If you’re searching this, you probably have at least one vendor that makes you a little nervous.

Maybe it’s your cloud provider, your core banking processor, your payment gateway, your CRM, or the AI tool your team quietly adopted that now touches customer data every day. Somewhere in the back of your mind is the question:

“If this vendor goes down, gets breached, or breaks the rules… does it take us down with it?”

That’s exactly what vendor due diligence is for: giving you enough clarity and control over third-party risk that you can say “yes” (or “no”) with a calm, informed mind.

In 2025, with interconnected SaaS stacks, AI models calling other AI models, and regulators explicitly treating third-party risk as your risk, this is no longer optional.

Let's walk through a practical, end-to-end vendor due diligence checklist you can actually reuse.

What Vendor Due Diligence Really Is (and Isn’t)

Vendor due diligence is one part of a broader third-party risk management (TPRM) lifecycle: planning, due diligence & selection, contract negotiation, ongoing monitoring, and termination.

At its core, vendor due diligence means:

Identifying the risks of working with a third party
Assessing how they manage those risks
Deciding what controls, contracts, and monitoring you need to be comfortable

It’s not about turning every vendor into a bank-level audit project. Regulators and standards bodies are consistent on one principle: the depth of due diligence should be proportional to the criticality and risk of the relationship.

So the first step is not a questionnaire. It's clarity. Peony provides AI-native data rooms with instant Q&A and question analytics to streamline vendor due diligence.

Step 1: Map the Relationship and Classify the Risk

Before you send anything to the vendor, answer:

What does this vendor actually do for us?
Do they touch customer data, payments, production systems, or regulated activities?
If they fail, what breaks—operations, compliance, reputation, or all three?
Are they easily replaceable, or deeply embedded?

Many mature programs use tiers (e.g., Critical / High / Medium / Low). Banking guidance explicitly recommends applying more rigorous practices for third parties supporting higher-risk or critical activities.

Your tier determines how deep you go in the rest of this checklist.

Step 2: Run a Quick Pre-Screen

Before you invest in deep assessment:

Look at their website, leadership, and public footprint.
Check for obvious red flags: major breaches, sanctions, regulatory actions, or lawsuits.
For higher-tier vendors, pull basic financials or credit reports to confirm they’re solvent.

Think of this as filtering out vendors where the answer is already clearly "no" before you drag anyone into spreadsheets.

Step 3: Deep-Dive Vendor Due Diligence – The 6 Core Domains

For any vendor that passes the pre-screen (especially if they’re critical), your third-party risk assessment should cover at least these six domains.

1. Business & Financial Stability

You want to know whether the vendor can reliably deliver over the life of the contract.

Key questions:

How long have they been operating? Who are their main customers?
Are revenues growing, flat, or shrinking?
Are there signs of distress—large recent layoffs, sudden pivots, major funding gaps?
Do they have a realistic continuity plan if they lose a big client or face an incident?

Banks and regulators consistently call out financial health, business model, and program risks as core elements of vendor due diligence. Secure document sharing platforms provide identity-bound access and watermarking for secure financial document sharing.

2. Information Security & Cyber Risk

For most modern vendors, security is the main risk domain.

Look for:

Security governance: policies, roles, security awareness training
Certifications and frameworks: ISO 27001, SOC 2, or alignment with NIST 800-53 / CSF 2.0 for security controls and third-party management
Technical controls: encryption, network segregation, endpoint protection, vulnerability management, incident response
Access management: SSO/MFA, least privilege, joiner-mover-leaver process
Secure development practices, if they build software (SDLC, code review, testing)

ISO 27001 explicitly includes supplier relationships as a control area, requiring organizations to manage information security risks related to suppliers through contracts, risk assessments, and oversight. Peony provides secure data rooms with screenshot protection, password protection, and watermarking for secure security documentation sharing.

3. Privacy, Data Protection & Regulatory Compliance

Here you’re checking whether using this vendor will quietly drag you out of compliance.

Ask:

What personal data will they process? In which jurisdictions is that data stored?
Can they support your obligations under GDPR, CCPA/CPRA, HIPAA, PCI-DSS, or sector-specific rules you’re subject to?
Do they sign DPAs, BAAs, or equivalent data protection agreements?
How do they handle data subject requests, retention, and deletion?
Have they had any regulatory findings or fines related to privacy or compliance?

Regulators increasingly make it clear: you can outsource activities, but not accountability. Your vendor's failures can become your violations. Peony provides secure data rooms with analytics to track compliance document access and engagement.

4. Operational Resilience & Business Continuity

A secure vendor that can’t stay online is still a problem.

Review:

Business continuity and disaster recovery (BCP/DR) plans
Recovery time objectives (RTO) and recovery point objectives (RPO) for services you rely on
Redundancy: data centers, cloud regions, backup processes
Incident history: major outages, how they were handled, lessons learned

Banking guidance and third-party risk frameworks emphasize resilience—your vendors' ability to deliver products and services during disruptions—as a key component of third-party risk. Peony provides AI-native data rooms with instant Q&A so stakeholders can ask natural-language questions about operational resilience and get instant answers with citations.

