What is Vendor Risk Assessment?

Estimated reading time: 6 minutes

As a business, you’re going to deal with some level of risk at all times. 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 assessment on customers to help ensure that you’re providing services to mostly high-quality people who will give you the best return possible, and you can also perform risk assessment on employees to help keep your internal business operations safe. However, another equally important party to perform 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 the strategic evaluation of the potential risks of working with third-party vendors (or suppliers). When a company performs vendor risk assessment, they create a set of criteria to score a vendor’s risk and determine whether or not to work with that vendor based on whether the benefits of working with them outweigh the potential risks. 

Performing vendor risk assessment allows companies to make more informed decisions about what third-parties they choose to work with in order to avoid running into issues later on 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 of their suppliers. However, it’s especially important for businesses that handle high-risk transactions, sensitive customer information, or need to maintain compliance with regulations. 

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 in order 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 down the road 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 handle a lot of sensitive information. On the other hand, huge 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? If there is a greater chance that a vendor’s operations could fail, in turn disrupting your business’s operations, 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 loss.
  • 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 is the business’s practices? Do they act in an environmentally responsible way? Environmental risk is becoming increasingly important with increasing environmental regulations on businesses, as well as the general public concern over the environmental 
  • 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 — 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. 

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 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.