A Practical Guide To The Vendor Due Diligence Checklist

Vishal V

Vishal V

Jun 24, 2024

Vendor Due Diligence Checklist

Vendors are a critical component of every business ecosystem. In fact, every business today has a list of affiliated companies and vendors who help it fulfill its business requirements. However, companies must be careful about the type of service provider they choose. Not being cautious can open the door to several potential risks. Caution, in this case, comes in the form of a thorough due diligence process. 

A vendor due diligence process is usually conducted before the onboarding process to ensure third-party vendors can demonstrate they have sufficient internal controls to safeguard their data and avoid security incidents. 

Vendor due diligence goes beyond looking out for complaints on review sites. It’s a broad term that describes a myriad of checks. Companies need a structured approach to third-party risk management to help them discern what is important to their business and stay well within the acceptable risk level. 

This is precisely where a vendor due diligence checklist comes in handy. 

This blog explains the complete diligence process, steps to develop your own supplier due diligence checklist, and a sure-shot way to optimize business relationships and drive vendor compliance.  

What is vendor due diligence?

Vendor due diligence is the final stage of the vendor selection process. It entails a detailed assessment of vendor risk, fixing security gaps, and ensuring potential vendors can fulfill compliance requirements. 

The due diligence process isn’t limited to analyzing the cyber risk surface, it is also tasked with helping the organization understand the kind of security policies and controls they have in place to prevent security breaches and business disruptions. The process comprises of three essential components—contract review, completion of a due diligence questionnaire, and a background check to assess their track record in the past. 

Want to learn more about vendor selection? Check out our free guide.

What is a vendor due diligence checklist?

A vendor due diligence checklist is a vital component of vendor risk management that allows companies to verify all aspects of due diligence before entering into a business relationship. A well built supplier due diligence checklist aids the procurement and security teams in filtering out vendors with insufficient security practices and helps them make more informed decisions and safeguard business reputation.

The vendor due diligence checklist goes beyond aspects of security. It also helps companies gauge operational stability, conduct financial reviews, and gain a basic business overview to understand if they’re a good fit in the long term.

Just to make things simpler, we’ve created a sample vendor due diligence checklist that you can use to conduct your due diligence process. Download your free checklist here. 

Steps to develop a vendor due diligence checklist 

A great due diligence assessment keeps organizational risk at its base. A risk-based approach helps organizations choose vendors that have the right security measures in place to minimize the threat surface and avert certain types of risk. 

Here are the five vital steps to develop an effective due diligence checklist:

1. Assess your risk appetite

Every business has a risk appetite—the tolerance to certain types of risk. The risk appetite determines what the organization considers to be an acceptable level of risk and shapes their security and compliance strategy

The first step is to understand business objectives and discern how vendor performance may impact these objectives. The checklist must evaluate and screen vendor risk profiles based on the baseline risk appetite and how closely vendors are aligned with it. 

2. Take a deeper dive into vendor risk 

Vendor risk assessment is a comprehensive process that assesses in detail the likelihood of certain risks and evaluates vendors on key aspects of cybersecurity posture, financial resilience, and security practices. 

The next step to developing an effective due diligence checklist is to conduct a thorough vendor risk assessment and identify areas that pose risks. Once these risks are identified, they need to be segregated based on severity, likelihood, and impact. This helps determine which areas to prioritize and which areas take up more weightage during vendor ratings. This step also points to the extent of remediation efforts required to correct these gaps.

It’s also important to note that not all vendors require the same amount of scrutiny—sometimes vendors do not have extensive access to crucial data and so, the risk they pose may not be as high as others. And so, a tiered approach to vendor risk is recommended.

3.  Research compliance and regulatory requirements

Vendor compliance is a crucial aspect of the due diligence process. Companies need to thoroughly research industry standards and regulations that apply to vendors. This includes compliance requirements and cybersecurity frameworks that vendors need to comply with in order to align with the company’s compliance posture.

This stage is considerably more complicated because it typically starts with understanding the applicable standards and then decoding how to enable vendors to implement them. Depending on the vendor tier, it may also require a comprehensive analysis of vendor security controls and measures to understand how familiar they are with compliance and regulatory requirements.

