Vendor Risk Assessment and Vendor Due Diligence
Vendor due diligence is an assessment process designed to obtain assurance that the service provider is suitable. It is an important component of an effective third-party risk management process whereby firms manage their third-party dependencies for the delivery of critical operations.
During the due diligence process, a firm is expected to collect and analyse information to determine whether third-party service provider relationships would support its strategic and business goals and whether the relationship can be implemented in a safe and sound manner, consistent with applicable legal and regulatory requirements.
The scope of Vendor Risk Assessments and Vendor Due Diligence would typically cover the following aspects: financial, operational capacity, information security and data protection, legal and regulatory compliance, geographical, concentration risk, certifications, reputation, technical infrastructure, capabilities, as well as cultural fit and integration with the organisation’s processes.
Before entering into, or significantly changing, an outsourcing arrangement, a firm is expected by the regulators to:
- Analyse how the arrangement will fit with its organisation and reporting structure, business strategy, overall risk profile, and ability to meet its regulatory obligations.
- Examine whether the agreements establishing the arrangement will allow it to monitor and control its operational risk exposure relating to the outsourcing.
- Conduct appropriate due diligence of the service provider’s financial stability and expertise
- Consider how it will ensure a smooth transition of its operations from its current arrangements to a new or changed outsourcing arrangement (including what will happen on contract termination).
- Give regard to any concentration risk implications such as the business continuity considerations that may arise if a single service provider is used by several firms.
Where the vendor due diligence and/or risk assessment establish that the firm’s existing policies, procedures and controls are not adequate to reduce the assessed risks to an acceptable level, the policies and procedures should be strengthened and/or additional countermeasures need to be implemented. Such risk mitigation measures could, for example, include putting in place additional monitoring, requiring a more senior level of management approval or specific contractual clauses and conditions.
Service providers that would fall within scope of the vendor due diligence process could be upstream or downstream, and might include: