What is Vendor Risk Assessment?

Estimated reading time: 12 minutes

As a business, you’re going to always deal with some level of risk. Essentially every party you interact with as a business — from employees to customers to third parties — brings at least some risk. While it’s impossible to completely eliminate risk in any company, you can work to reduce your overall risk with risk assessment. You can perform risk assessments on customers to help ensure that you’re providing services to mostly high-quality people who will give you the best return possible. Are you hiring? You can—and should—also perform risk assessment on new employees to help keep your internal business operations safe. However, another equally important party to perform a risk assessment on is vendors 

More and more companies are focusing on vendor risk assessment, with more than 60% of risk management professionals saying it’s an increasing priority for their business. Let’s dive into what vendor risk assessment is, how to perform vendor risk assessment with a vendor risk assessment template, and how vendor risk management software like a public and private records database can help you with vendor risk assessment. 

What is vendor risk assessment?

Vendor risk assessment is an insight into the strategic evaluation of the potential risks of working with third-party vendors (or suppliers) and the potential for risks to an organization. When a company performs vendor risk assessment, they create a set of criteria to score a vendor’s risk and determine whether to work with that vendor based on whether the benefits of working with them outweigh the potential risks. They can also determine how to mitigate any risks should the worst happen.

Any company should always conduct vendor risk assessments when outsourcing one or more critical business functions to a third party, such as interactions with customers or handling sensitive customer information. Performing vendor risk assessment allows companies to make more informed decisions about what third parties they choose to work with. By doing so, they can avoid running into issues later in the relationship that could negatively impact their revenue, compliance, or other reputation. When you have strong vendor risk assessment procedures in place, you’ll not only help keep your company safe, you’ll also craft a better reputation and increase your return on investment. 

Any business who works with vendors can perform vendor risk assessment. With the increasing amount of connectivity between different businesses, it’s more important than ever for businesses to properly vet all their suppliers. However, it’s especially important for businesses that handle high-risk transactions, sensitive customer information, or need to maintain compliance with regulations. Businesses should also perform a periodic supplier risk assessment to ensure that all third-party vendors continue the expectations of quality and do not bring any unforseen risks to the company.

Financial institutions are heavily regulated by a variety of laws including the GLBA and the FCRA. So it’s vital that financial institutions assess the risk of their vendors to ensure that none of the practices of their vendors could get them into legal trouble. It is also important for big corporations who handle high-level transactions and deal with many different vendors to perform vendor risk assessment to protect their customers and the overall functioning of their company. Healthcare organizations should also invest in vendor risk assessment to protect their patients and their patient’s information and maintain compliance with regulations like HIPAA. 

• Vendor risk assessment is the process of assessing a potential vendor’s risk before working with them to identify potential risks that vendor could pose to your business.
• When you perform vendor risk assessment, you’ll help prevent third-party issues from arising in the future and increase your return on investment from vendors.
• All businesses can perform vendor risk assessment for better security, however it’s particularly for businesses that need to maintain compliance with regulations.

How to perform vendor risk assessment 

Every business is unique, which means every business will have their own unique risk assessment based on their goals and what they deem to be the biggest risks to their business. For example, financial institutions and healthcare organizations may deem risks to information privacy as more important than other risks because they regularly handle a large amount of sensitive information. Large corporations that are under strict scrutiny may value reputational risk over other kinds of risk, while sustainability-focused companies might value environmental risks. While every business will be different, here’s a general vendor risk assessment template:

