You’re undoubtedly at least familiar with the activities in third-party risk management. Organisations rely on third-party vendors, service providers, and suppliers to meet operational needs. Although these collaborations have significant advantages, they expose organisations to risks. Third-party risk assessments play an important role in assessing and mitigating these risks.
By performing thorough assessments, organisations can understand the potential threats posed by a third-party relationship and develop effective risk management measures.
In this post, we will look at the significance of third-party risk assessments, their purpose, and why organisations should prioritise them in their risk management practices.
Read on!
What is a Third-Party Risk Assessment?
A third-party risk assessment systematically evaluates the risks and vulnerabilities associated with engaging with third-party vendors, service providers, or suppliers. This process usually evaluates the likelihood and impact of various third-party risks from these external relationships, such as cybersecurity, security risk, compliance risk, financial risk, and operational risk.
For instance, a third-party risk assessment may inform you which business partnerships could put your organisation at risk of data breaches or disclose operational data, customer data, and confidential data such as patents or intellectual property in your system or network.
In addition to financial penalties, data breaches usually cost organisations resources and time and lead to reputational damage. Organisations can proactively identify and handle potential vulnerabilities and protect their operations and reputation by performing these assessments.
What Are the Main Categories of Third-Party Risk?
There are three main categories of risks when working with third parties: profiled risk, inherent risk, and residual risk. These risks usually inform you of the level of depth your assessment process should take and the corrective measures you should require from vendors depending on their business practices and information security.
1. Profiled Risk vendor
This is the risk a third party poses to your business depending on externally observable data such as their location, ownership, industry, usage of third parties, or basic ESG policies. Third parties with operations in a geopolitically unstable location or ones that leverage multiple third parties may require more scrutiny during the third-party risk assessment process.
2. Inherent Risk
Inherent risk is the type of risk that a third party poses depending on their internal controls and business practices. For instance, an organisation that will have access to your customer information and has been third-party verified and audited to be GDPR compliant may have a lower inherent risk score than an organisation that doesn’t have an established data privacy policy or information security.
3. Residual Risk
Residual risk is the level of risk that remains after the vendor has successfully implemented your organisation’s requirements or if they have implemented the right compensating controls. This risk is often referred to as an “acceptable risk” when an organisation has opted to accept the remaining risks linked to the third party.
Why Do You Need a Third-Party Risk Assessment?
1. To Understand Your Vendors’ Cybersecurity
Giving vendors access to your systems usually allows cybercriminals to find a way into your system. Therefore, you should ensure that the vendors place the same value on cybersecurity as you do. Vendor risk assessments will help you understand what security controls are currently in place and how well they will hold up in an attack. You must assess your current suppliers and possibly new ones you want to onboard.
2. Protect Your Organisation’s Financial Health.
To protect your business, you must be able to anticipate and identify future risks. This applies to both your organisation and vendors. Keep in mind that if one of your vendors is the victim of a security breach, it can have serious and far-reaching effects on your business. Investing time and money in your assets will be worthwhile, making it more economical to be proactive than contending with the financial aftermath of a security breach.
3. Comply with Requirements.
Globalisation and the increase of regulations such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA) mean organisations have to ensure their vendors follow these rules. Similarly, industry regulations such as NYDFS, HIPAA, and PCI-DSS require critical risk assessments as part of the compliance process.
4. Protect Your Company’s Reputation.
If you don’t conduct a thorough assessment of your vendor’s risk, you will be exposed to reputational risks that can ruin your organisation. Besides the physical damage, a breach can ruin your company’s reputation. Whether customers hear from the headlines or you that their private data has been compromised, their trust is reduced, and it may be impossible to regain.
What Are the Steps to Third-Party Risk Management (TPRM)?
Step 1: Identify Vendors You Need to Assess.
Make a list of vendors that you want to assess and classify. Identify the most crucial vendors to your success that present the most risk, and subject them to a vendor risk assessment. This is essential since a typical large or medium-sized business works with hundreds, if not thousands, of vendors. You can only assess a small percentage of the total number of partners working with you; therefore, choosing your vendors wisely is important.
Step 2: Create a Risk Assessment Questionnaire.
Create your assessment in questionnaire format. You can create it in-house using resources you find online or use vendor risk management software.
Use the questionnaire to find out more about your vendor’s processes, procedures, and policies so you can determine their additional risks. Also, ask for proof of the organisation’s standards in areas of concern.
It is important to ensure that things are simple and concise. Avoid too many items on the questionnaire and ask freeform questions, as you may get inaccurate and incomplete responses.
Step 3: Have the Vendors Complete the Assessment.
Your vendors should complete the assessment, and in some cases, you can help them. They may require multiple employees to answer questions, and documentation might be required too.
Step 4: Analyse and Evaluate the Results.
After all, vendors have completed the supplier risk assessment; you will need to evaluate their answers and analyse the results. It is crucial to assign every vendor a risk rating depending on the potential risks they pose to your business and the level of risk.
Step 5: Respond Appropriately to the Results.
You need to evaluate the risks posed by every vendor, decide what vendor risk assessment process will be appropriate to mitigate the vendor risk and respond appropriately based on the results. Often, you will need to request that the vendor address any concerns. In some instances, ask for an onsite audit that will help you understand better how the vendor works and do a detailed evaluation.
In rare cases, you may want to remove the vendor from your list entirely. This usually happens in high-risk vendors where nothing can be done to mitigate the risks.
Step 6: Request Regular Risk Assessments.
Depending on the supplier’s risk, you may request more frequent assessments. Such evaluations might be carried out anywhere from once every year to every couple of years.
Frequently Asked Questions on Third-Party Risk Assessments
1. What Are the Objectives of Third-Party Risk Assessment?
The main objectives of third-party risk assessments include the following;
- Determine and evaluate the various risks posed to a business by each of the third-party relationships.
- Create strategies and measures to manage the identified risks effectively.
- Ensure that third-party vendors follow relevant regulations and industry standards.
- Examine the third party’s data protection and privacy practices to protect the sensitive data’s confidentiality, integrity, and availability.
- Evaluate the vendor’s business continuity and threat recovery strategies to ensure they can continue offering services in case of an interruption.
- Assessing the third party’s procedures, performance, and public image can affect the organisation’s reputation.
- Assess and monitor third-party risks regularly to respond to changing conditions and developing threats over time.
2. What is Third-Party Risk Management?
Third-party risk management (TPRM) involves a comprehensive analysis of risks from relationships with third-party providers such as suppliers, vendors, contractors, and other business partners.
3. What is a Third-Party Risk Assessment of Vendors?
A third-party risk assessment is a review of a vendor’s procedures performed as part of due diligence to provide an understanding of their practices. It’s a way to assess the potential risks third parties pose and identify vulnerabilities.
4. Who is Responsible for Third-Party Risk?
Usually, your organisation’s senior management and board of directors manage third-party relationships. Identifying and managing associated risks should follow the same practices as other internally controlled operations within the organisation.
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