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The due diligence process, also known as reasonable diligence, is an essential in-depth investigation that companies must perform before establishing business relationships with third parties, particularly suppliers. This process often includes a supplier due diligence to assess the inherent risks of these relationships, especially those related to supplier security and the integrity of business practices. It is a comprehensive evaluation covering the legal, financial, operational, and security aspects of the target company, providing a clear view of its solvency, integrity, and business practices.
In the context of business partnerships, supplier evaluation is critical to ensuring the security and compliance of business relationships. Through third-party risk management, it helps identify risks such as corruption, money laundering, or unethical practices. Compliance verification and a rigorous preliminary assessment are essential to protect the company against potential risks and ensure that partnerships are built on solid and transparent foundations.
This article explores the key steps of an effective supplier due diligence, its role within a cybersecurity strategy, and methods to secure your partnerships by integrating these practices into your evaluation process.
Supplier due diligence originated in the field of business law and finance, referring to the preliminary checks carried out before a transaction. This process aims to thoroughly assess the risks and opportunities associated with a business relationship with a third party. In cybersecurity, supplier due diligence specifically focuses on evaluating the risks associated with a third party before or during a collaboration to ensure the security and compliance of data and IT systems.
In the cybersecurity sector, supplier due diligence is used to evaluate service providers such as SaaS solution providers, managed service providers, integrators, or software vendors. These entities often have access to the company’s systems or sensitive data, making it essential to conduct a thorough assessment of their security and compliance.
This approach is also applied during mergers and acquisitions or when changing critical providers, where it is crucial to identify potential cyber risks and develop appropriate mitigation plans.
Supplier due diligence is critical because of the increased exposure to cyber risks through third parties. Recent data shows that 62% of data breaches in 2023 involved a supplier. Notable incidents such as the SolarWinds attack in 2020, the MOVEit attack in 2023, or the Okta security breach in 2022 affected thousands of customers, demonstrating the significant consequences of insufficient supplier risk assessment.
Cybersecurity regulations and standards reinforce the need for supplier due diligence. For example, the DORA regulation (Digital Operational Resilience Act) requires mapping critical third parties and assessing their resilience.
The NIS2 directive (Network and Information Security Directive) strengthens the obligation to monitor subcontractors in essential sectors. In addition, ISO 27001, the international standard for information security management, requires rigorous supplier monitoring in accordance with its Annex A.15. These requirements highlight the importance of a thorough assessment of third-party risks.
Failure to perform supplier due diligence can lead to severe consequences such as data loss, regulatory penalties, or reputational damage. For example, a European bank was fined €4.3 million for non-compliance with data protection regulations.
Furthermore, incidents such as the MOVEit attack caused massive data leaks at companies like British Airways, resulting in financial losses and significant operational disruptions. These examples illustrate the major risks of insufficient supplier evaluation.
The first step is to gather essential information about the supplier, including legal, financial, and structural data. It is crucial to verify certifications such as ISO 27001, SOC 2, or GDPR compliance attestations. Identifying the supplier’s headquarters, subcontractors, and contractual practices is also important to assess their solvency and reliability.
Assessing the supplier’s cyber posture is a critical step in third-party risk management. It includes calculating the supplier’s cybersecurity score, reviewing their history of security incidents, and checking for public vulnerabilities (CVEs) in their products. Conducting a thorough security audit and mapping suppliers based on their risk exposure also helps strengthen this step and detect potential weaknesses.
An analysis of their security architecture and the cybersecurity tools they use is necessary to understand their ability to protect data and systems.
Regulatory compliance is a vital aspect of supplier due diligence. It is important to conduct a thorough compliance check, analyze the supplier’s GDPR compliance, verify the presence of a Data Protection Officer (DPO), and ensure compliance with DORA and NIS2 requirements. Integrating these elements into a robust third-party risk assessment clarifies contractual responsibilities in the event of an incident.
Classifying suppliers by their level of criticality is essential for effective risk management. Suppliers accessing customer data, critical systems, or operating in sensitive sectors should be identified and ranked based on their potential impact on the availability, integrity, or confidentiality of data and systems. This classification allows you to focus monitoring and mitigation efforts on the most important suppliers.
The final step is to establish continuous monitoring of suppliers. This involves automating security incident detection, regularly updating supplier data, and tracking incidents that may affect the supplier. Setting up alerts and conducting periodic reviews based on supplier criticality are essential to maintain an optimal level of security and anticipate potential risks.
Manual supplier monitoring is often inefficient and time-consuming. It is recommended to use solutions that automate evaluations and consolidate audits. Platforms such as Trust HQ or Aprovall offer advanced tools to automate supplier assessment, access comparative benchmarks, and centralize data, ensuring better visibility and faster decision-making.
A best practice is to integrate supplier due diligence into enterprise risk management (ERM). This involves incorporating the results of the preliminary assessment into risk mapping, business continuity plans, business impact analyses (BIA), and overall third-party risk management. Such an approach effectively coordinates efforts to reduce risks related to supplier security and critical third parties.
Establishing cross-functional governance is essential for effective due diligence. Close collaboration with the legal, compliance, and IT departments is key. The legal team can review contracts and agreements, the compliance department can conduct audits and verify regulatory compliance, and the IT department can evaluate the technical aspects of the supplier’s security and infrastructure. Formalizing these processes and establishing clear protocols ensures consistent and effective management of third-party risks.
Board of Cyber offers innovative and automated solutions to facilitate and optimize supplier due diligence. With their flagship tools, you benefit from automated and continuous evaluation of your suppliers' cyber performance.
Board of Cyber’s Trust HQ solution enables automated supplier evaluation, shared audits, and access to comparative benchmarks between different suppliers. This non-intrusive, fully automated approach allows for rapid and continuous assessment of the cyber maturity of your business partners.
In addition, Board of Cyber collaborates with numerous technology partners, industry experts, and cybersecurity specialists, offering a trusted ecosystem and comprehensive expertise to manage third-party risks (TPRM), supplier mapping, security audits, data protection, and cyber resilience.
With Board of Cyber, you adopt a 2.0 cybersecurity governance approach, supporting Chief Information Security Officers (CISOs) in their continuous improvement processes. This global, automated approach ensures an optimal level of security and helps meet regulatory requirements and cyber risks effectively.
In summary, supplier due diligence is an essential step to secure your business partnerships and protect your company against cyber and regulatory risks. The stakes are high, including data breaches, regulatory penalties, and reputational damage.
It is crucial to follow the five key steps of due diligence, use automation tools, and collaborate with legal, compliance, and IT teams.
Do not let third-party risks compromise your business. Contact our team to discover our third-party supplier evaluation solution and benefit from automated and continuous assessment of your partners' cyber performance. Act today to ensure optimal security and compliance for tomorrow.
