What is due diligence in risk management?

Third-party relationships are essential for modern business, but they also introduce significant risks. Due diligence is the process that helps organisations manage these vendor and supplier risks in a proactive way. In this blog, we explore what due diligence means in practice, why it matters, and how a structured approach supports better decisions, regulatory compliance, and supplier accountability.

We'll cover the types of due diligence (from cybersecurity to ESG), when to apply due diligence across the third-party lifecycle, best practices and common challenges, and how an automated platform like 3rdRisk can streamline the due diligence risk assessment process.

Why due diligence matters in third-party risk management

Working with third parties, whether they are vendors, suppliers, contractors or partners, can offer great advantages. At the same time, each of these relationships introduces potential vulnerabilities that could affect your business. Due diligence is the practice of thoroughly evaluating and monitoring these external parties to identify and manage risks before they cause harm.

Neglecting due diligence can have serious consequences. The World Economic Forum found that 98% of organisations have at least one third-party partner that suffered a data breach in the past two years. In addition, 41% of companies that experienced a major cyber incident last year linked it to a third party. These figures underline the importance of understanding and managing the risks associated with third parties.

Due diligence plays a key role in protecting against cyber threats, but it also supports regulatory compliance and reputation management. Supply chain attacks and compliance failures have increased sharply in recent years. For instance, the EU's cybersecurity agency ENISA reported that supply chain cyber incidents rose from less than 1% in 2020 to 17% in 2021. Regulators now expect businesses to manage third-party risks properly, with laws like the EU's DORA and NIS2 setting strict requirements. Stakeholders, including customers and investors, are also paying close attention. In short, due diligence forms a crucial part of any effective third-party risk management strategy.

Defining due diligence in vendor risk management

In the context of vendor and supplier management, due diligence refers to the comprehensive review and analysis an organization performs to verify that a third-party will meet its expectations and not expose it to unacceptable risk. This means “knowing your vendor” in depth before and during the engagement. Practically, due diligence involves examining a third party’s capabilities, controls, financial stability, legal/regulatory compliance, security posture, and ethical practices – typically through questionnaires, document reviews, background checks, and risk assessments.

Put simply, doing due diligence on a vendor is making sure they are who they claim to be and can do what they promise without introducing undue risk. In third-party risk management, due diligence serves two main purposes:

• Pre-contract evaluation: Before onboarding a new vendor or supplier, you investigate them to identify any red flags – for example, past data breaches, compliance violations, financial troubles, or negative media exposure. This helps you avoid engaging high-risk parties or at least negotiate controls and mitigations upfront.
• Ongoing monitoring: Due diligence is not a one-time event. It continues throughout the third-party lifecycle (as we’ll discuss later). Circumstances change – a vendor’s security posture might deteriorate, new regulations might apply, or a supplier could get acquired. Continuous and periodic due diligence ensures you catch new risks over time.

Example: If you are considering a cloud service provider, due diligence might include reviewing their security certifications (like ISO 27001), auditing their data privacy practices, checking references, and ensuring they have no history of regulatory penalties. This gives you confidence (or warnings) about doing business with them.

By clearly defining due diligence in this context, your internal stakeholders (procurement, IT security, compliance, etc.) understand that it’s a formal risk assessment process, not an optional task. It sets the stage for making informed decisions about third parties.

Types of third-party due diligence

Third-party due diligence can span multiple risk domains. A thorough due diligence assessment will typically cover several categories of risk, ensuring a 360-degree view of a vendor’s trustworthiness and performance. Key types of due diligence in vendor/supplier risk management include:

• Regulatory Compliance Due Diligence: Verification that the third party complies with all relevant laws, regulations, and industry standards. This can include privacy laws (e.g. GDPR), anti-bribery and corruption laws, sector-specific regulations, and emerging frameworks. For instance, banks must ensure vendors meet requirements of regulations like the EU Digital Operational Resilience Act (DORA). This type of due diligence checks for things like proper licenses, regulatory certifications, past legal violations, and compliance controls in place.
• Cybersecurity Due Diligence: An assessment of the vendor’s information security posture and cyber hygiene. Since third parties often handle sensitive data or connect to your systems, you need confidence in their security measures. Cyber due diligence may involve questionnaires or audits of security controls (covering areas like access management, network security, incident response, and encryption), reviewing security certifications (e.g. ISO 27001, SOC 2), and possibly using external cyber risk ratings. Given that over half of organizations admit they lack sufficient visibility into their supply chain’s cyber vulnerabilities, evaluating a vendor’s cybersecurity is absolutely critical.
• Financial and Operational Due Diligence: Analysis of the third party’s financial stability and operational capabilities. A financially unsound supplier could go out of business and disrupt your operations, so due diligence reviews financial statements, credit ratings, and ownership structure. Operational due diligence looks at the vendor’s capacity and processes – do they have resilient operations, adequate staffing, quality controls, and business continuity plans? Operational capabilities are a key risk domain in due diligence. You want to ensure the third party can reliably deliver on its obligations.
• Environmental, Social, and Governance (ESG) Due Diligence: Increasingly, organizations are examining vendors for ESG factors – sustainability practices, ethical conduct, and governance. This might include checking the supplier’s environmental impact, labor conditions, diversity and inclusion policies, and governance frameworks. ESG due diligence is not only about company values; it also intersects with reputational and compliance risk. For example, a supplier’s poor labor practices or misalignment with your ESG commitments can cause reputational damage‍. Regulators are also moving toward requiring supply chain due diligence for human rights and environmental impacts (e.g. the proposed EU CSDDD law). Ensuring third parties meet your ESG and ethical standards is thus a vital part of modern due diligence.
• Reputational and Legal Due Diligence: This overlaps with the above areas but focuses on any adverse information about the third party. It involves screening for things like sanctions lists, watchlists, negative news (media scans), pending lawsuits, or past fraud and corruption issues. The goal is to uncover any integrity risks. Reputational due diligence often uses public records and specialized databases to check if the vendor has been involved in scandals or controversies. Considering how fast reputational damage can occur in the age of social media, this type of due diligence protects your brand by association.

These categories often overlap, and an effective due diligence assessment will be multidisciplinary. In fact, due diligence is seen as “the foundation of effective third-party risk management”, requiring a thorough evaluation of potential partners before the relationship, and ongoing monitoring afterward. A visual diagram could be inserted here illustrating a “wheel” of due diligence risk domains (regulatory, cyber, financial, ESG, etc.) to show how they collectively cover third-party risk exposure.

When to perform due diligence across the third-party lifecycle

Due diligence isn’t a one-time checkpoint; it’s a recurring theme across the third-party lifecycle. Here are the key stages when due diligence should be applied:

Initial Onboarding (Pre-Contract):

The first and most obvious point for due diligence is before signing a contract or partnership. At this stage, you conduct initial due diligence assessments to decide if the third party is an acceptable risk. Many organizations incorporate a due diligence checklist into their vendor selection or procurement process. Screening at the gate is a best practice – it’s easier to filter out high-risk vendors upfront than to deal with issues later. For example, you might refuse to onboard a supplier that fails your security requirements or has pending legal issues.

Periodical Assessments (Ongoing Monitoring):

Risks can evolve over time, so due diligence should be refreshed periodically for active third parties. Common practice is to re-assess vendors annually or biennially, especially for critical suppliers. Some organizations adopt a risk-based schedule – e.g. high-risk vendors get assessed every year, medium-risk every two years, low-risk every three years. Regular assessments might involve sending updated questionnaires, reviewing new certifications or financial reports, and checking for any incidents since the last review. This ongoing due diligence ensures no vendor falls through the cracks as “compliant once, compliant forever.”

Trigger-Based or Event-Driven:

Apart from scheduled reviews, you should perform due diligence whenever certain triggers occur. These triggers could include: a contract renewal or extension (an ideal time to revisit due diligence requirements); a significant change in the vendor’s situation (like mergers, acquisitions, or leadership change); external events like a data breach at the vendor or news of regulatory action; or changes in the risk landscape (new laws, geopolitical events, etc.). In such cases, an ad-hoc due diligence assessment is warranted to evaluate the new risk.

