What is Vendor Risk Assessment?- Definition
Vendor risk assessment (VRA), also known as vendor risk review, is the process of identifying and evaluating potential risks or hazards associated with a vendor's operations and products and its potential impact on your organization.
When you perform a third-party vendor risk assessment, you determine the most likely effects of uncertain events, and then identify, measure, and prioritize them. Potential risks include the accuracy and reliability of operational, customer, and financial information; security breaches, operations effectiveness; and legal and regulatory compliance. By performing vendor due diligence and monitoring (particularly of those that impact your operations), you can help mitigate those risks and provide a solid foundation for productive relationships.
Understanding Vendor Risk Assessment
A vendor risk assessment helps organizations understand the risks that exist when they use third-party vendors’ products or services. Conducting a risk assessment is particularly important when a vendor handles a critical business function, accesses sensitive customer data, and/or interacts with customers.
The key to successful third-party vendor relationships is prevention. Consequently, organizations should exercise due diligence to ensure that their third-party vendor relationships are productive and risk-free.
Importance of Vendor Risk Assessment
A company should always conduct a vendor risk assessment when bringing on a new third-party vendor. However, an organization should also perform periodic vendor risk assessments to ensure its third-party vendors are keeping up with its quality standards and not introducing risks to the company, its customers, and investors.
When a company gives its third-party service providers access to its network, it also gives them access to sensitive corporate, employee, and customer data.
A vendor risk assessment is important because it allows an organization to better understand the risks posed by its third-party vendor relationships as any third-party risk is also the organization’s risk. Common risks associated with third-party vendors include financial, cybersecurity, information security, operational, reputational and compliance risks.
If the networks of an organization’s third-party service providers aren’t secure, they can put that sensitive corporate information at risk. In that case, the company will be held accountable for whatever happens to that information.
Although a company can’t entirely eliminate all the risks associated with its third-party service providers, vendor risk assessments help minimize the impact on the business.
An organization’s goals for a vendor risk assessment should be to:
- Identify any risks a third-party vendor may pose
- Evaluate whether third-party service providers can eliminate those risks
- Monitor the risks that can’t be eliminated
- Assess the extent of the outstanding risks
- Determine whether it can accept those outstanding risks
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