Third-party risk assessments identify, evaluate, and mitigate potential risks that third-party vendors might introduce into business operations. These processes form the foundation for a proactive risk management program, meeting regulatory requirements while safeguarding organizational assets and preventing reputational damage. Cyber risk assessments help identify any security hazards that could potentially disrupt operations and the supply chain.

This article outlines a seven-step third-party risk assessment process to streamline TPRM and ensure organizations remain resilient and secure in a landscape marked by constant change and regulatory scrutiny.

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Step 1: Initiate pre-assessment planning

The first step in a thorough third-party risk assessment is pre-assessment planning. This step sets the foundation for a comprehensive evaluation of potential risks associated with an organization’s third-party ecosystem. By calibrating this initial phase, organizations can prepare a holistic risk management strategy, ensuring they identify and address all potential risks.

Preliminary vendor risk profiling

Start by identifying and categorizing potential vendors based on the types of risks they are most likely to expose your organization to. This process involves analyzing the nature of the vendor’s services, the data they handle, their geographic locations, and their industry sectors. For instance, a third-party vendor handling sensitive data will have a different risk profile than one supplying physical goods. This risk profiling helps prioritize further due diligence efforts according to each vendor’s level of risk and your organization’s risk tolerance.

Due diligence

Performing due diligence is crucial to pre-assessment planning before onboarding third-party vendors. Due diligence entails thoroughly examining a third-party vendor’s business practices, financial risk, compliance with relevant regulations, and cybersecurity measures. This phase should also assess the vendor’s historical performance, market reputation, and any past legal issues or regulatory infractions that could indicate potential risks.

Gathering public information is a significant part of the due diligence process. This process includes reviewing a third-party vendor’s website, public filings, news articles, industry reports, and customer reviews. Publicly available data forms the basis of your initial assessment and helps identify any red flags (reputational risk, supplier risk, etc.) or areas requiring deeper investigation. This step provides valuable insights into the vendor’s business operations, strategic goals, and market standing.

UpGuard streamlines evidence gathering with our risk assessment tools, automating processes and saving your organization time.

Step 2: Develop risk identification criteria

Once you’ve established preliminary assessments and profiles, the next step in the third-party risk assessment process is to develop specific criteria to identify potential risks. This step is vital for ensuring the assessment process is thorough and relevant to your organization's particular needs and risks. By carefully developing risk identification criteria informed by both internal data and external benchmarks, organizations can more effectively spot potential issues early in the third-party relationship.

Related: The top third-party risk assessment solution options

Risk identification criteria

Establish a set of criteria that covers all potential risks associated with dealing with third parties. These criteria should encompass a wide range of risk categories, including cybersecurity risks (such as data breaches and cyber attacks), compliance risks (such as violations of regulations and legal requirements), and operational risks (such as supply chain disruptions and quality control issues). Divide each category into elements relevant to your operations and specific evaluated third parties. For instance, under cybersecurity, criteria could include the security of data storage and transmission, incident response capabilities, and information security training programs for employees.

Utilizing industry benchmarks and internal data

It’s important to use industry benchmarks and internal data to ensure your risk identification criteria are strong and in line with industry standards. Industry benchmarks can offer insights into common risks and best practices for managing them, which can be especially helpful in cybersecurity, where technology constantly evolves. Internal data, such as past incidents involving third parties, compliance track records, and audit results, can also help define the criteria by highlighting areas where your organization may be particularly vulnerable.

UpGuard includes features for industry benchmarking regarding risk ratings, which can help organizations understand how they stack up against peers in managing third-party risks. This benchmarking can provide a valuable reference point for setting and adjusting risk identification criteria.

Explore more about UpGuard’s security rating here >

Step 3: Establish third-party risk assessment templates for each third-party vendor

After developing risk identification criteria, the next step is to establish customized risk assessment templates for each third-party vendor. This customization ensures that the assessments are directly relevant to each new vendor's specific risks, thereby enhancing the effectiveness and precision of the risk management process. By establishing tailored risk assessment templates and using strategic segmentation, organizations can ensure that their third-party risk assessment process is efficient and effective.

