Vendor risk assessment: importance and best practices

vendor risk assessment

Last modified on June 21st, 2024

Imagine waiting for a strategic delivery that got stuck during the Suez Canal blockage in 2021. We live in uncertain times, at the mercy of lockdowns and escalating conflicts — and so are our businesses. To ensure business continuity, you need to conduct a vendor risk assessment strategy. Keep reading to learn about best practices for implementing a risk management program in your company.

Trustpair helps mitigate vendor fraud risks by automating your third-party data controls during onboarding and throughout your relationship, so you’re always protected against fraud. Request a demo to learn more!

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What is a vendor risk assessment?

Vendor Risk Assessment (VRA) is the process organizations use to identify and evaluate the risks inherent to doing business with their vendors.

No business is ever without risk: the same goes for third-party relationships. By assessing the exact risks that come with each supplier, companies can mitigate them by:

  1. Choosing the right suppliers that meet their accepted level of risk.
  2. Preparing a risk management program based on the identified risks.

Using a risk assessment framework reduces the risk of business disruption and protects the company’s future in the long run. It’s an added security (and compliance) that helps lower threats against organizations.

VRA usually comes as a questionnaire sent to suppliers when selecting a new provider, or renewing a contract. These questionnaires are critical parts of vendor assessments; they are the visible parts of the company’s processes in monitoring threats.

 

Why are vendor risk assessments important?

Why you need vendor risk assessment

Entering into a business relationship without knowing your supplier is like getting married to someone without first getting to know them: it might seem excitingly spontaneous, but it might very well ruin you.

Entering into a business relationship without knowing your supplier is risky, as you don’t know what you’re getting into — and may very well ruin you.

Vendor risk assessments ensure you know exactly who you’re dealing with before relying on a supplier. With cybersecurity threats more present than ever, these controls identify your supplier and ensure your company’s security.

Completing vendor assessments minimizes the risk of surprises further down the line and ensures business continuity. It also helps with compliance with local laws and regulations.

For example, learning how long your potential new supplier has been in business can indicate how solid they are, and reduce the likeliness of them disappearing overnight. If that were to happen, your business operations could slow down or even come to a stop, endangering your organization.

VRA is the first of the vendor management best practices, as it begins the vendor selection process.

What do you risk without vendor assessment?

On the other hand, not completing your third party vendor risk assessment could cost you a lot — directly and indirectly.

Not completing your VRA can leave you exposed to:

  • Non-compliance with Anti-Money Laundering laws and other financial regulations. Know Your Supplier (KYS) is an important part of AML standards and regulations. You are also legally obliged to check your supplier isn’t on — or linked with — the international sanction and watchlists. Failing to comply leaves you exposed to hefty fines.
  • Financial fraud: in 2023, 96% of US companies were targeted by at least one fraud attempt. Not checking your:
    • Suppliers’ bank data during onboarding (and regularly afterward) leaves you open to cyber criminal schemes such as vendor fraud.
    • Vendor security defenses before trusting them with your data could make you vulnerable to cyber fraud and result in data breaches (and the lawsuits that come with them).

Both represent direct and indirect financial losses, from business interruption and reputational losses.

Identifying potential suppliers’ weaknesses means you are protected before anything bad happens. Conducting due diligence helps you avoid or at least reduce the negative impact on your business when a risk does materialize.

Next, we’ll see the steps to implement this in your organization.

 

What are the steps of the vendor risk assessment process?

Each organization has its own unique vendor risk assessment process based on its specificities. However, the process is usually divided into 5 main steps:

1. Gather relevant internal stakeholders.

Assemble the relevant people from different departments to ensure you have a comprehensive assessment that considers all the risks. Include people from various services:

  • Legal,
  • Operations,
  • Finances,
  • IT,
  • Sales and marketing,
  • Management
  • And any other relevant department.

Everybody will have different priorities and points of view: together, you’ll have a level-headed, 360° approach to your business risks and will be able to determine what’s important.

2. Build a balanced risk assessment process

Ideally, you’d have a standardized risk management framework for all your vendors that you can then adapt depending on the vendor.

It’s all about finding the right balance between:

  • having a clear and effective vendor risk assessment process to ensure security and
  • realizing that finding a new ball-pen provider shouldn’t take months.

On the other hand, sourcing a new strategic partner should take months, so you have time to complete your due diligence. (If you’re using an RFI or an RFP, this process can take a while anyway).

The time and resources you dedicate to this process depend on your suppliers’:

  • Criticality to your procurement process (ballpen all the way to sole-source server storage providers).
  • Access to sensitive information your vendors will have (patents, customer information, employee data, etc.) — this is key for compliance!
  • Sensibility to uncontrollable events like political conflicts or natural disasters.

All in all, set up a process that makes sense to you and is adapted to the risks you’re trying to safeguard yourself from.

3. Create and send your questionnaire

Once you have established your priorities and your process, it’s time to gather all of it into a risk assessment questionnaire. This document is sent to potential vendors to collect information that will help with your decision-making.

