Third-Party Risk Management Red Flags
In today’s connected world, your business doesn’t just rely on its own systems—it relies on vendors, contractors, cloud services, and suppliers. But every third party you depend on introduces new risk.
A single overlooked weakness in a vendor’s security practices can become your next breach, audit finding, or reputational hit.
This post breaks down common red flags to watch for in third-party risk management—whether you’re just getting started or tightening your existing process.
Why Vendor Risk Management Matters
Third-party vendors are frequently the source of security and compliance failures. From data breaches caused by insecure storage vendors to compliance fines due to missing contracts, third-party risk can become first-party damage.
Many compliance frameworks like GDPR, HIPAA, SOC 2, and ISO 27001 require organizations to:
- Assess third-party vendors regularly
- Ensure security responsibilities are documented
- Monitor vendors handling sensitive or regulated data
Common Third-Party Risk Red Flags
Below are signs that a vendor relationship may expose your organization to unnecessary risk. Even one or two of these should warrant a deeper review.
1. No Written Agreement or DPA
A vendor that processes personal or sensitive data must have a Data Processing Agreement (DPA) or equivalent legal contract.
Why it matters: GDPR, CCPA, and HIPAA require specific contract clauses outlining roles, responsibilities, and breach response timelines.
2. Incomplete or Vague Security Questionnaire Responses
If a vendor avoids questions, responds with generalities, or can’t provide supporting evidence, that’s a warning sign.
Examples of evasive responses:
- “We use standard practices”
- “Security is handled by our IT team”
- “N/A” on key control questions like MFA or backups
3. No Recent Security Testing
Ask whether the vendor has conducted:
- Penetration testing in the last 12 months
- Security audits or compliance assessments
- Vulnerability scans
A lack of security validation suggests they are not proactively managing risk.
4. Unclear Data Handling Practices
You should know:
- What data they collect or process
- Where it’s stored (geo-location and encryption)
- Who can access it (and how access is controlled)
Vendors unable to clearly articulate this are likely not managing data responsibly.
5. No Breach Notification Plan
If a vendor doesn’t have a process to notify you of incidents, you may be the last to know when your data is compromised.
This is a major problem under HIPAA and GDPR, where breach notification timelines are regulated.
6. Outdated or Missing Policies
Vendors should be able to provide updated:
- Information Security Policies
- Acceptable Use Policy
- Privacy Policy
Missing or outdated policies suggest a lack of operational maturity.
Simple Vendor Review Flow
Vendor Selected
↓
Send Security Questionnaire
↓
Review DPA and Contracts
↓
Evaluate Responses for Red Flags
↓
Assign Risk Rating + Next Steps
How to Respond to Red Flags
When you identify issues, don’t panic—but don’t ignore them.
Options include:
- Request clarification or remediation in writing
- Escalate findings to procurement or legal
- Require additional controls or contract updates
- Set shorter review cycles for higher-risk vendors
Tip: Always track vendor reviews and notes in a centralized log. Google Sheets, Notion, or Airtable work well for small teams.
Real-World Example
A small business we worked with was using a payroll vendor that hadn’t implemented multi-factor authentication. The vendor’s questionnaire appeared acceptable—but on closer inspection, it relied on outdated assumptions.
The client replaced the vendor after comparing risk to cost. This proactive step likely prevented a serious future incident.
Related Compliance Requirements
Here’s how vendor risk management ties into key frameworks:
- GDPR: Requires contracts and security guarantees from data processors.
- HIPAA: Mandates Business Associate Agreements and due diligence for service providers.
- SOC 2: Includes third-party oversight under its Trust Services Criteria.
- ISO 27001: Requires controls for supplier relationships (Annex A.15).
FAQs
Do I need to assess every vendor?
No. Focus on those with access to sensitive data, customer information, or critical systems.
How often should vendor reviews be done?
At least once a year. High-risk vendors may need more frequent reviews.
What if a vendor refuses to complete the questionnaire?
This is a red flag. Consider alternate vendors or escalate internally.
Final Thoughts
Managing third-party risk isn’t about avoiding vendors—it’s about reducing uncertainty and ensuring accountability.
By watching for key red flags and following a consistent review process, small businesses can:
- Reduce exposure to breach and compliance risks
- Meet audit and regulatory expectations
- Build better vendor accountability
Need help building a scalable vendor risk review process?
Anchor Cyber Security offers lightweight, tailored assessments for small teams—using the tools you already have.