Many business industries face first and third-party risks related to their processes, some directly related to vendor assessment. Vendor management usually creates an assessment questionnaire to help evaluate and avoid these problems.

Regardless of what industry you work with, these risk management tasks are vital to ensure everyone’s safety and minimize their potential impact. But your template must be well-thought-out and contain all the necessary categories for the vendor risk assessment process to work.

In this article, we will show you how to create the perfect vendor risk assessment template. Follow all the steps carefully, and you’ll have the ideal tool for minimizing vendor risk and developing strategies to ensure the company’s safety.

The vendor risk assessment is the process used to identify potential risks regarding first and third-party vendors. With the proper template, you can identify these risks and evaluate how they can impact vendor relationships and other aspects.

Through vendor due diligence, you can also help mitigate these risks and avoid problems like data breaches and other issues depending on the type of company you run. When you create vendor risk assessment templates for a first or third-party vendor, you’ll most likely identify problems of all kinds and levels. 

There are several reasons why every company that works with vendors should create risk assessments. The first is to avoid problems regarding vendor relationship or any other aspect.

But risk management goes beyond just this. A good vendor risk management can ensure the company is ready if any recovery plan is needed. Not only that, but sometimes risks can become a reality, whether a data breach or any other problem.

Having the right skills and strategies to minimize their impact is also important to keep the business long-term health.

One of the most common practices regarding vendor risk is to create reviews to identify each risk's severity and the probability of them happening. Different subcategories help evaluate these two criteria.

Understanding them and how they work is vital for precise measurement of results. Here are the main subcategories and how they impact the vendor risk assessment review:

Risk Identification

Risk identification is the first step of the review, and, as the name suggests, it consists in identifying the vendor risk possibilities. To do this, the company can rely on numerous factors, like the company’s previous experiences, for example. 

It is also recommended to do this process in teams. This way, you can have multiple perspectives regarding the same topic.

At the end of the risk identification phase, you’ll end up with a list of potential risks. The vendor risk review is an important step that should be taken into account independently of the nature of the risks evaluated.

Risk Evaluation

The next step of the risk review is the evaluation of the identified risks. There are two leading indicators that should be considered when evaluating: Severity and likelihood.

The first one regards how serious the problem and its impact can be for the company. The second indicator refers to the probability of each risk identified happening.

With these two pieces of data, you can evaluate the main risks and the ones that should be avoided at any cost. Other factors can be considered, but these two are indispensable.

It is also essential to know that risk evaluation can be classified into two categories. The first is qualitative risk evaluation, and the second is quantitative risk evaluation. Here is what each one means:

Qualitative Risk Evaluation

Using the qualitative system is the most common, and your evaluation template will look like a traditional risk matrix. It will rank all possible risks considering seriousness and likelihood.

It gets listed from highest to lowest impact on the company. For this, most companies also use a scale that goes from 1 to 5, in which risks ranked as one usually won’t have any impact, while 5-graded risks will cause problems that can be irreversible.

Quantitative Risk Evaluation

On the other hand, the quantitative evaluation considers monetary data as the main decisive factor for any course of action. Here you’ll have risk tree analysis and many other tools to help you decide what to do with your first or third-party risk assessment.

You’ll also base almost everything on EVM for the best course of action. With this, you ensure the best monetary results when dealing with potential risks.

There can be multiple types of vendors in your company. Each one can relate to different risks, but they are all essential for everything to run smoothly and effectively.

Here are the main types of vendors and each one’s role in a business:

Suppliers and Manufacturers

Suppliers are vital to any company, regardless of the industry or service provided. They are responsible for offering everything you need for your business.

From the materials for a construction project to the paper sheets for your business office, all these items are provided by suppliers and manufacturers. Making a supplier risk assessment can help you avoid delays in the production and delivery of goods and services.

Service Providers

Service providers are also indispensable members of the company’s team. This party turns everything into reality, from codes that need to be written to pieces of a product that need to be assembled.

Physical work jobs and services such as consulting and mentorship are also responsibilities of these members. They compose some of the essential business operations, and if their risks are ignored, the company can meet severe consequences.

Specialized Members

These members are usually present in the company’s leading party, but it is also common to see businesses hiring them as third-party for specific tasks. Some common examples of specialized members include lawyers representing the company in specific legal actions or an IT expert hired to evaluate a software problem.

The vendor management processes include hiring these third-party service providers and assessing potential risks. Any identified risk in this service provider category might not be catastrophic but should not be ignored.

Contractors

All contractors should also be included when evaluating vendor risk. They include your service providers, suppliers, and other relevant parties that should be considered in the procurement process. 

With this, your vendor lifecycle management becomes more profound and organized when evaluating risks and planning the best action.

Now that you know what vendor risk assessment is and the main parties involved in the process, it is time to learn how to perform it and list the main details you need to know. Follow all the following steps carefully to ensure a precise risk evaluation and a successful strategy to avoid and mitigate them.

Every detail can make a massive difference in the final version of your plan. Here are the main steps:

List All Vendors

The first step is to list all your vendors, regardless if they are third-party vendors or team members of your company. Along with listing them, you should also identify the role of each one.

You can briefly describe their tasks and what they do for the company. Additionally, highlight which vendors have access to critical information regarding the company and its activities. 
The more complete the information on this list gets, the better it will be for the following steps and, consequently, for your vendor risk assessments.

Rank Your Vendors

After listing all vendors and writing all the essential information regarding each one, it becomes easier to do this step. Here you’ll have to list all the vendors from level one to five, based on their roles and responsibilities.

Here is what each one of the five levels means:

1 - Non-Essential Vendors

As the name suggests, level-one vendors don’t impact the company anyhow and don’t provide or perform critical tasks for the company. These members don’t perform any task related to data security or any other aspect that can affect business continuity if they quit.