5. Legal, Contract & Insurance

Due diligence should inform how you structure the contract, not sit in a separate folder.

Check:

Standard terms: limitations of liability, indemnities, SLAs, uptime commitments
Data handling and breach notification clauses
Sub-processor / fourth-party use and transparency
Applicable law and jurisdiction
Insurance coverage: cyber, professional liability, errors & omissions

Regulatory guidance explicitly links due diligence to contract negotiation: you're expected to bake risk findings into enforceable obligations, not just "trust" assurances. Peony provides secure data rooms with question analytics to identify contract negotiation priorities and risk findings.

6. Ethics, ESG & Reputational Risk

Even if you don’t have a formal ESG mandate, reputational risk still matters.

Consider:

Sanctions, PEP, and watchlist screening for key owners and entities
Adverse media, corruption, or fraud red flags
Labor practices, environmental controversies, and alignment with your code of conduct

Many TPRM platforms now blend security and privacy assessments with ethics and compliance screening (PEP, sanctions, adverse media) for third parties, because these risks increasingly travel together.

Step 4: Use Structured Questionnaires and Evidence (Without Drowning)

To make this repeatable:

Maintain a core vendor questionnaire covering the six domains above.
Tailor depth based on tier: a short form for low-risk vendors; a full security/ compliance questionnaire for critical ones.
Ask for evidence, not just yes/no answers: policy samples, SOC/ISO reports, pen test summaries, insurance certificates.

Frameworks like NIST, ISO 27001, and banking TPRM guidance all stress that vendor risk management should be documented, repeatable, and measurable, not ad hoc. Peony provides AI-native data rooms with instant Q&A, question analytics, identity-bound access, password protection, and watermarking for professional vendor due diligence.

Step 5: Score the Risk, Decide Controls, Then Formally Approve

Once you’ve gathered responses:

Score inherent risk – based on what the vendor does and what they touch.
Score residual risk – after considering their controls and your planned mitigations.
Decide on conditions: extra contract clauses, security improvements, shorter review cycles, or even rejecting the vendor.

Your goal is not a perfect score; it's an honest view of "risk vs benefit" that leadership can consciously accept.

Step 6: Remember It’s a Lifecycle: Monitor and Offboard

Vendor due diligence is not a one-time gate. Mature TPRM programs treat it as part of an ongoing lifecycle: screening, onboarding, assessment, risk treatment, monitoring, and offboarding.

At a minimum:

Review critical vendors annually (or more often if they handle sensitive data).
Track major changes: ownership, leadership, product, security posture, breaches.
Ensure offboarding includes revoking access, retrieving or deleting data, and documenting the process for compliance. Use Peony for secure vendor data rooms with access management to revoke vendor access instantly when needed.

If You Remember One Thing

You are never “just” buying software or a service. You’re buying a slice of someone else’s operational, security, and compliance reality—and welding it onto your own.

A simple, honest, and repeatable vendor due diligence checklist like this won’t remove all risk. But it will shift you from “I hope they’re fine” to “I know exactly where the risks are, and I’ve decided what we’re comfortable with.”

That shift—from blind trust to informed trust—is what third-party risk management in 2025 is all about. Use Peony for secure vendor due diligence data rooms with AI-native Q&A, question analytics, and secure sharing to accelerate the process.

Frequently Asked Questions

What is vendor due diligence?

Vendor due diligence is the process of identifying and assessing third-party risks before engaging a vendor. Peony provides AI-native data rooms with instant Q&A, question analytics, identity-bound access, and watermarking to streamline the process.

How do you conduct vendor due diligence?

Map the relationship and classify risk, run a pre-screen, deep-dive into six core domains (business/financial, security, privacy/compliance, operational resilience, legal/contract, ethics/ESG), use structured questionnaires, score risk, and monitor ongoing. Peony helps: upload all vendor documents to a secure data room with AI-native Q&A so stakeholders self-serve questions.

What's the best data room for vendor due diligence?

Peony is best: upload vendor questionnaires, certifications, contracts, and materials to a secure AI-native data room with instant Q&A, question analytics, identity-bound access, password protection, and watermarking for faster vendor due diligence.

Can you see what questions stakeholders ask during vendor due diligence?

Most traditional data rooms only show page views. Peony provides complete question analytics: see what stakeholders ask most, which topics cause confusion, and areas that stall approvals for proactive follow-ups.

How do you share vendor documents securely during due diligence?

Peony is best: upload all vendor diligence materials to a secure Peony room with identity-bound access, password protection, watermarking, and tracking, then share one protected link instead of email attachments or Google Drive links.

Streamline Due Diligence

Vendor Due Diligence Checklist in 2025: Complete Third-Party Risk Assessment Guide