How To Conduct a Vendor Risk Assessment

Why conduct a software vendor risk assessment?

Working with third-party software vendors has many advantages, but every partnership comes with risks that need to be understood and managed. The risk assessment process sets out to achieve this, leaving you in the loop on vulnerabilities so you can minimise their likely impact and comply with regulations as well.

Most significantly, assessing vendor risk before committing to a contract makes it simpler to decide whether a prospective third-party supplier is the right fit for your organisation. This is doubly relevant when operational resilience is also hanging in the balance.

With all that in mind, let’s go through the process of performing a vendor risk assessment, giving you an overview of what you must do to analyse any potential partner before outsourcing commences.

4 Key components of a vendor risk assessment

A thorough vendor risk assessment typically includes:

• Evaluating Security Measures - Assess the vendor’s policies, procedures, and tools to prevent data breaches or misuse of sensitive assets.
• Reviewing Data Handling Practices - Understand how the vendor manages customer and business information for which they are responsible.
• Assessing Financial and Operational Stability - Examine the vendor’s financial health and reliability to ensure long-term continuity and prevent disruptions.
• Verifying Compliance Claims - Confirm that the vendor’s regulatory compliance statements are accurate and backed by evidence, instead of relying solely on their assurances.

Once complete, a vendor risk assessment provides details of third-party risks that, if they came to fruition, would compromise your business’s operational resilience and leave it exposed to everything from regulatory repercussions and legal penalties to reputational damage. Therefore, conducting a risk assessment is a priority whenever you want to onboard a new vendor or renew a contract with a current vendor.

In turn, the information you unearth here can inform the preventive action you take. For instance, the software escrow services provided by Escode are a useful tool for reducing exposure to vendor-related risks identified in the assessment process. This includes vulnerabilities associated with SaaS solutions, which can otherwise go unnoticed.

How To Conduct a Vendor Risk Assessment: 7 Key Steps

Here’s a step by step look at what it takes to conduct an effective software vendor risk assessment.

Step 1: Define Risk Criteria for Vendor Risk Assessment

Every organisation has a set of risks that are most significant to it specifically, so these must be identified before vendors can be assessed with any degree of accuracy. Compliance might be at the top of the agenda because of how strict regulations are in your industry. Operational resilience could hold more sway over your long-term viability. Data security may trump all other concerns because of the level of cyber threats in your niche. Defining risk criteria and ranking them comes first.

Step 2: Gather Vendor Information

You cannot assess a vendor’s suitability until you have a good grasp on the practices they follow, the policies they adopt, and the systems on which their services are founded. You can gather this information directly through a combination of interviews and certification reviews, with questions guided by the risk criteria you’ve defined earlier. Your industry will dictate what information matters most, and look out for certifications like ISO 27001 if you’re operating in a space where security can’t be left to chance.

Step 3: Assess Vendor Security Measures

Beyond top-level information gathering, you must drill down into what vendors do to prevent breaches and avoid the misuse of critical assets that will be within their control over the partnership. You should be on the lookout for the presence of appropriate security tools and strategies and any red flags that suggest this is not up to par.

Step 4: Evaluate Compliance

Some of the regulatory compliance questions you have will be answered earlier in the vendor risk assessment process. However, you will still need to go through their operations with a fine-toothed comb to be confident that working with them will not invalidate your own compliance efforts. Industry-neutral regulations like GDPR and PCI DSS, as well as sector-specific requirements from the likes of the PRA and the FFIEC, may need to be the benchmarks against which you measure would-be vendors.

Step 5: Check Financial Status

A vendor can tick every compliance box and still be a risky prospect if they don’t have solid financial foundations. Money woes can cause unexpected service disruptions, so it is in your interests to look into their finances, review past performance, determine whether vendor continuity planning is adequate or lacking, and pick providers that can be relied on for long-term partnerships.

Step 6: Assign Risk Levels

Now that you have insight into the risks associated with a vendor, you need to rate them according to their threat level, whether that’s low, medium, or high. This ranking is determined by how likely it is that a particular problem will actually play out and what impact it would have on your operations. This helps guide procurement decisions and strengthens your continuity planning.

Step 7: Implement Risk Mitigation Plans

The final step in this process is to implement strategies to mitigate risks uncovered in the assessment. You might determine that it’s necessary to revise agreements that are already in place with third parties or require new vendors to alter their policies and practices before you move forward. In some situations, it may be necessary to discontinue relationships with vendors that have an intolerable level of risk associated with them and are unable to address this satisfactorily.

Final Thoughts

If your business relies on third-party software vendors and you have concerns around continuity, Escode is here to help.

Our software escrow solutions mitigate the risks associated with outsourcing vital services, giving you a route to continuity and recovery. Take a look at what we offer and move towards a more stable relationship with vendors today.