Customization based on risk profiles

Each third-party vendor has a unique risk profile based on factors such as its industry, services, operational geography, and the data it handles. Risk assessment templates should be tailored to these profiles to address specific vulnerabilities and compliance requirements.

For example, a vendor handling payment processing would require a different risk assessment focus—emphasizing PCI DSS compliance and cybersecurity—compared to a cloud service provider, which might focus on data encryption methods, data sovereignty, security controls, incident response plans, and compliance with standards such as ISO/IEC 27001.

Security questionnaires are the fundamental risk assessment tool. These questionnaires encompass all relevant areas of potential risks, such as security measures, compliance with pertinent regulations, operational resilience, and ethical practices. The depth and specificity of the questions may vary based on the level and type of risk associated with each vendor. Explore templates for specific third-party vendors and customize them to best suit your organization’s needs.

Segmentation and tiering methods

One effective way to manage the assessment process across potentially numerous third-party vendors is through segmentation or vendor tiering. This method involves categorizing vendors based on the level of risk they pose to the organization.

Factors influencing this tiering could include the criticality of the services provided, the sensitivity of the data handled, and the vendor’s past security performance. High-risk vendors are subject to more detailed and frequent assessments, whereas lower-risk vendors may require less rigorous or less frequent assessments. This prioritization helps allocate risk management resources more efficiently and ensures your team prioritizes the highest risks and manages them effectively.

Step 4: Conduct third-party risk evaluations and scoring

Once risk assessment templates are tailored and distributed, the next crucial step is to evaluate and score the questionnaire responses to identify and prioritize risks effectively. Vendor questionnaire responses also need to be validated, ensuring that the responses accurately reflect the security performance of the vendor. This step is vital for understanding the extent of potential vulnerabilities and the necessary measures to mitigate them.

Risk evaluation and scoring methodologies

Assessing third-party risks can use both quantitative and qualitative methods. Quantitative approaches are objective analyses of risk factors, promoting standardization and simplifying comparisons. Security ratings are a commonly used type of quantitative measurement, utilizing letter grades or tiers based on objective factors. Qualitative methods involve subjective assessments and expert opinions, providing valuable context. Combining both offers an in-depth and comprehensive view, ensuring thorough evaluation and better risk management.

UpGuard offers a unique approach to risk evaluation and scoring, using third-party risk assessments and risk ratings. Instantly understand your vendors’ security posture with our data-driven, objective, and dynamic security ratings. Our security ratings are generated by analyzing trusted commercial, open-source, and proprietary threat intelligence feeds and non-intrusive data collection methods.

Explore more about UpGuard’s security ratings >

Enhancing efficiency with automated tools

Technology significantly enhances the efficiency and accuracy of third-party risk evaluations. Automated risk scanning tools quickly gather and analyze data on risk indicators such as cybersecurity vulnerabilities, regulatory compliance, and financial health. Automated questionnaires streamline the questionnaire process and communication between organizations and vendors, saving valuable time.

Automated tools process large volumes of information much faster than manual methods, allowing for timely risk identification and freeing up resources for risk management teams to focus on interpreting results and planning mitigation strategies. Tools also allow businesses to monitor potentially thousands of vendors and scale their operations efficiently with smaller IT teams.

Advanced platforms like UpGuard offer continuous monitoring, initial assessments, and ongoing surveillance to detect changes in third-party risk profiles. This continuous monitoring is vital for high-risk relationships, helping organizations avoid potential issues by providing timely alerts.

Learn more about UpGuard’s monitoring features here >

Step 5: Design and implement control strategies

After evaluating and scoring third-party risks, the next critical step is to design and implement effective control strategies to manage and mitigate these identified risks. This phase is crucial for ensuring an organization minimizes the potential impact risks could have on their operations and business continuity

Risk controls and mitigation strategies

When designing controls, ensure they are proportionate to the level of risk associated with each third-party vendor. High-risk vendors may require rigorous measures such as frequent monitoring, enhanced data protection clauses, or reconsidering reliance on the vendor. Control strategies should be based on risk assessment outcomes and address identified vulnerabilities. For instance, significant cyber risks could necessitate stringent data encryption, regular audits, and incident response agreements.

For different risk levels, consider the following strategies:

  • High risk: Implement multi-factor authentication and continuous monitoring, establish strict compliance checks, and conduct more frequent and detailed audits.
  • Medium risk: Utilize regular reviews and updates to security protocols, periodic audits, and strong contractual agreements with clear terms about compliance and data security.
  • Low risk: Focus on standardized security measures, occasional audits, and basic compliance checks to ensure ongoing adherence to expected standards.

Aligning strategies with business objectives and regulatory requirements

Governance, risk, and compliance (GRC) refers to the process of aligning company strategy to manage risk and maintain compliance. This alignment helps the organization avoid legal issues while securing against third-party risks. For example, if regulatory compliance is crucial, control strategies should ensure third-party engagements adhere to laws such as GDPR for data protection or SOX for financial reporting. Strategies may involve detailed compliance assessments and specific controls to facilitate monitoring.

Integrating risk control strategies with business objectives ensures the controls are sustainable and add value rather than merely being considered compliance measures. This approach fosters broader organizational support for risk management initiatives, enhancing their effectiveness and the organization's overall resilience.

Step 6: Monitor and adjust risk controls

Effective third-party risk management continues after the implementation of control strategies. Continuous monitoring and the ability to adjust these controls as needed are crucial to maintaining a resilient risk management framework. This step ensures that any changes in the risk landscape are promptly identified and addressed.

Continuous monitoring systems

Continuous monitoring involves using automated tools to monitor and assess third-party vendors' performance, cybersecurity threats, compliance statuses, and operational metrics in real-time. Establishing KPIs and KRIs helps track these metrics effectively during ongoing monitoring.

Organizations should integrate technologies with real time alerts and reporting features to quickly respond to deviations from expected risk levels. For example, platforms like UpGuard offer continuous monitoring capabilities to detect emerging risks promptly and take immediate action to mitigate potential impacts.

Organizations should establish a regular schedule for reviewing risk controls, such as quarterly or bi-annually, and also be prepared to make adjustments on an ad hoc basis in response to specific incidents or changes in the third party’s risk profile. This proactive approach ensures that controls evolve in line with the risk landscape.

Incident response planning

Incident response planning is crucial in third-party risk management. Despite preventive measures, incidents like data breaches and compliance violations can occur. A well-defined incident response plan helps organizations respond swiftly to minimize impact.

The plan should detail steps for identifying, reporting, and addressing incidents, including vendor communication protocols, roles and responsibilities, and post-incident analysis. Regular drills ensure preparedness.

Incorporating incident response planning into third-party risk management enhances the organization’s ability to handle unforeseen risks and maintain business continuity, fostering stronger, more resilient vendor relationships.

Step 7: Communicate and report findings

The final step in the third-party risk assessment process involves effectively communicating the results of risk assessments to internal and external stakeholders. Clear, actionable, and informative reporting ensures that all relevant parties know the risks and the steps to mitigate them, fostering a culture of transparency and proactive risk management.

Preparing clear, actionable, and informative reports

Vendor risk summary reports  ensure that risk assessment findings lead to meaningful action. Here’s how to prepare reports that achieve this goal:

  • Structure and clarity: Organize the report logically, with clear headings and sections. Begin with an executive summary that highlights the main findings and recommendations.
  • Detailed analysis: Include detailed analysis and evidence to support your findings. Use data and examples to illustrate points clearly.
  • Actionable recommendations: Provide specific, actionable recommendations that stakeholders can implement. Clearly outline who is responsible for each action and the timeline for implementation.
  • Visual aids: Present data visually using charts, graphs, and tables. This makes the information easier to understand and more engaging.
  • Regular reporting: Establish a schedule for regular reporting to keep stakeholders informed of progress and any new developments.

