Third-Party Due Diligence: Not All Vendors Are the Same

The regulatory environment is becoming increasingly stringent and continues to rapidly change. So, it’s little surprise that your third-party risk management (TPRM) program is expected to evolve to keep up with these changes. When you look at the big picture of third-party risk, it’s a lot to manage, right? It would be ideal to work off a due diligence checklist for all your vendors and requesting the same documents from everyone. Unfortunately, this situation isn’t possible because not all vendors are the same.

So, with all these expectations, and with so much to review, request and manage in so little time, what can one do? We’re here to share some valuable insight on why you need to treat each vendor uniquely and some helpful tips on how to do so. We’ll also provide some guidance to ensure proper due diligence is being done.

Not All Vendors Are Created Equal

Third-party due diligence can’t be a check-the-box activity. This is because adequate due diligence is tailored to the product or service being provided. If it’s not, then you’re not properly addressing risk.

Here are a couple of reasons why your vendors aren’t created equal:

1. Not every vendor will have the same documentation. Your landscaping company isn’t going to have a business continuity (BC) or disaster recovery (DR) plan, so it would be a waste of time and resources to request it. Alternatively, a BC/DR plan is a must for a critical vendor like your core processor.
2. Vendors often offer multiple products/services. In this case, you could be using one vendor for two or three different services. For example, if you’re using a single vendor for core processing, check imaging and card advisory services, each service needs its own set of due diligence performed. The oversight will also vary depending on the nature of the service or product, with some services requiring increased oversight.

Risks of Treating Your Vendors Equally

Your organization can be put in a position of substantial risk if you choose to treat all vendors the same. Let’s keep going with the business continuity and disaster recovery example. There was a real-life scenario of an organization that neglected to gather ALL of its network security provider’s business continuity, pandemic and disaster recovery plans. The vendor wasn’t properly testing the plans at least annually, which lead to some severe consequences.

When a disastrous event impacted the network security provider’s operations, it extended to the organization using them. The network security provider was down for more than two days as the plan they had in place didn't work – which is a huge deal! Had the organization reviewed all of its vendor’s business continuity plans, they probably would’ve realized that the vendor failed to appropriately test them and would have requested controls be strengthened. And, with testing more frequently, the vendor would have likely realized they had a faulty plan in place.

How You Can Simplify Your Due Diligence Process

Believe it or not, you can make the entire due diligence process slightly less daunting by creating strong processes.

Here are three recommendations to simplify your due diligence process:

1. Determine inherent risk and criticality: This is an important first step within a vendor engagement because it provides guidance on the due diligence that needs to be collected allows you to justify how TPRM resources are distributed. While inherent risk is based on the nature of the vendor relationship, criticality is determined by the vendor’s impact on your organization.
2. Determine the appropriate due diligence based on the inherent risks: Once you understand the vendor’s inherent risk and criticality, you can make an informed decision on how to mitigate the risk. This is accomplished through collecting and documenting information from the vendor and applying controls that mitigate or reduce the inherent risk.
3. Use that information to determine the residual risk: The information gathered from the due diligence process will then be used to identify the vendor’s residual risk, which should always be lower than the inherent risk. Residual risk should be clearly documented and reported to senior leadership, who can decide whether to accept the risk or take further actions.

Implementing these best practices should help tremendously. Be sure to set up alerts or reminders to review and update due diligence. Ongoing monitoring is critical to protect your organization.

Remember, even if you have two vendors that provide similar services, it doesn’t mean that both vendors have proper controls in place. Trust but verify!