It is the lowest level and is generally related to third-party relationships. Any risk involving this party won’t present relevant consequences for the business.

2 - Back-Office Vendors

This category refers to vendors that work at the company but don’t interact with customers or any data regarding business information. They can work in the supply chain, for example.

This category also offers low vendor risks but, differently from non-essential vendors, their risks can represent some impact on the company, even though they are not as serious as a financial risk or natural disasters, for example.

3 - Customer Data Vendors

On the third rank comes the customer data vendors. At this level, there are still no direct interactions between the vendor and the customers, but they can access the main information regarding clients.

Here, the service level agreements and the risk criteria should be more severe since any problem can affect your company. These vendors will directly work with crucial data, so cybersecurity risks and other factors must be taken into account when planning strategies to mitigate them.

4 - Customer Facing Vendor

The customer-facing vendor is responsible for the direct relationship between the client and your business. They don’t have access to data and are strictly responsible for direct talks between the two parties.

Although the risks differ from the data vendor, they can present an equal or sometimes more severe effect on the company if no action is taken. For this vendor category, it is common for organizations to constantly monitor vendor performance along with other vendor assessments.

5 - Essential Vendor

The highest vendor tier is the essential vendor, and it refers to members responsible for customer interaction and data. As expected, since it is the highest level, the operational risks involving these vendors can also cause the most severe damage.

To maintain security and business continuity, the risk tolerance for essential vendors should be zero, and any potential problem should be mitigated and avoided at any cost. From the industry regulations to the protocols involved, everything must be planned to prevent a compliance risk or any other kind of problem that can be generated.

Determine Critical Vendors

Now that you have all your vendors ranked, it becomes way easier to determine which vendors are essential for your business to run properly. Your critical vendors are those members that, if lost, can cause numerous problems for the company, whether financially or operationally.

When evaluating critical vendors, it is also important to consider the impacts that their loss could have on the customers. Also, consider how long the company would take to replace this vendor and how much it would cost.

Evaluate Your Risks

Next, you should evaluate all the possible risks regarding your vendors. It is essential to understand that there are numerous risk types, and each one can bring different consequences.

Along with the risk types, you must also decide on the criteria to evaluate them and the risk tolerance of each item. Some of the most common risk types are:

• Data Security Risks

• Third-Party Risks

• Geographic Risk

• Residual Risk

• Cybersecurity Risk

• Reputational Risk

• IT Risk

• Operational Risk

• Fraud Risk

• Replacement Risk
   

The most common types of risks will depend on your business industry and the kind of service or product you provide. Make sure to do proper research and risk analysis to identify the likelihood of each one.

Create a Risk Matrix Considering the Main Criteria

Having a risk matrix is perfect for illustrating the most concerning points of your vendor activities and the risks related to each one. Here you can choose two primary metrics to evaluate the seriousness of each problem and how important it is for the company to avoid them.

Most matrix templates consider severity and likelihood as the most important criteria, but you can choose other criteria for the evaluation. With the risk matrix, you can see which potential risks need to be mitigated at any cost, and it also becomes easier to create strategies in case these risks turn into reality.

Create Strategies

Now that you have already identified the most probable risks and which ones are more severe, it is time to create strategies to avoid them and minimize the consequences in case they turn into reality.

Consider all aspects and sectors of your business when creating these plans. Vendor lifecycle management puts the essential vendors and severe risks as the top priority, so make sure to analyze these two factors when planning any action.

Many people might get confused about what the vendor risk assessment questions have to do with the other topics. 

By applying a questionnaire to your vendors, you can identify possible risks. The questions can regard multiple topics, going from performance questions to references, for example.

This way, you can better understand your vendors and the possibilities of their actions becoming risks for your organization. Here are some examples of questions you can feature on your documents when evaluating vendors:

• Name of their main references (with contact information)

• Cybersecurity policies they employ

• Percentage of on-time deliveries

• Process used to communicate security incidents

• Data recovery capabilities

• Disaster recovery processes

• Documentation provided for review

By including these and any other information you want, you can better evaluate the vendor and the risks. It is a complementary tool that can generate numerous benefits.

When it comes to the creation of vendor risk assessments, there are tons of options available. From known software to specialized programs, each one has its own tools and features to help you with the documentation.

Among all the options available, we highly recommend using Microsoft Excel for this task. MS Excel not only has the best tools on the market but is also an industry standard. This means that you won’t need extra programs for your business tasks.

If you don’t have a Microsoft Office activation key, you can find one at RoyalCDKeys for a considerably lower price. This way, you get access to all features you need and still save money.

If you don’t want to create your risk assessment document from scratch, there is no problem. Here are some free templates you can download and edit using Microsoft Excel to best fit your needs.

Make sure to choose the correct template for reaching your objectives. This way, you ensure the best results and optimized management of the primary data gathered.

Here are some free examples:

Template #1

Vendor risk list template. A document focused on listing different risks regarding multiple parties, along with space for risk rating and description.

Get this template

Template #2

Vendor risk questionnaire. Template featuring multiple questions and checklists regarding multiple topics for vendor risk evaluation.

Get this template

Template #3

Simple vendor risk assessment template. A general document that can be used for any kind of business or project.

Get this template

Creating vendor risk assessments is essential for any business that wants to minimize damages and possible consequences caused by these issues. For this to be possible, a well-structured template is vital.

From the type of risk assessment document you create to the information you feature, everything will have a distinct impact and must be previously planned. Make sure to create something aligned with your objectives and which aspects you want to analyze.

Now that you know everything you need, it is time to start creating your vendor assessment. This way, you’ll be able to mitigate any potential risks and maximize your company's efficiency.