Learn how to write an executive summary report >

Effective communication with internal stakeholders

When communicating risk assessment results internally, tailor the message to different audiences. Provide senior management and board members with a high-level overview of key risks, their potential impact on business relationships, and strategic recommendations. Operational teams will need more detailed information about specific risks and the practical steps they should take to mitigate them.

Here are some tips for effective internal communication:

  • Use clear and concise language: Avoid jargon and technical terms that might confuse non-experts. Present the information in a straightforward and accessible manner.
  • Highlight key findings: Focus on the most critical risks and their potential impacts. Use visuals such as charts and graphs to illustrate these points effectively.
  • Provide context and recommendations: Explain the significance of the findings and offer clear, actionable recommendations. Outline the steps already taken and those that must be implemented to mitigate identified risks.
  • Regular updates: Ensure ongoing communication by providing regular updates on the status of risk controls and any new findings from continuous monitoring during a third-party vendor’s lifecycle.

Communicating with external stakeholders

External stakeholders, such as customers, partners, and regulatory bodies, must also be informed about your third-party risk management efforts. Transparency in this communication builds trust and demonstrates your commitment to managing risks responsibly. Tips for communicating with external stakeholders include:

  • Tailor the message: Different external stakeholders will have different interests and concerns. Customize your communication to address their specific needs and expectations.
  • Maintaining transparency: Transparency helps build credibility and trust, so be honest about the risks identified and the steps taken to address them.
  • Compliance and assurance: Assure that your risk management practices meet regulatory requirements and industry standards, including sharing relevant certifications or audit results.

Best practices in third-party risk management

Alongside the third-party risk assessment process, consider implementing additional best practices in your organization’s TPRM program to ensure a holistic approach to risk management. These practices work alongside the assessment process to create a robust TPRM framework to mitigate risk and ensure clear communication with third-party vendors.

Additional TPRM best practices include:

  • Clear contracts and SLAs: Ensure all contracts with third parties include clear, enforceable clauses regarding compliance, data security, and breach notification. Service Level Agreements (SLAs) should define the performance criteria and include penalties for non-compliance.
  • Cybersecurity standards: Require third parties to adhere to specific security practices appropriate for the level of risk they might present. Standards might include NIST CSF and ISO 27001 or industry-specific regulations like HIPAA for healthcare or PCI DSS for payment services.
  • Training and awareness: Provide training and regular updates to employees involved in managing third-party relationships so that they can recognize risks and understand the procedures for reporting and mitigating them.
  • Senior management involvement: Ensure senior management is involved in third-party risk governance, including regular reporting on third-party risks to the board and senior stakeholders.
  • Use of technology: Leverage technology solutions for monitoring and managing third-party relationships. Technology can help automate the TPRM process, such as tracking compliance, monitoring third-party performance, and onboarding/offboarding.

Accelerate your organization’s third-party risk assessment process with UpGuard

Completing risk assessments across a large vendor ecosystem can be daunting and time-consuming. The sheer volume of vendors, coupled with the need for thoroughness and accuracy, can strain resources and complicate the process, making it challenging to maintain consistent and effective risk management practices.

UpGuard's Managed Vendor Assessments service utilizes a team of expert analysts worldwide to oversee the entire risk assessment process on your behalf, significantly reducing the time it takes to complete an assessment workflow.

This service is perfectly suited for new and expanding enterprises that are implementing a vendor risk management program and need support due to limited capacity and resources.

Clients benefit from detailed, actionable reports that adhere to industry standards. These reports help inform risk mitigation strategies and facilitate decision-making.

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