10 Best Practices of Successful Vendor Risk Assessments

Performing a thorough vendor risk assessment is a crucial step in a third party’s lifecycle. By understanding the best ways to assess the risk posed from each of your vendor relationships, you’ll gain important insights into knowing the best ways to mitigate risks in the future and protect your organization.

10 Best Practices for Successful Vendor Risk Assessments

1. Make sure you haven't overlooked any vendors. Compare your vendor list to a list provided by your Accounts Payable department. Once you have compared the two, you should have a complete list.
2. Organize your actively managed vendors into groups. Sort the vendors into different groups based on product or service (e.g., processors, marketing agencies, cloud storage providers).
3. Risk rate each of your vendors. It's important to understand and document the risk of all outsourced engagements. Don't underestimate any vendor – the landscaper, shred company, landlord, or janitorial services. Every vendor relationship and every product or service must be assessed.
4. Assess vendor relationships at the product or service level. To properly evaluate all risks posed by a vendor relationship, you'll need to complete individual risk assessments on each of the products and services provided by the vendor and as the vendor as an entity. You'll need to identify the inherent risks in the product or service and the vendor relationship.
5. Identify both the inherent risk and criticality of each vendor. Criticality is all about impact, and critical vendors are those that can cause significant negative impacts to your operations or its customers should the vendor fail. Inherent risk is about the types and amounts of risk present in the product or service and, therefore, the vendor relationship. Generally, inherent risk is categorized as low, moderate, or high. Each vendor should have an inherent risk rating and be considered critical or non-critical.
   
   
6. Keep a disciplined approach. An effective risk assessment process needs to be consistent in form and content and must be repeatable and reportable.
7. Determine the scope of due diligence. The scope of due diligence should consider the types and amounts of risks present. Depending on the level of risk and whether the vendor is critical, more extensive due diligence may be necessary. For example, in cases regarding elevated risk vendors, you may want to consider the following assessments:
   • Regulatory and Legal Compliance
   • Vendor Financial Health
   • Information Security
   • Reputational
   • Vendor Risk Management
   • Geo-Political
   • Business Continuity and Disaster Recovery
8. Complete vendor due diligence before you sign a contract. Before signing a contract, ensure all risks have been identified and the vendor's controls have been verified. Use your contract to legally obligate the vendor to mitigate identified issues within a specific timeframe.
9. Keep up with the latest regulatory changes. As regulations emerge or change, your organization must evaluate how those regulatory developments affect your third-party risk management processes. Make sure you have robust change management practices to ensure your TPRM processes are current with regulatory requirements. Don't forget to update your governance documents, including your policy and program.
10. Keep senior management, and the board informed. TPRM should regularly report to senior management and the board regarding the TPRM program, Critical Vendors, and any open issues. Beyond regular reporting, senior management and the board should be notified right away of any regulatory changes, issues with critical vendors, or material new or emerging risks.

By incorporating these best practices into your third-party risk management program, you will take key steps to create a stronger foundation and perform more effective risk assessments.