Vendor Risk Assessment Checklist: 7 Key Components

‍Not sure where to start with vendor risk assessment? We've got you covered – introducing a vendor risk assessment checklist and a structured plan to guide you through the process. But what is included in the vendor risk assessment checklist? In this article, we'll explore that in detail.

Vendor risk review is an intricate process that involves performing a series of actions, such as identifying vendor risks, scoring them, assessing them, and continuously monitoring them to stay ahead. Each action demands undivided attention to detail. So, anyone unfamiliar with the process might find it confusing and can easily get lost in the complexity. As a result, they may even overlook important steps that will expose their organizations to high-impact vendor risks. But how?

Suppose XYZ is running a new financial institute and has decided to partner with a well-reputed third-party supplier to manage its financial data. Since performing a vendor risk assessment is an industrial practice, they decide to conduct one. However, they are not well-versed in vendor risk assessment, so they only reviewed what they thought was necessary. As a result, something slipped through the cracks, i.e., reviewing the vendor's data security practices. Unaware of this fault, they proceeded to onboard the vendor and gave them access to their data.

Months later, a hacker breached the vendor's system and wiped out all the data (including XYZ's financial data). The reason behind this incident was the inefficient vendor's security practices. Thus, they couldn't withstand breaches, and XYZ failed to review that during the assessment. Due to this, XYZ ended up incurring high recovery costs.

You may say this is just a hypothetical scenario, but you will also be surprised to know such incidents happen in real-time. So, if you don't want to be a victim of such incidents, conduct vendor risk assessments thoroughly without missing out on any step.

How can that be done? The answer is – to follow a well-structured vendor risk assessment checklist. The vendor risk assessment checklist gives you a proper to-do of how to proceed with vendor risk assessment while ensuring every step is followed and nothing critical is missed. Further, with the help of this guidance, your organization can avoid the potential fallout of vendor-related issues.

But what's included in the vendor risk assessment checklist? Let's find out.

Follow Vendor Risk Assessment Checklist To Prevent Third-Party Risks

Below mentioned are the 7 key components of the vendor risk assessment checklist:

1: Gather Relevant Vendor Portfolio Insights Before Engaging With Them

Before performing a third-party risk assessment, you first need to gather the following relevant vendor-related information:

• Basic Vendor Details: This is a set of information that includes — the vendor's product and service description, point of contact, operating location, Tax ID, and email address.
• Capacity & Consistency Details: This information includes whether the vendor can deliver products and services as your demand grows and whether they can consistently deliver products and services without missing deadlines.

Note: You can gather these details by checking the vendors' past performance.

• Performance Details: This information includes the percentage of on–time delivery, the average response time for raised products or service requests, and downtime minimization practices.
• Disaster Preparedness Details: This information includes readiness strategies practiced by the vendor, which disaster recovery or data loss prevention policies are in place, and whether they have incident response plans to address uncertain security incidents or natural disasters.
• Governance & Organization Structure Details: This information basically includes who is accountable and responsible for different tasks, such as who is responsible for supervising cybersecurity practices, whether there is a dedicated risk committee, how frequently the third-party suppliers train their security team, and who is the appointed chief information security officer (CISO).
• Financial Health Details: This includes a copy of the audited financial statement from the last assessment year and insurance details. This information gives you a clear picture of whether the vendor is financially stable enough to meet your contractual obligations.
• Information Security Practices Details: This information includes how regular vendors conduct risk assessments, whether they have formalized information security policies/frameworks in place, how often they perform vulnerability scans and penetration tests, details of authentication and authorization measures, access control details, and data disposal process information (what methods and rules they follow to delete data).
• Compliance Details: This information includes which compliance regulations the vendor adheres to, such as if they are SOC 2 certified, ISO 27001 certified, or GDPR certified. Also, gather information about the history of non-compliance lawsuits (you can get this information by doing a background check of the third-party supplier).

Note: In this vendor risk assessment checklist step, make sure to also verify the above details before using them for your vendor risk assessment. 

To verify the data, you can go through the vendor's official website, read the latest articles and news, and check customer reviews. For non-compliance and lawsuit details, dig into public records and legal databases or request full disclosure (fill out vendor assessment questionnaire) directly from the vendor. Or else, you can even assign a team member to conduct thorough background checks (do not assign this task to a third party because there will be bias involved, and you can't take that risk).

2: Get An Understanding Of Different Types Of Vendor Risks

The next step in the vendor risk assessment checklist is to understand vendor risk types. There are different types of vendor risks, and each of them affects your organization in different ways. For example — some vendor risks impact your data security, some hinder your operation efficiency, and others damage your organization’s reputation. What are these vendor risks? We’ve listed below a few of them:

• Strategic Risk: This risk emerges when third-party suppliers misuse or disclose your company's trade secrets, confidential information, or intellectual property (IP).
• Compliance Risk: This risk emerges when vendors fail to adhere to necessary compliance regulatory requirements.
• Geographical Risk: This risk emerges when vendors operate from a location that faces frequent service interruptions due to political instability, war conflict, or other local problems.
• Technical Risk: This risk emerges when a vendor's data security measures are ineffective enough to defend against cyberattacks.
• Resource Risk: This risk emerges when vendors lack sufficient resources, such as budget and products, to meet your organization's growing demands.
• Reputational Risk: This risk emerges when your organization partners with a vendor who can ruin your organization's brand image or credibility (this can be because the vendor does not have a good image in the market due to their poor commitments and security or regulatory compliance practices).

