A third-party risk assessment is an analysis of the risk 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.
Risks to be considered include security, business continuity, privacy, and reputation harm; as well as the risk that regulatory compliance obligations might force you to stop working with a party until its issues are addressed.
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.
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.
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.
A risk management framework from the International Organization for Standardization (ISO) or the National Institute for Standards and Technology (NIST) is 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 are a valuable tool to 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, so they become part of the process.
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