Here are some sample questions for vendor risk assessment:

Department Goal: Establish that vendor can… Example of question
Finances Financially withstand difficulties (is solvent)  Can you provide your latest financial statements/source of funding?
IT  Meet your needs now and in the future Can you work with our vendor management system?
Data security Protect your and your clients’ data What security protocols and controls do you follow?
Legal Prove they’re trustworthy partners Do you have any ongoing litigation with past clients or employees?
Compliance Comply with legal regulations What measures have you taken to comply with AML regulations? 
Operations Meet your demands in terms of quantity/quality/other important criteria How many of these products could you deliver every month?
Purchasing Proove customer satisfaction What percentage of products are delivered on time?
Strategy Keep your business information safe Do you work with any of our competitors?
Marketing Be associated with you without damaging your reputation Have you been featured in the press negatively?

 

4. Assess the risks

Once you’ve received your questionnaire back from your potential vendor, it’s time to collect and compare the data to complete your assessments.

Calculating risk can be done using the following formula: Likelihood x Impact = Risk.

It can be helpful to use a risk assessment matrix to help you:

  • Attribute risk scores to each factor and supplier,
  • Have an overview of one or all suppliers.

You also need to gather your own intel, by doing thorough due diligence, that includes:

Once you have all these elements, it’s up to you to choose which vendor suits your needs and criteria best.

Remember that every organization has a different risk level. Startups tend to be more prone to risk and move fast, and big companies tend to be risk-averse (translating into longer procure-to-pay processes).

5. Mitigate your risks

Regardless of the vendor(s) you have selected through your vendor risk assessment process, you still need to mitigate their existing risks.

Nothing in business (or life) comes without risk: but since you know what they are, you can now prepare a response plan to face them.

Risk mitigation is all about planning. Ensure you discuss (internally and with your vendors) contingency plans in case of an incident. Having a clear plan of action reduces your reaction time and limits your exposure.

While this is the end of this step-by-step explanation, know that risk assessment never stops. It sounds dramatic, but assessing your third party vendors should be done on an ongoing basis to ensure your company is completely protected.

But don’t worry, we’ve got your back! Trustpair helps you stay on top of your vendor account validation by automatically checking your suppliers’ credentials. More on this below.

 

What are the best practices of vendor risk assessment?

Use VRA throughout your vendor relationships

Vendor risk assessment usually happens before selecting your third parties. But this approach is very limiting and leaves you open to risk.

Risk management best practices include carrying out vendor assessment at 4 key moments:

  • When selecting and onboarding suppliers.
  • When renewing a contract with an existing supplier. This is to ensure that your due diligence and risk mitigation strategies are up-to-date.
  • When a risk happens. Once the situation is back under control, review your risk management approach for your supplier so it doesn’t happen again, and design better contingency plans.
  • Regularly during your vendor relationships. Ideally, you issue regular vendor risk assessment questionnaires to your existing third parties. Some experts advise doing so every 6, 12, or 18 months depending on their criticality.

At Trustpair, we take it a step further: we recommend ongoing vendor assessment, so you’re always protected. And we’ve got the solution to make it easy and efficient for you.

Use anti-fraud software

Vendor risk assessment covers a huge scope. Using Trustpair means you can focus on other risks and allocate more resources to those, rather than manually checking all your vendor’s data (which is time-consuming and error-prone).

Using Trustpair means completely eradicating the risk of vendor fraud for example. In this elaborate scheme, criminals either:

  • Hack into your system and change your real suppliers’ bank information for their own. You end up paying them when you think you’re paying your proper vendors, costing your money and your vendor relationship.
  • Impersonate one of your suppliers, getting paid for goods or services never rendered (that’s also called invoice fraud, and companies like Facebook and Google fell prey to this).

When you use anti-fraud software solutions, the risk of these happening is eradicated. Our software checks your vendors’ information as soon as a new vendor is onboarded, and before any transaction is sent. This way, you can be absolutely sure you are sending funds to the right account (and organization).

If any suspicious activity is detected, the transaction is blocked and the alarm is raised. We flag it in your secure dashboard so you can investigate. Our 200+ clients have a 100% successful protection rate against fraud.

It’s especially handy when working with suppliers overseas, whose data is harder to check manually. Plus, we integrate with your payment chain, making your procure-to-pay process seamless.

Learn more about supplier risks in our dedicated white paper!

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Key Takeaways:

Vendor risk assessment is about identifying and mitigating third party risks. Vendor risk management covers all types of risks from legal to operations.
Using anti-fraud software ensures you’re not a victim of fraud through your third parties. Trustpair automatically checks your vendors’ credentials in real time to protect you.

FAQ

Third-party risk assessment should include:

  • Identifying your vendor’s Ultimate Beneficial Owner.
  • Ensuring they’re not on any sanction or person of interest list,
  • Compliance with the Know Your Supplier (KYS) process,
  • Using a risk assessment matrix and
  • Having a contingency plan if the risk does happen.

Vendor risk types include legal risks, operational risks, reputational risks, strategic risks, cybersecurity risks, data risks, financial risks…

Manage the risks related to corporate treasury.

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