Throughout Engagement – Continuous Monitoring:

Beyond formal periodic assessments, organisations are moving toward continuous monitoring of third parties. This means using tools and services to get real-time alerts about your vendors – for instance, news feeds for negative press, cybersecurity rating services for security posture changes, or financial monitoring for credit downgrades. Continuous monitoring complements formal due diligence by catching issues in between assessment cycles. For example, if your continuous monitoring flags that a vendor’s security rating has dropped or they were mentioned in a lawsuit, you might initiate a fresh due diligence review immediately.

Offboarding and Renewal Decisions:

When a contract is up for renewal or when considering offboarding a vendor, due diligence plays a role too. At renewal, a due diligence review can inform whether to continue the relationship and under what conditions (maybe you’ll renew only if certain risks are mitigated). Upon offboarding, due diligence includes ensuring exit obligations are met (e.g. data is returned or destroyed, no lingering access) – essentially a final risk check to close out the relationship safely.

Throughout these stages, the scope and depth of due diligence may vary based on the vendor’s risk criticality. This is where segmentation comes in: not all third parties carry the same level of risk, so you can adjust how much due diligence you do accordingly. A “mom-and-pop” supplier with a low-risk service might get a lighter touch assessment, while a critical cloud provider gets an in-depth audit. Segmentation of vendors by risk tier helps focus due diligence efforts where they matter most.

Best practices for effective due diligence

Implementing due diligence in third-party risk management requires careful planning and execution. Here are some best practices and critical components to strengthen your due diligence program:

Scope Your Assessments Based on Risk:

‍Tailor the due diligence scope to the vendor’s risk profile. Identify the inherent risks of the third-party engagement (e.g. will they handle sensitive data? impact critical operations? be subject to strict regulations?). Use these factors to decide what questions to ask and what evidence to request. For example, a SaaS vendor handling customer data may need extensive security and privacy due diligence, whereas a office supply vendor’s assessment can be simpler. Scoping ensures you focus on relevant risk areas and don’t overburden either your team or the vendor with unnecessary checks.

Use Standardised Questionnaires and Frameworks:

Develop a due diligence checklist or questionnaire that covers all key risk domains, leveraging industry best-practice templates where possible. Many organizations use standard questionnaires like the SIG (Standardized Information Gathering) or CAIQ (Consensus Assessments Initiative Questionnaire) for cybersecurity. You can also use industry-specific templates or those provided by professional bodies. Standard frameworks ensure you ask the right questions consistently. However, be ready to customize or create your own questions if needed to cover unique risks‍. Aim to make questionnaires clear and concise – avoid overwhelming third parties with hundreds of questions if possible. It’s noted that response quality often drops if you ask too many questions (200+); concise, risk-focused questionnaires get better results.

Perform Initial Screening and Background Checks:

‍Before diving into detailed questionnaires, do some upfront screening of the third party. This includes checking public databases and watchlists for sanctions or law enforcement flags, verifying business credentials (e.g. ownership, address, references), and Googling for any negative news. Basic Know-Your-Business (KYB) verifications can catch obvious issues early (like if a vendor is on a sanctions list or has a history of fraud allegations). This initial screening helps prioritise your due diligence efforts and may disqualify certain high-risk candidates outright.

Document Everything and Maintain an Audit Trail:

‍A critical component of due diligence is documentation, both for internal transparency and for regulators or auditors. Keep records of all assessment steps: questionnaires sent and received, evidence collected (certifications, financial reports, policies), notes from interviews or onsite audits, and the final risk evaluation outcomes. Documentation provides an audit trail to show that due diligence was performed rigorously and in good faith. It also ensures accountability – internal stakeholders can see how and why a vendor was approved or flagged. Using a centralised system or platform to record this information makes it easier to manage. Remember, if a regulator inquires about why you trusted a particular supplier, you should be able to produce the due diligence evidence quickly.