By properly understanding different types of risk, you can determine which vendor risk is relevant or applicable to your organization. This way, you can prepare a plan well in advance to address those risks and protect your organization from their potential impact.

3: Create A Vendor Risk Assessment Framework

A vendor risk assessment framework is a structured plan detailing how organizations identify, evaluate, and address the risks associated with engaging with third-party suppliers.

Since every organization has a different focus (some focus on data security while others focus on maintaining operational efficiency), you have to create a framework that aligns with your organization’s objectives. But how to create one? Here’s a step-by-step guide:

• First, define the vendor risk applicable to your organization, such as third-party vendor compliance risk, operational risk, data security risks, or others. Then, mention those risks in your framework (note: these will be the risks you need to watch out for during vendor risk review).
• Then, specify the methods you will use to evaluate risk—you can choose between quantitative and qualitative risk assessment methods.

• Quantitative assessment uses numbers/figures to measure vendor risk. It gives a score between 0 and 10 (the higher the score, the higher the risk and vice versa).
• A qualitative assessment describes the potential impact of vendor risks. Instead of focusing on numbers, it takes into account scenarios (like what would happen if vendor risk occurred).

• Next, mention your post-assessment plan in your framework, including who will be responsible for addressing vendor risk, what vendor risk management policies you will enforce, and how you will prevent those risks from occurring in the future.

Note: These are the basic components that every vendor risk assessment framework should include. However, you can add additional components as per your requirements in this vendor risk assessment checklist step. 

4: Conduct The Vendor Risk Assessment

The next step in the vendor risk assessment checklist is to refer to your vendor risk assessment framework and perform a thorough vendor risk review accordingly. First, review all the vendor-associated information that you have gathered initially (only use the verified data) and then find out if your preferred vendor has the potential to introduce any type of risk to your organization.

If you find out that the vendor poses certain risks, list what type of risk it is bringing (only jot down the relevant risks). After that, precisely evaluate each identified risk and understand its potential impacts (you can use either qualitative or quantitative methods to evaluate the risk).

Note: This vendor risk assessment checklist step is focused on a new vendor with whom you have not yet partnered.

Also Read: Vendor Relationship Management - A Guide for IT Teams

5: Assign Score To Vendor Risks & Define Thresholds For Acceptable Levels Of Risk

Once you have identified the risk and its potential impact, your next vendor risk assessment checklist step is to assign a risk score and set a specific limit (threshold) for the level of risk your organization is willing to tolerate. But how do you score vendor risk and decide on a threshold? You need to use the ‘vendor risk matrix tool.’ This tool examines the vendor risks and categorizes them based on how likely they are to happen (likelihood) and how serious the impact will be if they occur (severity). Just like the below image (this is one of the pre-built templates of the vendor risk matrix tool):

To help you understand better, here’s a breakdown of what’s in the image.

• ‘Risk rating key’ and ‘severity’ columns denote the different risk severity levels.

• Green (Low) – Any vendor risk that falls in this category is tolerable (which means it won’t affect your operations or data).
• Yellow (Medium)—Any vendor risk in this category requires input and some efforts to mitigate it (it is manageable).
• Orange (High)—Any vendor risk that falls in this category is unacceptable (this means it poses a high threat). So you have to be very cautious and also seek additional support from security experts to manage it.
• Red (Extreme)—Any vendor risk in this category is intolerable. The best approach is not to onboard the vendor that introduced this risk, and if the existing vendor bought this risk, then terminate their contract.

• The ‘Likelihood’ column denotes how likely the vendor risk will occur.

• Improbable — Any risk that comes under this category will never occur or is unlikely to occur.
• Possible – Any risk that comes under this category has a fair possibility to occur (50/50 chances).
• Probable — Any risk that comes under this category will definitely happen. 

Now, how do you calculate the risk score? It's very simple; you just need to refer to the table above. Let's take an example to provide you with more clarity: a vendor risk is classified as 'possible' and has an 'undesirable' severity. Then, it will be declared a high-category risk, and its risk score will be '8'. This means that this risk needs immediate attention and additional expert support to manage.

By performing this vendor risk assessment checklist step (i.e., assigning scores and setting up this risk tolerance threshold), you can make informed decisions regarding vendor partnerships and create a better risk management plan.

Suppose your preferred vendor introduces high risks (more than you can tolerate), you can decide not to onboard them. If the vendor introduces low risks (acceptable), you can accordingly implement targeted security measures to prevent those risks from occurring in the first place or minimize their impact on your organization's data security and operational efficiency.

In fact, if existing vendors introduce unexpected risks, this threshold helps you quickly spot those risks that need immediate attention, allowing you to take proactive precautionary actions. This way, you can keep your organization secure from uncertain vendor risk.

