Vendor Risk Assessment Guide

Discover the key steps to conducting a vendor risk assessment and see how it helps evaluate security, compliance, and operational risks. Modern businesses are linked through a global web of interconnected supply chains to access partners, consumers, and compete in the global marketplace. The reliance on third-party vendors helps address multiple operational needs, such as balancing budgets or addressing skill gaps. On the other hand, extensive reliance on third-party vendors increases cybersecurity risks, as providers could have access to critical business data, financial records, customer information, or other sensitive materials. 54% of large organizations identify supply chain challenges as the biggest barrier to achieving cyber resilience. Key concerns include third-party software vulnerabilities and propagation of cyberattacks throughout the ecosystem. The increasing complexity and lack of visibility into the vendors’ security levels further raise the cybersecurity risk threshold. The global 2024 IT outage that crashed millions of Windows systems, disrupted critical servers, and halted business operations across the world underscores the heightened risk of supply chain dependencies. Therefore, it's vital to ensure your third-party vendors have strong security practices in place to prevent any data breaches, outages, or compliance violations. And this is best achieved with vendor risk assessment.

What is a Vendor Risk Assessment

A vendor risk assessment is the evaluation of the security, compliance, and operational risks associated with third-party vendors, suppliers, and service providers. It is a part of a comprehensive security risk assessment and risk management program. Since vendors often have access to sensitive data, systems, or networks, assessing their security posture is critical to protecting an organization from cyber threats, compliance violations, and operational disruptions. Vendor risk assessment spans the entire vendor lifecycle, from initial selection and onboarding to offboarding and termination. This process usually involves evaluating the vendor’s security practices, privacy controls, financial stability, and operational procedures—often through structured questionnaires.

Why is Vendor Risk Assessment Important

Assessing vendor risks is crucial for identifying and mitigating potential threats from third-party service providers. By conducting thorough evaluations, organizations can proactively manage risks when outsourcing services, sharing sensitive data, or granting access to their supplier network.

• Vendor risk assessment helps prevent data breaches. At least 35.5% of all breaches in 2024 were related to third parties. Poor security controls in a vendor’s environment can lead to ransomware attacks, phishing, and data leaks.
• Vendor risk assessment helps meet сompliance кequirements. Regulations and standards like HIPAA, GDPR, PCI DSS, SOC 2, and ISO 27001 require organizations to manage vendor risks.
• Vendor risk assessment helps address business continuity risks, while a vendor’s financial instability or operational failures can disrupt critical services.
• Helps strengthen relationships with third parties. By ensuring your vendors have solid security measures in place (backed by certification and regular risk assessments), you not only protect your business but also foster long-term partnerships.

When to Perform a Vendor Risk Assessment

A vendor risk assessment isn’t a one-time process—it should be conducted at multiple stages of the vendor lifecycle to ensure ongoing security and compliance. Organizations that value their security and reputation should conduct a vendor risk assessment in the following cases:

• Before engaging a new vendor, evaluate the vendor’s security posture, identify potential risks, assess regulatory compliance, security policies, incident response plans, and history of data breaches or security incidents.
• When renewing contracts to ensure they still meet your security and compliance standards.
• If a vendor experiences a data breach, compliance violation, or cyber incident, reassess their security posture immediately to determine if additional controls, restrictions, or contract modifications are necessary.
• When regulations or business needs change. Regulatory changes, such as HIPAA updates, PCI DSS updates, or shifts in the company’s security strategy (e.g., adopting zero trust) may necessitate a fresh risk assessment of existing vendors.
• During termination to ensure proper migration or secure disposal of sensitive data and confirm adherence to contract terms.
• Annually. An annual assessment allows businesses to track vendor performance. It also helps identify and terminate risky vendor relationships before they become a liability.

How to Сonduct a Vendor Risk Assessment

A well-executed vendor risk assessment ensures that your business can avoid potential security breaches, compliance violations, or disruptions due to a vendor's poor practices. Here's a step-by-step guide to conducting a vendor risk assessment:

Step 1. Identify third-party vendors

Businesses often have a lack of visibility over their vendors due to insufficient centralized vendor management, a constantly changing vendor base, and evolving business relationships. The first step of vendor risk assessment should identify all third-party vendors and service providers your organization works with. This includes contractors, consultants, SaaS tools, cloud services, and any external entities that have access to sensitive data or support business operations.

