A third-party risk assessment is an analysis of the risks introduced to your organization via third-party relationships along the supply chain. Those third parties can include vendors, service providers, software providers and other suppliers.
Third-party risk assessments are a crucial part of every third-party risk management program (TPRM). Assessments may be conducted in-house or by an independent safety or cybersecurity professional working on your behalf.
Types of Third Party Risks
Your company may be diligent about monitoring your immediate risk, but it’s important to remember that any risk threatening your suppliers or contractors can also affect your organization. Here are some risks you should consider for all third parties:
It’s impossible in the modern era to run a company successfully without the internet. While technology can streamline and enhance your connections with third-party vendors, it can also create vulnerabilities that can lead to cyberattacks. A data breach at a vendor’s company can threaten your own customer data, so exercise caution with regards to cyber risk.
Safeguarding your company’s reputation is critical to your success and to building future relationships with customers and investors alike. The companies you choose to work with will reflect back on you, and reputational damage can be difficult to remedy.
Operational risks are those risks that threaten the day-to-day procedures of your company. Any risks that affect the business continuity of your vendors will in turn affect your organization. Understanding the contingency plans and risk management strategies of your contractors will help assure that your own business operations continue to run smoothly.
Any regulatory requirements that are necessary for your company also apply to any third parties working on your behalf. This is important to keep in mind when selecting your suppliers, as regulatory compliance failures caused by them can potentially be damaging and expensive for you.
This refers to any risks that could keep your company from achieving your future goals. Before undertaking any partnerships, it’s in your best interest to review your plans and make sure your new vendors are in line with your company’s priorities.
Financial risk is the possibility that you will lose money after an investment or business decision. With third parties this could mean loss of money due to your selection of vendors, or a financial loss for the vendor itself which could result in supply chain issues for you.
Why Do a Risk Assessment of Third-Party Relationships?
As you can see, numerous risks may not be apparent at first glance when considering a new contractor. This is why third-party risk assessments are so important. Analysis of these risks can help you perform your due diligence and find suppliers that align with your goals and values and strengthen your relationships with these companies.
As you scrutinize your third-party vendors and other supplier relationships, remember that not every party in your supply chain will need a thorough risk management analysis; the person who delivers office supplies may not be as big a risk as the software-as-a-service contractor that processes customer payments on your behalf.
That’s why it’s important to classify your contractors by risk and access level. Those that don’t have access to your computer networks or confidential information may pose little risk to your organization, compared to those that are regular service providers.
How to Conduct Supplier Risk Assessment on an Ongoing Basis
Third-party risk assessment is a continuous process. It should be an integral part of your onboarding practices and real-time monitoring of your business network. Continuous monitoring of supplier risk is necessary because business partners and vendors can, and do, change their processes all the time. For example, a vendor might decide that outsourcing is the best choice for one service it provides to you, and therefore expose your organization to a new subset of unknown vendors.
Determining the nature and extent of risk that each third-party relationship poses to your business is the main purpose of a third-party risk assessment. Thankfully, you don’t have to come up with an assessment tool on your own.
Risk management frameworks such as those from the International Organization for Standardization (ISO) or the National Institute for Standards and Technology (NIST) are available to use as you build or reinforce your third-party risk management program. These frameworks also include examples of templates to use for third-party vendor onboarding questionnaires.
Those questionnaires can help you scrutinize the security controls a vendor is applying to its workflow, and they can also stipulate that a vendor must provide you with an up-to-date security assessment to obtain a contract with your firm.
Steps in the third-party risk assessment process include:
- Identifying potential risks posed by all your third-party relationships;
- Classifying vendors according to their access to your systems, networks, and data;
- Reviewing service-level agreements (SLAs) to assure that vendors perform as expected;
- Determining compliance requirements for your organization, including which regulations and standards they and you must meet;
- Assessing risk for individual vendors according to their importance to your organization, the sensitivity of the information each vendor handles, and access to your digital network;
- Querying vendors with risk management questionnaires;
- Auditing certain vendors according to their answers to the questionnaire, and conducting on-site visits where necessary; and
- Continuously monitoring for changes in the vendor’s environment and yours, as well as for changes in regulations and industry standards.
Also, make vendor risk management a priority for your organization. Conduct training and webinars for all internal stakeholders who work closely with vendors, so those stakeholders become part of the process.
What is Third Party Risk Management?
Once your supplier and vendor relationships have been analyzed and divided into groups according to the levels of risk each one represents, you can streamline your supplier risk management efforts to a high degree of efficiency. And make no mistake, applying proper risk management is crucial for the modern, interconnected business – which may be more vulnerable to cybercrimes or hacking than you’d first assume.
Third-party risk management is the ongoing task of assuring that your third-party risk is appropriately monitored and controlled. This includes adjusting your policies and relationships as new risks arise. It’s not enough merely to assess your vendors at the time of your initial contract. You will also need to create a system that stays on top of emerging risks and
Manage Third-Party Risks Easily with Reciprocity ZenRisk
As your company grows, managing third-party risk can be increasingly difficult. Vendors and suppliers are necessary for progress, but they bring with them an increased level of risk that you cannot afford to ignore. How can you keep your company protected without compromising your goals?
ZenRisk, powered by the Reciprocity ROAR platform, is your solution. This innovative software provides a single source of truth for your company’s risk and compliance management ecosystem, including third-party vendors and contractors. Schedule a demo today to learn how ZenRisk can help you manage your company’s third party risk.