Integrate Stakeholders and Expertise:

Due diligence is multidisciplinary, so involve the right internal stakeholders in the process. For example, IT security can review technical controls, Legal can review contracts and compliance, Finance can analyse financial statements, and Procurement can coordinate communications with the vendor. A collaborative approach ensures nothing is overlooked. It’s also wise to assign clear ownership of the due diligence process (often the Third-Party Risk Manager or a risk committee) so that assessments are completed consistently. Additionally, engage the vendor management or business owner who sponsors the third-party – they can often provide context on the vendor’s criticality and help communicate with the vendor if needed.

Leverage Technology Tools:

Managing due diligence for dozens or hundreds of third parties manually (via spreadsheets and email) can become unwieldy and error-prone. Best practice is to use a dedicated third-party risk management (TPRM) solution or platform to automate and streamline the process. Modern TPRM software allows you to send digital questionnaires, automatically score responses, track tasks and reminders, and consolidate all vendor data in one place‍. It also creates a better experience for the vendors (no more clunky spreadsheets emailed back and forth). As we’ll highlight later, platforms like 3rdRisk provide workflow automation, centralised data, and real-time monitoring that make due diligence far more efficient and scalable than manual methods.

Establish Review and Escalation Procedures:

‍Due diligence doesn’t end when the vendor submits their information. You need a defined review process to analyse the results. Establish criteria for what constitutes acceptable versus unacceptable risk. For instance, if a vendor’s questionnaire reveals they lack a certain control (say, no encryption of data at rest), determine how that will be handled – is it a blocker, or can a mitigation (like contractually requiring encryption within 6 months) be applied? Have a workflow for follow-up: who will reach out for clarification on answers, how findings will be documented, and how decisions will be approved. If high risks are identified, involve senior management or a risk committee to decide on exceptions or rejection of the vendor. By planning these steps in advance, your due diligence process will be consistent and defensible.

Keep the Process Engaging and Vendor-Friendly:

‍One often overlooked best practice is to consider the vendor’s experience in your due diligence process. If you bombard a critical supplier with a very long, jargon-heavy questionnaire without context, they may respond slowly or poorly. Communicate the purpose and importance of the due diligence to the vendor up front. Wherever possible, make it easier for them – for example, allow them to provide existing audit reports or certifications in lieu of answering every detailed question (if those artifacts sufficiently address your concerns). Using an online portal or platform with a friendly interface can also help. Some TPRM platforms even incorporate explanatory guidance and a friendly tone to encourage vendors to participate actively. Higher response quality from vendors means better risk insights for you.

Implementing these best practices will strengthen your due diligence program and make it more sustainable. In summary: scope wisely, use standardised tools, document thoroughly, involve the right people, and leverage technology to work smarter. By doing so, you create a robust process that stands up to scrutiny and effectively reduces third-party risk.

Common challenges and how to overcome them

Due diligence is not always straightforward. Some common challenges include:

‍Challenge 1: Volume and Scale – Too Many Third Parties to Assess
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Problem: Large organisations might have thousands of suppliers and partners, making it daunting to perform comprehensive due diligence on all. Limited resources can’t possibly deep-dive into every vendor on a frequent basis.

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Solution: Risk segmentation and prioritisation. Implement a segmentation strategy to categorise vendors by criticality and risk level. Focus intensive due diligence on high-risk and critical third parties, and apply lighter assessments or certifications for low-risk ones. Automation is also key here – using a platform to send questionnaires and track responses for hundreds of vendors simultaneously saves massive time. Some companies also adopt a “shared assessment” approach (leveraging third-party risk exchanges or industry consortium questionnaires) to avoid duplicating effort on common vendors.

‍Challenge 2: Lack of Visibility and Information Gaps

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Problem: You might find that you don’t know enough about your third parties – for example, many firms admit they don’t thoroughly understand their vendors’ data breach risks. Sometimes vendors are reluctant to share detailed info, or you might not have tools to gather external risk data. Blind spots in areas like fourth-party (sub-contractor) risk are also common.

