Companies must evaluate and supervise their third-party suppliers and providers. Various logical and physical threats can disrupt a third-party vendor or service. As a result, organizations should broaden their evaluation scope to cover more risk areas while evaluating vendors. 

While cyberattacks on businesses of all kinds have grown in frequency, so have geopolitical threats, requiring new government sanctions and stringent rules to protect from data breaches and human rights violations. 

Prolonged supply chain failures, personnel shortages, and the work-from-home debate are other difficulties organizations face. As if that weren’t enough, vendor financial health and business continuity are still major third-party risk management concerns. This is where third-party vendor risk assessments and qualifications can make a huge difference.

A third-party risk assessment examines the risks presented to your organization through third-party partnerships along the supply chain. Vendors, service providers, software providers, and other suppliers are examples of third parties.

Third-party risk assessments are an important component of any third-party risk management program. (TPRM). Assessments can be performed in-house or on your behalf by an independent cybersecurity vendor providing services in this area. 

In this blog, we will delve deeper into the purpose of a third-party vendor risk assessment, its benefits, and the different steps involved in the effective evaluation.

What is the Purpose of a Third-Party Risk Assessment?

Developing and maintaining third-party partnerships entail a number of risks.

What kinds of threats are there?

Reputation, strategy, management, information security, and economic burdens are all factors to consider. Other risks include data compromise, unauthorized use of information by third parties, noncompliance’s negative and destructive repercussions, and supply chain management anomalies.

The globalization of industrial operations, in particular, has resulted in the emergence of third parties worldwide. As a result, the graph of operational and distribution-related risks has risen. Any natural, artificial, or deliberate disruption in any aspect of the modern world has a negative impact on the output and services provided by businesses.

If a company does not have a solid risk management program to address such third-party risks may suffer economic and reputational damages. This necessitates good risk assessment and risk management, as well as the pursuit of effective associated assessment services.

What are the Benefits of Third-Party Risk Assessments?

These are the four main benefits of assessing third-party vendor risks:

1. Detect vulnerabilities

By carefully researching a vendor, you can identify potential risk areas that could jeopardize your company’s security. Then, based on a vendor’s impact on your organization, assess the significance of any vulnerabilities. 

You can determine a vendor’s influence by considering the following inquiries:

• What kind of information will the vendor have access to? 
• How important is the vendor to the operation of the business?

2. Facilitate due diligence: 

When you understand the impact and risk a vendor poses and incorporate due diligence requirements into your assessment process, you can more clearly analyze each vendor to determine if you should seek a new vendor relationship or continue an existing one.

3. Reduce liabilities 

Discovering flaws, particularly during the vetting process, allows you to decide whether to proceed with a given vendor (e.g., accept, deny, or transfer risk) to decrease strategic, operational, legal, regulatory, and other chances for your company.

4. Minimize expenses: 

By implementing appropriate controls and monitoring processes as part of due diligence, your organization can deal with security risks in a proactive rather than a reactive manner. Furthermore, reducing possible hazards reduces the financial burden placed on your firm due to a cybersecurity attack or other data breach

What are the Steps to Conducting a Third-party Vendor Risk Assessment?

Here are the nine steps you need to perform in order to conduct an effective third-party vendor risk assessment:

1. Identify the various types of vendor risks

You need to know every threat you face stemming from your third-party vendor’s vulnerabilities before you get down to business with them.

Here is a list of some common ones:

• Strategy Risk: Will they steal your trade secrets, concepts, or intellectual property?
• Financial risk: Do they have or can bring in enough money to keep going?
• Risk of non-compliance: Do they follow applicable rules and regulations?
• Geographical risk: Do they operate in a dangerous location, for example, one prone to natural disasters or politically unstable? 
• Risk of resources: Do they have enough resources, for instance, time, capital, labor and resources to do what you’re paying them to do?
• Technical risk: How secure are their information technology, data management policies, procedures, compliance programs, and infrastructure?
• Risk to your company’s reputation: How will collaborating with them influence your company’s reputation internally and externally?
• Subsequent risk: Do they outsource any of their operations that could damage your company?
• Replacement risk: How easy would it be to replace them if they went out of business?
• Operational risk: How might their day-to-day policies and practices endanger your company?

Knowing all the risks you may be susceptible can help you conduct a more thorough third-party vendor risk assessment.

2. Develop risk criteria

The risk criteria will vary depending on the type of business your company does and what you’re engaging the vendor to do.

Here are the questions to ask:

• What kinds of risks will you evaluate?
• How will you evaluate risks?
  Use a numbered scale, or a color scale such as  red for most risky, yellow for medium, green for low etc. 
• Will you weigh each type of risk equally or prioritize lower-risk categories?

A hospital, for example, deals with sensitive personal data and prioritizes data privacy while evaluating vendors.

Assess vendors regularly to minimize prejudice and find the greatest fit for your organization. Don’t rush into a company just because you know someone who works there or they’re well-known. Create a vendor risk assessment with a consistent methodology and score criteria that you can use for each evaluation.

3. Assess each product/service separately before assessing the company as a whole

Third-party risk assessments should include at least two reviews: one for the vendor and one for each product or service you want to buy from them.

A company-level examination reveals the vendor’s overall risk. You should ask the following questions:

• What is their public image?
• How might collaborating with them affect yours?
• Are their business practices legal and compliant?
• Is the company in a dangerous or unstable location?
• How responsive and dependable is their customer service?
• Have they been involved in any recent public scandals? What about it?

In contrast, a product-level evaluation shows a product or service’s risk.

