Risk management professionals worldwide agree that the level of risk facing enterprise companies has increased significantly in recent years. Perhaps most concerning is that around 34% of companies say the increase in risk has stemmed from a greater reliance on third-party vendors.

In virtually every industry, companies are becoming more reliant on third-party vendors to assist with everything from software to logistics and supply chain management. Each new third-party vendor you work with carries a certain level of risk, connected to their reputation, performance, and cybersecurity strategy. This makes vendor due diligence an essential component of any partnership. 

The vendor due diligence process allows leadership, risk management, and compliance teams to make informed decisions about who an organization should do business with, protecting it against potential liabilities. Here’s everything you need to know about assessing third-party risk. 

What is Vendor Due Diligence?

Vendor due diligence (VDD) is a comprehensive screening process before a company partners with a third-party vendor. These assessments are often conducted by investors or buyers of companies and by enterprises choosing to work with new suppliers, partners, or vendors. 

The assessment aims to identify whether a prospective vendor is being honest about their reputation and security posture, outlining risks that could endanger the other company. A comprehensive approach to due diligence can be time-consuming depending on the partnership. 

Before diving into relevant areas, risk assessors need to collect information about a potential vendor’s business structure, operations, reputation, and security standing. Some companies use their own in-house due diligence checklist for the process, while others leverage software or the support of third-party agencies to accelerate the process. 

The full screening process generally includes various tests, risk assessments, questionnaires, and interactions between both businesses. 

Why is it So Important to Vet Vendors?

The right process can protect companies against problems associated with compliance, regulations, and public image. Plus, it can help business leaders ensure they can protect their critical assets and data from potential security breaches.  

The benefits of effective due diligence include:

  • Improved insight: Conducting due diligence allows companies to gain insight into each prospective vendor’s financial strength, legal history, brand reputation, and security standing. This can help to protect your company’s integrity by minimizing the risk of poor partnerships. 
  • Risk management: Third-party due diligence helps companies discover prospective problems in working with a company before they impact their business. Your investigation can uncover cybersecurity issues, corrupted operations, and compliance problems. 
  • Brand protection: A thorough due diligence checklist will provide companies with the information they need to protect their brand from reputational damage and financial issues in the future caused by poor cybersecurity or compliance issues.

How Does the Due Diligence Process Work?

Vendor due diligence is often part of a comprehensive third-party risk management strategy. The exact steps involved in the process may vary depending on the company you’re working with, and the risk management strategy you already have. 

Typically, the process starts with understanding the product, the vendor, and the potential “risk” elements that could impact your business. To enhance due diligence, companies should look at various aspects of vendor risk, such as:

  • Cybersecurity risk: This involves looking at a company’s cybersecurity policies and procedures, how they handle threats, and how they’ll use any information or data obtained from your company. Make a note of any potential vulnerabilities. 
  • Compliance risk: Examining compliance risk means checking whether the vendor has violated any governing laws, regulations, or guidelines related to your business. For instance, violating PCI or HIPAA guidelines could also put your business at risk. 
  • Reputational risk: If a breach or problem occurs with your vendor, your reputation will also be at risk. It’s important to think about how your vendor’s behavior will impact the image you’re building for your company.
  • Financial risk: Financial risk involves examining whether a third-party vendor can perform their duties in line with the contract set out by your company. If a vendor is struggling financially, they may not be able to provide consistent service. 

Often, vendor due diligence doesn’t just involve assessing a vendor once. It also means implementing a comprehensive vendor management strategy, which allows you to constantly assess and monitor your vendor’s approach to information security, compliance, and performance. 

You may regularly conduct assessments with multiple questionnaires and request reports and documentation from your vendor throughout your relationship. Some businesses conduct an annual “vendor due diligence report” to determine whether they should continue a partnership. 

What does a Vendor Due Diligence Checklist look Like?

A vendor due diligence checklist is one of the most valuable tools companies can use to assess potential risks associated with third-party vendors. It outlines the steps your organization will take to perform due diligence consistently. 

While the exact steps in a vendor due diligence checklist might vary, they will usually address various steps for assessing risk. Some companies use frameworks like ISO 27001 to guide them through evaluating each part of their vendor’s ecosystem.

Some of the core components of a vendor due diligence checklist include:

  • Collect general business information: Find out what services the company offers, how they deliver those services, and which other companies they may work with (fourth parties).  
  • Assess reputation and culture: Check the vendor’s reputation in the industry, whether any complaints have been issued about them, and whether they share your values. 
  • Financial review: By looking at financial reports from the last few years, determine whether the company is generally profitable and financially sound. 
  • Review compliance: Request reports and documentation demonstrating evidence of the company’s compliance with standards relevant to your industry. 
  • Examine data protection: Determine whether the vendor complies with industry and mandatory regulations for securing business and personal data. 
  • Assess cybersecurity: Examine the vendor’s security policies, the systems they use to mitigate incidents, and the responses they take to security breaches. 

What Does Vendor Due Diligence Do for Third-Party Risk Mitigation?

Vendor due diligence is an important aspect of effective third-party risk mitigation. Working with the wrong vendors can lead to many problems for companies, from damage to their reputation to cybersecurity issues. 

Vendors often require access to sensitive company data and financial information. If a vendor is compromised in an attack, criminals could also gain access to your sensitive data, launching further attacks against you. Plus, there’s a risk your business could suffer from regulatory fines due to poor vendor management strategies. 

Without knowing the security measures your vendor takes or their approach to compliance, you can’t protect your business and data against vulnerabilities. Poor due diligence could increase your risk of phishing attacks, malware attacks, and data exfiltration. It could also shine a negative light on your business, making it more difficult to expand.

How Can I Strengthen My Cybersecurity With RiskRecon by Mastercard?

Effective vendor due diligence is essential to mitigating risk for virtually every company. RiskRecon offers companies a variety of solutions and technologies designed to help you protect and defend your business from various threats. 

With RiskRecon, companies can obtain executive summary reports of every vendor in their supply chain, complete with a portfolio rating, performance distribution summary, and insights into recent breach events. Plus, you can compare and contrast vendors side by side, examining their risk factors and performance over time. 

With RiskRecon, you can even receive custom-fitted risk action plans, so you can start mitigating risk immediately and implementing policies to reduce threats. 

Request a free demo of RiskRecon today to find out more.