Third-Party Risk Assessment: A Practical Guide

What Is a Third-Party Risk Assessment?

A third-party risk assessment (also known as supplier risk assessment) quantifies the risks associated with third-party vendors and suppliers that provide products or services to your organization. This assessment is useful for analyzing both new and ongoing supplier relationships. The growing risk of supply chain attacks makes it critical to monitor the level of risk posed to your organization by supply chain vendors and by their products or services.

A third-party risk assessment, part of a third-party risk management program, evaluates all security-related considerations when outsourcing a product or service to a third party. It typically involves establishing risk criteria and performing onboarding and screening for third-party partners and vendors.

Why Are Third-Party Cyber Risk Assessments Important?

Here are a few reasons you should carry out third-party risk assessments:

• Knowing your vendors’ cybersecurity practices — allowing vendors to maintain connections to your IT environment provides an additional means for cybercriminals to break into your network. You need to make sure that providers take cybersecurity as seriously as you do. A cyber risk assessment can help you understand what security controls are in place and how resilient you are when an attack occurs. It is important to evaluate existing suppliers as well as new suppliers.
• Protecting your organization’s financial health — to protect your business, you need to identify and anticipate risks and disasters before they happen. If a vendor, especially a major one, is the victim of a security breach, it could have catastrophic and far-reaching implications for your business. The time and money spent protecting your assets is a valuable investment — it is more economical to act proactively than to deal with the financial consequences of a security breach.
• Improving compliance—there is a growing number of regulations, such as the General Data Protection Regulation (GDPR) and California Consumer Privacy Act (CCPA), which require organizations to work with suppliers who are compliant. Similarly, industry regulations such as New York State Department of Financial Services (NYDFS), Payment Card Industry Data Security Standard (PCI DSS), and Health Insurance Portability and Accountability Act (HIPAA), require mandatory risk assessments as part of the compliance process.
• Protecting reputation — failure to assess supplier risk exposes your organization to reputational risk. When a customer hears from you, or sees a headline, stating that your company and by extension their privacy has been compromised, you can lose their trust permanently.

Related content: Read our guide to third-party security

What Does a Third-Party Risk Assessment Involve?

The two key steps in a third party risk assessment is to establish risk criteria and perform onboarding for third party vendors.

Establishing Vendor Risk Criteria

Start by performing classification of suppliers. List the high-risk third parties for which you need to perform risk assessment.

Next, list the supplier risk criteria. You must include third-party risks that are most detrimental to your organization. For example, companies that manage or outsource sensitive data must have specific information security risks in their vendor risk criteria.

The risk criteria will:

• Determine the scope of the organization's risk assessment
• Affect your organization’s actions and policies
• Determine the techniques used to assess third-party or vendor risk
• Narrow your selection of third parties or suppliers

Conduct Third-Party Onboarding and Screening

To anticipate and avoid possible risks, create detailed diagrams outlining your relationships with third parties or suppliers. This can help you establish standard risk management processes throughout the company.

Experts recommend building a third-party risk management program using a framework that standardizes all third-party onboarding and screening. Use real-time risk identification and take containment actions whenever possible.

A well-designed risk management program framework provides a win-win situation. It lets you predict third-party risks and high-risk vendors prior to risk assessment. The risk management planning framework saves time and provides insightful risk assessment.

What Are Third-Party Security Risk Assessment Templates?

A third-party security risk assessment template allows you to assess each potential third-party partner before adding them to your organization. The purpose of a template is to help you:

• Identify and describe threats — assess your biggest threats and add further details about them.
• Assess possible consequences — while some threats are minor, others can pose significant risks to your organization. You can use this template to evaluate possible outcomes.
• Quantify each risk — identify, on a scale of 1-10, how threatening is each risk.
• Provide recommendations for security teams — most threats can be addressed with better processes or new protective measures. The template lets you suggest changes that can solve the problem.
• Streamline the process — templates are valuable because they simplify the vendor assessment process. The same template is available for each third-party partner.
• Opportunity for ongoing improvement — a good template can be a blueprint for continuous improvement.
• Serve as documentation — the completed template serves as the official document of the third-party risk assessment, which you can use for future reference.

Third-Party Risk Assessment Best Practices

The following best practices can help you perform third-party risk assessments more effectively.

Measure the Effectiveness of Your Assessment

An effective third-party risk program requires continuous monitoring of the accuracy of third-party risk assessments. To measure the effectiveness of risk assessments, organizations must first develop clear indicators of success. These indicators should reflect the scope of the assessment and be consistent with the company's goals.

Annual assessments are important because they help determine whether risks are really being identified. They should be closely monitored to ensure that appropriate actions have been taken when identifying risks. By measuring the performance of your assessment against success metrics, you can identify areas where risk reassessment needs to be reworked to improve future preparedness.

Use Technology to Your Advantage

Performing a third-party risk assessment can be resource intensive. Therefore, organizations should use technology to simplify their processes. Technology improves risk assessment by providing a central platform for monitoring all suppliers. This allows organizations to better understand third-party risks and use them to update assessment scopes for new vendors.

Technology platforms can incorporate third-party risk information collected during assessments to support decision-making. This technology can also be used to test the effectiveness of assessment controls and ensure the reliability of risk assessments.

Third-Party Risk Assessments as Part of a Comprehensive TPRM Programs

Third-party risk assessments allow you to evaluate the risks that third parties in the supply chain introduce to your organization. These third parties may include service and software providers, vendors, or suppliers.

A third-party risk management (TPRM) program is the overarching strategy for designing and implementing these risk assessments. You can conduct a third-party risk assessment in-house or use independent security specialists.

After analyzing your organization’s relationships with vendors and suppliers and grouping them based on their risk level, you can make your risk management strategy more efficient. Properly managing supplier risks is essential for interconnected businesses and helps address cybersecurity vulnerabilities throughout your ecosystem.

A TPRM continuously ensures the proper monitoring and controlling of third-party risks. It includes policy adjustments and vendor relationship management to adapt to new risks. Assessing each third party once before the first contract is not enough to ensure long-term security—it is also important to have a system that keeps up with emerging risks.