Also Read: 6 Vendor Management KPIs You Must Track

6: Prepare A Remediation Plan To Address Vendor Risks

Note: The remediation plan is not needed for initial vendor risk assessments (when your organization decides whether to onboard the vendor). This vendor risk assessment checklist step is only relevant when you are reviewing existing vendors and their potential risks.

After performing a vendor risk review, you will have to promptly address any identified vendor risks (high risk or low risk) to prevent their impact. To do so, you need to prepare a proper remediation plan.

In this plan, you must outline the exact steps and precautions that need to be taken to prevent, control, and minimize vendor risks from affecting organizational sensitive data and critical operations.

For example, you can assign a dedicated team to manage the vendor risks. You also need to have a clear escalation procedure because if your assigned team cannot handle the risk, they can immediately escalate the situation to another team of experts. This way, potential risks can be addressed with caution and without delays.

Also, once the risk is addressed, conduct a quick review and generate detailed reports. This way, you can be sure that your team has effectively mitigated the identified risk.

You can also implement security policies and tools to prevent the risk from occurring again. Keep a note—Just in case things don’t go as planned, make sure to have a disaster recovery plan ready.

7: Regularly Monitor Vendor Practices

Note: This vendor risk assessment checklist step is performed only for existing vendors. 

To ensure your vendors adhere to the agreed-upon standards and rules, it is important to monitor their practices regularly. Suppose you have mentioned in your contract agreement that the vendor has to follow your set security protocols to keep your organization's data safe and agree to the terms. You can monitor their practices to see if they genuinely follow the security protocols. If you find they are not committed to following your rules, you can offboard them and prevent the risk of security breaches (since the vendors are not following your security rules, you can risk compromising your data; however, by offboarding them, you eliminate that risk).

Also, at times, vendors modify their practices during mid-tenure, and such changes can have significant implications. So, to avoid encountering surprise risks, regularly monitoring vendor practices is crucial. This way, you can easily spot those changes and immediately assess those practices to keep your organization secure from vendor risks.

Apart from that, regulatory bodies also update their compliance requirements on a time-to-time basis, so to ensure your vendors are following the updated regulatory obligations, you have to monitor their practices. This way, you can avoid paying hefty penalties for engaging with non-compliant vendors. 

However, manually monitoring vendor details and practices can be a very time-consuming task. You have to list all the vendors you are engaging within a spreadsheet and then check their details one by one. 

A manual method is fine if you manage a handful of vendors, but it is not feasible if you deal with multiple vendors. You may miss out on monitoring critical high-risk vendors, which will have severe consequences. So, to avoid that, you can opt for a SaaS management platform like Zluri. 

Zluri will bring down all the vendor details (like their types, what services they offer, contract details, and more) in a centralized location, so you no longer have to switch between spreadsheets to check vendor information. Additionally, it displays the vendor's details in an organized manner, making monitoring much easier. The best part is that it automatically adds new vendor details to its system, providing you with up-to-date vendor information to monitor.

Also Read: Top 15 Essential IT Vendor Management Tools for 2024

Get Clear Guidance On How To Conduct Review & Mitigate Risks With Vendor Risk Assessment Checklist

In conclusion, a vendor risk assessment checklist isn’t merely a list of to-do tasks—it is a crucial step that helps ensure nothing is overlooked during vendor review. By laying out a clear outline of what actions to perform next, such as gathering relevant data, understanding vendor risk, creating a framework, conducting a review, preparing a plan, and monitoring vendor practices, this vendor risk assessment checklist acts as a reliable guide to keep you on track. 

In fact, its structured and organized approach helps prevent overlooking crucial steps and performing them out of sequence, which can otherwise hamper the effectiveness and accuracy of vendor security assessment. 

However, remember, in the end, it is not about ticking off tasks (marking them as complete) — it is about ensuring you execute each action thoroughly during vendor risk assessment. Therefore, dedicate the time and attention to each vendor risk review task needed without fail because even a minor oversight can have serious repercussions like exposing your data to vendor risks, disrupting operations flow, and, in the worst case, getting charged for non-compliance. 

How you perform the vendor risk assessment today will determine whether your organization will remain safe from vendor risks tomorrow. So make it count!

Frequently Asked Questions (FAQs)

1. What Is The Difference Between Vendor Risk Assessment Checklist And Vendor Due Diligence Checklist?

Vendor risk assessment checklist focuses on uncovering potential vendor risks and evaluating how they can affect organization data security and operational efficiency. On the other hand, vendor due diligence checklist focuses on verifying and ensuring that third-party suppliers adhere to all necessary regulatory and industry standards. Vendor due diligence checklist is also performed prior to vendor risk assessment checklist.

2. What Is A Vendor Risk Assessment Questionnaire?

A vendor risk assessment questionnaire is a form that consists of questions regarding a vendor’s policies, practices, compliance status, financial stability, and more. Potential third-party suppliers are given this form, and they must submit it back to the organization for supplier risk evaluation.