Step 2. Classify third-party vendors

Consider the risks associated with a potential vendor’s breach or outage impact from each of your vendors and group them based on the risk category. Assess the risk of sensitive data being exposed in case of a data breach. Based on the findings, assign a risk score or ranking to each vendor. You can use a simple scale (e.g., high, medium, low) or a more detailed numerical scoring system. A common approach is to divide vendors into:

• High-Risk Vendors. Vendors that handle sensitive data (e.g., SaaS providers, payment processors, or healthcare IT services) and/or support critical business operations. A breach could result in regulatory violations or significant financial loss.
• Medium-Risk Vendors. Vendors that interact with business systems but do not process highly sensitive data (e.g., marketing automation tools, HR platforms). A breach could expose business information, but it may not directly impact compliance.
• Low-Risk Vendors. Vendors with limited access to data or systems (e.g., office supply providers, catering services). These vendors pose minimal cybersecurity risks.

Step 3. Gather information about the vendor

Check whether the vendor complies with relevant regulations (HIPAA, GDPR, PCI DSS, or SOC 2), depending on your industry. The availability of the recent SOC 2 and ISO 27001 certification, PCI DSS ROC, or HIPAA audit is helpful in providing an independent opinion about the vendor's cybersecurity practices in place. At the same time, it's important to remember that certifications or audit reports do not guarantee immunity from data breaches. To assess their security posture comprehensively, create a vendor risk assessment questionnaire that identifies and evaluates cybersecurity controls.

Step 4. Develop a vendor risk assessment questionnaire

For proper information gathering, distribute vendor risk assessment questionnaires. For instance, questions might revolve around the encryption methods used to safeguard data, access control measures, adherence to specific regulatory standards (such as GDPR or HIPAA), risk management processes, and the extent of oversight on their supply chain. Depending on your business needs and industry requirements, your questionnaires may include the following:

• What (if any) security frameworks and/or data security laws and regulations do you follow (SOC 2, ISO 27001, HIPAA, PCI DSS, etc)?
• What encryption methods do you use?
• Do you have a data breach response plan?
• How often are you audited for compliance?
• What data do you handle, and how is it protected?
• Do you enforce the least privileged access for your employees?
• Do you have disaster recovery and incident response plans?
• Do you have established procedures for regular risk assessment and penetration testing reports?

NOTE: The large third-party vendors like Google, AWS, Atlassian, and others are unlikely to answer your questionnaires. With them, you may only rely on their audit reports and certification.

Step 5. Develop risk mitigation strategies

For risks categorized as unacceptable, develop a clear mitigation plan in collaboration with your service providers. Negotiate specific remediation actions and set realistic timelines to address security gaps. For example, if a vendor lacks multi-factor authentication (MFA), require them to implement it within a defined period. Additionally, set up continuous monitoring for critical vendors to track their security posture over time. This includes conducting periodic reassessments, reviewing security certifications, and ensuring vendors maintain compliance with your security policies.

Step 6. Continuous monitoring

Risk management is a continuous process, so monitoring is essential for managing vendor risk over time. Instead of a one-and-done assessment, establish a schedule based on the vendor’s risk level. For example:

• high-risk vendors should be reassessed annually;
• medium-risk vendors may require assessments every two years;
• low-risk vendors may only need evaluation before engagement.

Remember that reassessments are also necessary in case of a vendor data breach or major technological or operational changes.

Build an Effective Vendor Risk Assessment Plan with Planet 9

Vendor risk assessment is essential for businesses to gain insights into the potential third-party risks. In particular, it plays a key role in:

• preventing data breaches
• ensuring compliance with industry regulations
• addressing business continuity risks
• strengthening vendor relationships

However, businesses often struggle to keep an up-to-date vendor inventory, track which vendors have access to sensitive data, and maintain a centralized repository of due diligence reports. The complexity grows as organizations work with multiple third-party providers, making it difficult to ensure consistent security evaluations, compliance monitoring, and risk mitigation efforts. At Planet 9, we specialize in comprehensive security risk assessments, including vendor risk assessments. Our approach includes:

• identifying all third-party vendors and service providers;
• conducting thorough analyses to uncover potential threats and vulnerabilities;
• creating detailed vendor security questionnaires;
• evaluating the potential impact of a vendor breach and categorizing risk levels;
• ensuring third-party vendors comply with your organization's specific requirements;
• developing targeted remediation plans to address identified risks.

Schedule a free consultation with Planet 9 today to learn how we can help you enhance security, maintain compliance, and streamline your vendor risk management—all while enabling your business to thrive and scale. Relieve yourself from the complexity of vendor risk assessment so you can focus on your operational needs and business growth. Website: https://planet9security.com Email: info@planet9security.com Phone: 888-437-3646