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Solution: Integrate multiple data sources to enrich your due diligence. Aside from vendor-provided information, pull in external intelligence: cybersecurity ratings services, financial credit reports, adverse media searches, and even site visits for critical suppliers. Make use of integrations in your TPRM platform to automatically fetch some of this data (for example, 3rdRisk’s platform integrates with news monitoring, compliance databases, and risk rating providers). Also, foster open communication with vendors, explain that due diligence is mutually beneficial for a stable partnership. If a vendor refuses to cooperate or share essential data, treat that as a red flag in itself. Finally, ensure you maintain an updated inventory of all third parties (a central repository) as a baseline. You can’t assess what you don’t know you have.

‍Challenge 3: Vendor Fatigue and Engagement

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Problem: Important vendors often get bombarded with questionnaires from many customers. They may show “assessment fatigue,” resulting in slow responses or superficial answers. Smaller suppliers might lack the expertise to answer detailed risk questions, leading to incomplete data. This can stall your due diligence efforts.

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Solution: Streamline and simplify the process for vendors. As noted in best practices, keeping questionnaires concise and relevant helps. Prioritise critical questions and allow vendors to reuse existing audit reports or certifications where appropriate (e.g., provide their ISO 27001 certificate as evidence of security controls). Leverage platforms that offer a friendly user interface or even gamification to engage vendors – 3rdRisk, for instance, emphasises an intuitive experience with explainer videos and even a chatbot assistant to guide users. Regularly communicate deadlines and offer to hop on a call if a vendor is stuck on any question. Building a collaborative relationship rather than a checkbox exercise will improve response rates and quality.

‍Challenge 4: Keeping Due Diligence Up-to-Date

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Problem: Conducting an initial due diligence is one thing; keeping it current as risks evolve is another. Many firms struggle to update assessments or track if vendors implement promised improvements. Without continuous oversight, due diligence can become stale and ineffective.

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Solution: Adopt continuous monitoring and scheduled refresh cycles. Put a schedule in place for periodic re-assessments based on risk tier (e.g. annual for high-risk). Use automated reminders and task management to initiate these on time. Additionally, use continuous monitoring tools – for example, set up alerts for any vendor security incidents, financial distress signals, or news mentions. A good practice is to incorporate monitoring results into your risk dashboard, so you have a real-time pulse on third-party risk. This way, due diligence becomes a living process rather than a one-off project.

‍Challenge 5: Fragmented Process and Manual Work

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Problem: If different departments handle pieces of due diligence in silos (e.g. InfoSec does a security questionnaire, Procurement does a financial check, Compliance does another checklist) without coordination, the overall picture can be fragmented. Manual processes using spreadsheets and emails lead to version control issues and things falling through the cracks.

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Solution: Centralise the due diligence workflow. Establish a cross-functional team or governance structure for third-party risk so that efforts are coordinated. Even better, use a unified platform to manage the end-to-end process – from initial inherent risk scoring, to sending assessments, to tracking remediation actions. A centralised system provides a single source of truth and an audit trail for all due diligence activities. It also enables workflow automation (e.g., automatically assigning tasks to the right reviewers, sending notifications, consolidating findings in one report). This not only improves efficiency but also ensures accountability. Many organisations are now moving away from email and Excel toward purpose-built TPRM solutions to solve this challenge.

By recognising these common hurdles and proactively addressing them, you can greatly improve the effectiveness of your due diligence program. Remember that technology and smart process design can alleviate many of the pain points associated with third-party risk assessments.

How 3rdRisk supports the due diligence process

Implementing due diligence best practices can be demanding, but the right technology can enable and automate much of the heavy lifting. This is where 3rdRisk’s third-party risk management platform comes in. 3rdRisk is designed to simplify and accelerate due diligence workflows, making it easier for organisations to achieve thorough vendor risk assessments without getting bogged down in manual effort.

Automated Workflows:

3rdRisk provides embedded workflows that guide you through the due diligence process step by step. From initiating an assessment, to internal approvals, to vendor collaboration, the platform automates each stage. For example, you can trigger a pre-contract due diligence assessment as soon as a new vendor is added, with tasks automatically assigned to stakeholders and reminders sent out. The platform’s workflows (integrated with tools like Microsoft Teams for easy communication) ensure that controls are tested, documented, and traceable with less friction. You no longer have to chase down stakeholders or vendors, the system orchestrates the process.