• Geographic risk: does the geographic location of your vendors put you at a greater risk? This could mean your vendor is based in a foreign country with strict, foreign regulations that you would have to comply with, or it could mean your vendor is in a geographic area prone to natural disasters.
• Operational risk: how risky are these vendor’s day-to-day operations and workflows? How likely is it that those operations will fail?  Do they have a plan for business continuity? If there is a greater chance that a vendor’s operations could fail, in turn disrupting your business’s operations and continuity, that vendor is considered to have a higher operational risk. 
• Financial risk: is the vendor financially stable and will they meet your financial requirements? If a vendor is unable to meet your financial requirements or provides low-quality supplies to your company, it could impact your own business’s revenue and lead to considerable losses.
• Credit risk: can the company pay its own bills? Doing business with a bad credit rating and/or a history of making unwise business decisions.
• Information security risk: is the vendor at a higher risk of attacks that could lead to data breaches or information misuse? A vendor with strong infrastructure and information management procedures is less of an information security risk, while one without strong information management systems may be a higher information security risk. It is particularly important for businesses that handle large amounts of data to assess information security risk.
• Reputational risk: how could working with this company affect your business’s regulations? Do they have high-quality people who run their business and high-quality products and services? Does the business have a good reputation, like good reviews and good press? All of these are things to think about when assessing reputational risk, although information security procedures and compliance risks can also be thought of as reputational risks.
• Environmental risk: how sustainable are the business’s practices? Do they act in an environmentally responsible way? Environmental risk is becoming increasingly important with increasing regulations on businesses, as well as the public’s  concern over environmental impact.
• Compliance risk: how high is the risk of violating any regulations that your business must follow by working with this vendor? If your company has strict regulations to follow, such as KYC protocol or information security, you’ll want to make sure that the vendor takes proper measures to maintain compliance with these measures. This vendor scoring checklist is not definitive because every business is different. To perform the best vendor risk assessment for your organization, you will want to take the time to assess all possible sources of risk in your vendor relationships and determine what specific factors pose the greatest risk to your business. However, this checklist is a good place to start when deciding how you’re going to score vendor risk. 

Healthcare vendor assessments for risk

Hospitals, doctors’ offices, clinics, and other healthcare facilities must be particularly careful when onboarding a third-party vendor. Many providers rely on outside third parties for the inevitable shift to digital records and other resources. Now, providers are increasingly dependent on these third-party vendors. But the conundrum is that so many vendors are vulnerable to ransomware attacks and data and other security breaches. Not only does this lead to patient privacy leaks and HIPAA non-compliance, data-breaches can also endanger patient safety.

The Identity Theft Research Center reports that healthcare has seen the most breaches in the last two years. Every healthcare organization must be vigilant about protecting patient information and assuring patients that their information is kept safely and confidential.

Healthcare organizations must work with a wide range of third-party vendors to provide patient care. In addition to IT and digital patient records, the need for medical supplies is ongoing. You need to know if your supply chain is at risk of  disruption. From tongue depressors and hospital gowns to diagnostic equipment, to the labs that handle various tests, third party vendor risk assessment is an essential part of any healthcare provider’s operations.

One overlooked aspect of healthcare third party risk assessment is people who are not employed by the facility. This can include:

• Medical students
• Post-doctorate students
• Nursing students
• Contractors and other non-employees, such as contract nurses, temporary employees, and others brought in for job-specific tasks, especially those with access to sensitive patient data.  

Anyone who isn’t an employee but has access to proprietary company information must also be considered a third-party vendor for security purposes.

Tracers public and private database access lets you research both companies and individuals before you begin working with them. You can quickly and easily perform a risk assessment for any vendor before signing up with them.

Vendor Risk Examples

There are some ways to spot potentially risky vendors with the right data and information:

• A vendor has a poor credit rating, more liabilities than assets, declining revenue from the loss of a significant customer or canceled orders.
• A vendor’s ability to conduct business can be severely impacted by severe weather, natural disasters including fires, utility outages, acts of terrorism, and other events.
• A vendor functions inconsistent with your organization’s own standards, policies and procedures.
• A vendor is in a country or region prone to corruption, political unrest, or human rights violations, and a situation develops that leaves them at risk of losing business continuity.
• A vendor may be located in an area that does not have strict laws regarding information security and privacy leading to a harmful situation for your organization,
• A vendor and their subcontractors are all concentrated in one geographical area. This is particularly risky if there are multiple critical or high-risk services come from a single vendor, which can lead to risks and stoppages if a natural disaster or other external event occurs.

Research and due diligence with the right information helps companies understand each third-party vendor and any vulnerabilities that may be present. Tracers public and private records can bring millions of records to you in an understandable and usable format.

Risk assessment for vendor management

Collaborating with third-party vendors can be a great help to a business or organization when outsourcing some functions or tasks to an outside party. But it’s not without risks to the company. The goal of vendor risk assessment is to have a framework for management to identify, monitor, quantify, and reduce the risks involved with third-party vendors.