4. Develop the checklist 

Now that the groundwork is done, it’s finally time to develop the checklist. The due diligence checklist will consist of two parts—the due diligence questionnaire, a vendor-completed assessment of security controls and risk-related internal policies, and documentation of all criteria (company information, risk tier and score, organizational structure, legal standing, operational risks, financial health, security practices, infrastructure, performance, compliance, incident response, asset management, physical security, and data management). 

The due diligence questionnaire helps organizations verify the authenticity of claims and understand the security measures vendors have in place. It also helps set clear expectations and avoid conflicts of interest. The assessment, on the other hand, will help internal stakeholders make better decisions and avoid buyer’s remorse. 

5. Review and refine the checklist

Once the checklist is fleshed out, it must be circulated among key security teams and senior management for review and feedback. The checklist must incorporate their feedback to ensure it is comprehensive and relevant. It will also need to undergo a field test to ensure there are no gaps. This entails rolling it out to a small sample of existing vendors to check its effectiveness. 

The checklist will also need to be refined based on newer changes and amendments to security regulations and frameworks as well as any impacts change management has on the vendor ecosystem. 

Key elements of a vendor due diligence checklist

Vendor due diligence does not support a one-size-fits-all. Every company has its own set of security and compliance requirements and approaches vendor risk management differently. But while companies see the finer details differently, some crucial elements developing an effective vendor due diligence checklist hinges on.

General information:  This section contains details of the necessary business licenses and other foundational documents to tell the company that vendors have the relevant certifications to operate. Documents like proof of location, articles of incorporation, and an overview of organizational structure.

Financial analysis: The financial component consists of everything that points to the vendor’s financial solvency and its tax documents. It’s vital to take a closer look at assets and liabilities, loans on the business, compensation structures, growth year-on-year, and balance sheets to help gauge financial stability. 

Reputational risk and political standing: A vendor’s political standing and market reputation can also have a cascading impact on the company’s reputation. This section of the checklist must closely analyze the vendor for regulatory violations, lawsuits, negative reviews on social media or news, and if any management team members have been flagged as Politically Exposed Persons or on law enforcement lists. 

Technical review of information security: This component aims to establish the strength of the vendor’s information security system. The review is technical and will involve taking a closer look at penetration testing reports, internal audit reports, certifications, and history of data breaches. 

Policy review: This step ties closely with the contract stage. Essentially, the vendor’s internal policies need to be assessed to ensure no gaps in the vendor’s data network. Companies need to pay special attention to key policies such as change management, data recovery, disaster management, data encryption, data classification, data retention, and privacy management.

Ace Vendor Due Diligence with Sprinto

Vendors, like employees, are the custodians of information security and compliance. Any instances of non-compliance can have severe consequences ranging from security breaches, fines, loss of business, and legal trouble. And this is what makes the vendor due diligence process a vital aspect of your business’s security posture. However, supplier due diligence, like many other compliance tasks, can be tremendously cumbersome if done manually. 

Luckily, there’s a smarter way—with Sprinto

Sprinto’s compliance automation platform helps you automate tasks related to vendor due diligence—background checks, vendor due diligence checklist items, and gathering evidence of compliance. It also alerts you when any security control is about to fail and recommends corrective actions. You can also gain a comprehensive picture of your compliance health in real time with Sprinto’s compliance dashboard. 

Want to learn more? Speak to our compliance experts today.

Frequently Asked Questions

Why is vendor due diligence important?

Vendor relationships are long-term commitments—they impact how the business operates, how fast the company scales, and even its market reputation. A vendor due diligence process not only helps the company assess every aspect of vendor security and performance but ensures they can create and execute vital business objectives efficiently. 

What are some of the risks associated with vendor management?

Potential vendors give rise to various types of risk. Some of them include cybersecurity risk, financial risk, reputational risk, legal exposure, operational risk, and political risk. 

What is a due diligence questionnaire for security?

A due diligence questionnaire for security is a vendor-completed assessment that contains questions about security measures, internal controls, and risk mitigation strategies they have in place. This helps companies gauge vendors on their security posture, risk scores, and experience before initiating a vendor relationship.

Vishal V

Vishal V

Vishal, Sprinto’s Content Lead, masterfully weaves nuanced narratives and simplifies convoluted compliance topics with seasoned expertise. His perennial curiosity fuels his pursuit of fresh angles in every piece. Off-work, he’s an avid photographer, birder and a music buff, he blends expertise and exploration seamlessly in work and life.

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