Centralised Data and Integration:

All third-party risk data is consolidated in one place, giving you a single source of truth for due diligence information. 3rdRisk integrates with 40+ external data sources and systems to enrich your assessments. This includes pulling in compliance screening results, cybersecurity ratings, and real-time news feeds about your vendors. By merging these data points, the platform helps you get a comprehensive view of a vendor’s risk landscape without manual research. The integrations also extend to your internal tools, 3rdRisk can connect with procurement systems or GRC platforms to streamline data flow and avoid duplicate data entry. In practice, this means you can see everything from a vendor’s questionnaire responses to their latest risk score in one dashboard.

Best-Practice Templates and AI Assistance:

‍3rdRisk comes with a library of best-practice content, including framework-based control sets and assessment questionnaires, so you don’t have to start from scratch when building a due diligence checklist. Whether you need to assess compliance with NIS2 or DORA requirements, or evaluate ESG metrics, the platform has templates aligned to these standards. It even leverages artificial intelligence to help analyse responses and suggest risk insights. For instance, the AI might highlight inconsistent answers or flag higher risk areas in a completed questionnaire, accelerating your review. The result is smarter due diligence: faster analysis and the ability to focus human attention where it matters most.

Audit Trails and Reporting:

‍Every action taken in 3rdRisk is logged, creating a robust audit trail of your due diligence activities. The platform automatically records when assessments were sent, when reminders went out, when responses were received, and who reviewed and approved the results. This embedded audit trail means you can demonstrate compliance to auditors or regulators with ease – you have timestamps and records proving that due diligence was performed diligently. Additionally, 3rdRisk offers rich reporting and dashboard capabilities to make sense of the data. You can generate reports on the risk status of all third parties, track outstanding issues or remediation tasks, and even monitor trends (for example, how many vendors improved their risk posture since last year). These reports provide valuable insights for management and help in continuous improvement of the TPRM program.

Workflow Efficiency and Collaboration:

‍A standout benefit of 3rdRisk is how it improves stakeholder engagement. The platform’s user-friendly interface and features like a customisable chatbot assistant turn a traditionally tedious process into a more engaging one. Internal users get clear visibility of their tasks via dashboards, and vendors find the portal intuitive to navigate. 3rdRisk’s integration with communication tools (Teams, email) allows back-and-forth with vendors for clarification within the platform, keeping context intact. By automating reminders and providing a channel for Q&A, it increases vendor participation rates and speeds up completion – in fact, organisations have seen substantial improvements like a 14% higher stakeholder response rate after adopting 3rdRisk’s streamlined approach‍.

In summary, 3rdRisk automates due diligence, contract tracking, audit trails, and reporting in one solution. It was built by third-party risk experts to address exactly the challenges we discussed earlier, from eliminating spreadsheet chaos to injecting real-time risk monitoring and ESG considerations into your process. By using 3rdRisk, organisations can confidently scale their due diligence across thousands of third parties, knowing that nothing will fall through the cracks. The platform acts as a force multiplier for your risk management team, enabling you to do more assessments in less time, with greater accuracy and consistency.

Conclusion

Due diligence is a critical element of any third-party risk management programme. It helps organisations avoid surprises and build trusted, stable relationships with vendors and suppliers. By applying due diligence at the right time and in the right way, organisations can reduce exposure to cyber threats, compliance failures and reputational risks.

With increasing regulatory expectations and growing interdependence on external partners, due diligence is more important than ever. Platforms like 3rdRisk make it possible to carry out due diligence in a structured, efficient and transparent way. Instead of treating it as an administrative hurdle, organisations can turn it into a strength, contributing to long-term resilience and trust across the supply chain.

To learn more about how 3rdRisk supports third-party risk management and due diligence, visit our platform overview or explore our solutions for DORA, NIS2, and AI-powered risk profiling.