For example, if you wish to buy some software services, you might want to evaluate:

• Is the software safe to use?
• How long will it take our employees to become familiar with it?
• What is the price?
• Is it in accordance with applicable legislation (data privacy, reporting, etc.)? 

Evaluating the vendor and the product provides a complete picture of potential risk. This can assist you in determining whether to start or continue doing business with them.

4. Using domain experts for their expertise

It is imperative to involve subject matter experts when conducting third-party vendor risk assessments. You should call for assistance from other departments or external consulting experts. They can assess a vendor’s possible risk deeper because they know their industries’ day-to-day risks and best practices.

You can enlist experts in the following departments to provide you with their expert insights:

• Compliance 
• Legal 
• Finance 
• Security and IT 
• ESG (environmental, social, governance)

You may even form a risk assessment team, with one representative from each contributing department. This guarantees that evaluations are consistent, timely, and educated.

5. Evaluate every third-party vendor, irrespective of their role in your organization

Third-party risk evaluations are used for more than simply software and supply chains. Before entering into a partnership with any vendor, you should evaluate them no matter how little or what product or service they supply.

Even if you don’t do a formal risk assessment, evaluate cleaners, shredders, landscapers, property managers, and caterers. They may constitute a risk to your firm if they have access to your files, data, or physical space. Ensuring that third-party vendors satisfy your standards and adhere to best practices can save your organization thousands of dollars and its reputation.

6. Classify vendors based on the level of risk they pose to your organization

Once you’ve narrowed down your list of possible vendors, categorize them based on the level of risk they pose to your organization. You should ask yourself these questions.

• How much do they add to your day-to-day operations? 
• What level of access to your company’s data do they have? 
• How much of an impact will third-party disruptions have on your business?
  

While some vendors may only play a small role in your business operations and offer little danger, others may be vital to your company’s efficiency and warrant closer examination. Furthermore, standardize the criteria you employ to rank third parties. If there are many risk assessors, it will make comparing vendors easily and reduce confusion. 

Finally, select how much and what kind of due diligence you’ll perform on vendors at each risk category. This simplifies the procedure, increasing efficiency and uniformity.

7. Gather more information on each of your vendors with security questionnaires

Following the classification and categorizing of your vendor list, your organization can begin to collect more data using a risk assessment questionnaire. You can create your risk assessment or use a risk assessment or due diligence service to save time. 

Consider automating the process by sending low-level assessments to possible third-party vendors and marking certain questions for additional consideration. Third parties who do not offer the desired answer will be provided with a more detailed, high-level risk assessment. 

8. Make a risk management strategy

Now that you are acquainted with all of your third-party vendors and the risks they pose to your company, you can focus on creating a strategy for how your company will manage or reduce each potential risk the vendor offers. If calamity hits, you can respond fast and minimize bad outcomes. Use the strategies below to mitigate these risks, such as:

• Monitoring of the vendor’s processes on a regular basis;
• Yearly thorough due diligence to stay current on the vendor’s practices; and,
• Contract considerations such as data storage needs or subcontractor evaluation. 

You can also take the help of professionals from various departments to develop your risk management plan. They can provide insight into how to prevent and manage these risks, just as they helped uncover potential concerns during the evaluation.

9. Continuously update risk assessment criteria based on changing regulations

The process of evaluating vendors should go beyond just reviewing vendors. Your company should stay current on new and updated legislation and regulations. Among these include, but are not limited to:

• Data protection legislations
• Environmental laws and regulations
• Employment and labour regulations
• Tax codes pertaining to your state or country 

You must remember that you may be subject to more than local, state, and federal laws, and your organization may also have to observe rules and regulations in other regions of the world. For example, if you process the data of EU citizens, you must adhere to the GDPR’s standards.

As you revise your rules and procedures to remain compliant, ensure all of your vendors are as well. If they do not make the necessary modifications, schedule a phone call to inquire about their plans. If a vendor hesitates to change their processes, you may be liable for its compliance violations. In such scenarios, you may have to terminate your association.

Assessing vendor risk is a key component of selecting organizations to engage with. For example, a company may be acquired by another organization whose processes are incompatible with yours. They may also update a product or begin utilizing a new one incompatible with your company’s policies.

You can evaluate vendors quarterly or yearly, depending on their risk level or your needs. Ongoing monitoring and due diligence ensure your business partnerships are secure and mutually beneficial.

Security and Compliance with Akitra!

Establishing trust is a crucial competitive differentiator when prospecting new SaaS businesses in today’s era of data breaches and compromised privacy. Customers and partners want assurances that their organizations are doing everything possible to prevent disclosing sensitive data and putting them at risk, and compliance certification fills that need.

Akitra offers an industry-leading, AI-powered Compliance Automation platform for SaaS companies. Using automated evidence collection and continuous monitoring, together with a full suite of customizable policies and controls as a compliance foundation, our service helps customers become certified for HIPAA along with other frameworks like SOC 1, SOC 2, ISO 27001, ISO 27701, ISO 27017, ISO 27018, ISO 13485, GDPR, PCI DSS, FedRAMP, NIST 800-53, NIST 800-171, NIST CSF, CMMC, and other specific frameworks such as CIS AWS Foundations Benchmark, etc. Our compliance and security experts will provide customized guidance to navigate the end-to-end compliance process confidently. 

The benefits of our solution include enormous savings in time, human resources, and cost savings—including discounted audit fees with our audit firm partners. Customers achieve compliance certification fast and cost-effectively, stay continuously compliant as they grow, and can become certified under additional frameworks using a single compliance automation platform.

Build customer trust. Choose Akitra TODAY!‍

To book your FREE DEMO, contact us right here.