Once you have buy-in from your organization (including top executives) you can set up the framework for your risk assessment. Make decisions on how to monitor, get feedback and reviews, and identify and resolve any risks.  Consistently apply your risk criteria to all vendors and tailor measures according to the nature of the product or service when outsourcing from various third-party sources. Begin by:

1. Compile, classify and rank your vendor list. Without a comprehensive listing of all vendors, a company can lose control of how many they have, increasing risk to the company.  
   • Separate and compile currently used vendors. Take note of each vendor’s contributions to your organization, identify the internal owner of the vendor relationship, determine which vendors have access to crucial information, and assess whether the vendor oversees vital business operations.
   • Decide on your most critical vendors. Review your vendor list and assess whether the sudden absence of any vendor would result in a significant disruption to your company and impact your customers. Factor in the anticipated recovery time, ranging from days to weeks or even months.
2. Understand the different risk types, as well as criteria and tolerance. Assess your business and its risks before assessing vendors and know where your business and industry are headed. Then review the prior list of risks to examine vendors.
3. Determine your organization’s tolerance for risk and criteria for rating.
4. Profile the primary vendors by product or service type.
5. Compare the foremost contenders. Use your research to create a profile for each vendor, then create an ideal vendor profile to use as a baseline based on your current and projected needs. This can also be used when drafting RFPs.
6. Assemble reports for each vendor risk assessment. Then give each vendor its own risk profile, including a list of attributes you consider to be essential. Judging on price alone may leave your company in trouble if one of the possible risks does occur, especially if you haven’t considered mitigation beforehand.

Asking each vendors questions about their company is also important, including:

• Performance
  • What is your rate of on-time delivery?
  • What are your communication protocols for both internal and client communications?
  • What process documentation for project management can you provide?
  • Please define which contract conditions, including terms, renewal and notification conditions, and mandatory service levels, that you can you meet
• Compliance
  • When can we schedule a review of your liability insurance to confirm its current status?
  • What processes or capabilities do you have in place for verifying essential licensing and regulatory compliance, such as government security clearances, financial regulatory adherence, or HIPAA training?
  • When can we acquire criminal and background checks that include any litigation history, complaints filed with the state attorney general, or records from the Better Business Bureau, to demonstrate a track record of compliance?
• Security controls, processes, and protocols
  • Do you have an organizational security process, and do you have relevant documentation available for review?
  • What are your management protocols for a security breach incident?
  • What are your physical security procedures for your premises, such as data centers and offices? How are visitors handled with access to the facility? Do you have surveillance available?
  • What is your company’s process for digital asset management, i.e., operation, maintenance, upgrades, and dispositioning?
• Disaster preparedness and business continuity
  • What are your processes and procedures for business continuity after a natural or man-made disaster?
  • Do you have a contingency plan for business continuity in the event of a worldwide pandemic?
• References
  • Can you provide names and contact details for current and previous clients?
  • Can you provide financial statements and other proof of financial solvency?

Before signing on with any outside vendor, due diligence is vital to making the right decision. With access to over six billion records, Tracers can help you identify the vendors you do—and don’t—want your business to work with.

What do I need to get started with vendor risk assessment? 

Determining what your specific vendor risk assessment checklist and system you want to follow is the first step to performing vendor risk assessment. But to actually assess a vendor’s level of risk, you’ll need access to high-quality data about that vendor. The best solution for gathering data for vendor risk assessment is to use a public and private records database like Tracers.

Tracers provides over 43 billion records aggregated from thousands of sources and a variety of vendor risk assessment tools. You can access a Business Credit Report to gather a credit profile on a business, as well as access business records like an asset and liability search, UCC filings, corporate bankruptcy data, tax liens, judgments, or liabilities to get a clearer picture of a vendor’s financial risks. You can also perform a personal background investigation on any of the vendor’s executives and employees with tools like a criminal record finder. To make vendor risk assessment as easy as possible for you to perform, Tracers offers an API integration so you can integrate Tracers vendor risk tools directly into your own platform, and batch processing options so you can gather multiple lists of data for vendor risk assessment all at once. 

If you’re interested in seeing how Tracers comprehensive and reliable data can help your business with vendor risk assessment, get started today.