your business. Knowing who the subcontractors are allows you to map out the broader supply chain and pinpoint where potential risks might arise. For example, knowing an organization’s sub processors is key as they may be handling your data as well.

This knowledge is crucial because issues within a subcontractor’s operations, such as delays, quality problems, or compliance failures, can directly impact your vendor’s ability to deliver on their commitments.

Step 2. Assess subcontractor risks

Evaluate the risks associated with these subcontractors, including their financial stability, operational practices, compliance with relevant regulations, and overall reputation. By applying the same level of scrutiny to subcontractors, you can uncover potential vulnerabilities that might otherwise go unnoticed. This assessment helps you understand how resilient your entire supply chain is and whether any weak links could pose a threat to your business.

Step 3. Require transparency

Your third-party vendors should be open about who their subcontractors are, how they are managed, and what risks are involved. Who are their sub processors ? Where is your data going to be stored, transmitted, processed, etc.? Transparency is key to building trust and ensuring that there are no hidden threats within the supply chain. By demanding this level of openness, you can work collaboratively with the vendor to address any identified risks and implement strategies to mitigate them.

Vendor risk assessment questions:

• Who are your key subcontractors or third-party service providers, and what roles do they play in your operations?
• How do you assess and manage the risks associated with your subcontractors?
• What security controls do you have in place to ensure your subcontractors adhere to the same standards and practices that you do?
• Can you provide documentation on how you manage downstream risks?

Vendor risk assessment questionnaire template

Use our security questionnaire template to evaluate vendor security practices and minimize vendor risk. Pair the security questionnaire template with the risk assessment questions listed above to conduct a comprehensive evaluation of third-party risk. 

Third-party risk management and remediation strategies

Managing third-party risk isn’t just about identifying potential vulnerabilities—it’s about taking actionable steps to address and mitigate those risks before they can impact your business. In this section, we’ll dive into practical strategies you can implement to strengthen your vendor relationships and reduce risk.

From enforcing strong access controls to establishing clear communication channels, these approaches will help you proactively protect your organization and ensure that your vendor partnerships remain secure.

Strengthen contractual agreements

Ensure your contracts with vendors include specific risk mitigation clauses. This might involve requiring vendors to maintain certain security best practices, comply with specific information security frameworks, provide financial guarantees, or provide regular penetration test reports. It’s also important to define detailed SLAs that outline expected performance and security standards, along with penalties for non-compliance or service failures.

Implement continuous monitoring

Use automation that provides continuous monitoring of vendor security and compliance, particularly for critical services, to identify and address issues as they arise. In addition, schedule periodic security audits of your vendors to ensure ongoing compliance with security, regulatory, and operational standards.

Enhance transparency and collaboration

Hold regular risk reviews with vendors to discuss their risk management practices, emerging threats, and any changes in their operations or your requirements. Encourage vendors to be transparent about their risk management processes and require them to report any incidents or changes that could impact their risk profile.

Implement strong access controls

Limit access to sensitive information by granting vendors access only to the data and systems necessary for their role. Implement role-based access controls, regularly review access permissions, and require vendors to use multi-factor authentication to access your systems.

Develop and test incident response plans

Work with vendors to develop joint incident response plans that are tailored to the risks they pose to your organization. These plans should detail the steps both parties will take in the event of a security breach or other incidents. Regularly test these response plans through simulations or tabletop exercises to ensure both your team and the vendor are prepared to act quickly and effectively in the event of an incident.

Diversify your vendor portfolio

Reduce dependencies on a single vendor for critical services by diversifying your vendor base. This way, if one vendor encounters issues, you have alternatives in place. Establish relationships with backup vendors who can step in if your primary vendor fails to meet their obligations.

Leverage cybersecurity insurance

Consider obtaining cybersecurity insurance that specifically covers third-party risks. This can help mitigate the financial impact of a vendor-related security breach or other incidents.

Foster a culture of risk awareness

Provide ongoing training to your team and vendors on the importance of risk management and the specific steps they should take to mitigate risks. This encourages a culture where both your organization and your vendors are proactive in identifying and addressing risks.

Using automation to improve your vendor risk management program

Managing the risks associated with multiple vendors involves a lot of paperwork, communication, and follow-up, which can overwhelm even the most organized teams. Each vendor relationship may require different documents, risk assessments, compliance checks, and ongoing monitoring. Keeping track of all these elements manually often leads to inefficiencies, missed deadlines, or overlooked risks.

Plus, as your business grows and you onboard more vendors, managing risks manually becomes increasingly unmanageable. The sheer volume of vendors and the complexity of their associated risks can overwhelm manual systems, leading to bottlenecks and delays in decision-making.

Automation offers a powerful solution to these challenges. By automating third-party risk management processes, you can streamline the entire workflow, from initial risk assessments to ongoing monitoring. Automation tools can standardize processes, ensuring consistency and accuracy across the board. And they can also handle large volumes of data reducing the time and effort required to manage each vendor relationship.

Secureframe seamlessly integrates with hundreds of commonly used vendors, automatically retrieving their security information and providing you with tailored risk recommendations. It also enables you to store and review crucial vendor details, including vendor owners, data types, due diligence notes from your security reviews, and vendor compliance reports, all in a centralized location.

Our third-party risk management features streamline vendor evaluations and onboarding, allow for continuous monitoring and management of vendor relationships, and ensure you can identify and mitigate potential risks to protect your sensitive data and strengthen your overall information security posture.

• Centralize vendor information in a single dashboard to view vendor profiles, risk assessments, and document attachments in one place
• Continuously monitor vendor risk by setting up recurring reviews, tasks, and notifications via Slack and common ticketing systems like Jira, ClickUp, and Linear 
• Automatically extract relevant answers to security review questions from vendor documents like policies and compliance reports
• Distribute, receive, and track vendor questionnaires via Secureframe’s vendor portal

Schedule a demo to learn more about how Secureframe can give you the visibility, insights, and automation you need to improve your TPRM processes and protect your business against third-party risk.