How to Conduct a Third-Party Risk Assessment (Third-Party Risk Series Part 2 of 3)
Third-party partnerships are essential for doing business effectively and efficiently. However, given the numerous risks associated with third parties, figuring out who to work with can be a daunting task. Luckily, there are several strategies to narrow down your focus and properly assess your third-party vendors.
Join us as we walk through the steps of third-party risk assessment to help your company choose the right vendors.
Why Assess Third-Party Risk?
Third-party companies pose six main risks to your company—cybersecurity, financial, compliance/legal, operational, reputational, and strategic. However, simply knowing the risks third parties present is useless if your company does nothing to mitigate them. Your company needs to pair its knowledge with strategic action, usually in the form of a risk assessment.
Conducting a thorough risk assessment is important because it demonstrates your company has done its due diligence. In other words, your company has taken steps to investigate and verify third-party information before entering into an agreement. The overarching goal is to minimize, if not completely eliminate, harm to any people or property while conducting business.
Not only is conducting due diligence a business best-practice—it’s expected of you. Without evidence that your company put forth reasonable efforts to investigate and manage potential risk, you might face more serious penalties in the case of a third-party compliance violation. So while it may seem like just another check in the box, third-party risk assessments are actually critical for helping to protect your company and others.
How to Assess Third-Party Risk to Choose a Vendor
How you assess third-party risk may vary slightly depending on your business needs and bandwidth. However, there are a few basic, best-practice actions steps to consider when conducting a risk assessment. Below is a step-by-step outline of how to assess third-party risk in order to choose a low-risk vendor.
1. Evaluate Your Business’ High-Risk Areas
Every business has unique compliance requirements, and therefore, unique areas of risk. Before introducing a new third-party vendor, check with your company’s procurement department. There may already be an approved vendor that can meet your specific business needs. If you do need to find a new third-party vendor, consider where your company is most prone to risk and prioritize that area during your risk assessment. For example, a healthcare company that stores private patient information should pay special attention to cybersecurity risks posed by third parties. Once you’ve identified your company’s high-risk areas, you’ll be better equipped to pick third parties that meet your company’s compliance requirements.
2. Conduct Initial Vendor Research
In order to choose an appropriate vendor, you’ll need to conduct preliminary research on their company and services. Where do they conduct business? What are their qualifications? Financial condition? Reputation? Compliance history? Business longevity? You may need to refine your search criteria depending on your company’s specific priorities and risk areas, as established in step one. Your initial research will provide a baseline as to who might be a good fit for your company, and who is not.
3. Classify Third Parties by Risk Level
Once you’ve settled on a list of potential vendors, you’ll want to classify each by the risk level posed to your organization. How much do they contribute to your daily operations? What level of access do they have to your company’s data? How severely would your business be impacted if the third party experienced disruptions? While some vendors may only play a minor role in your business operations and pose very little risk, others might be critical for your business’ functionality and require further scrutiny. In addition, be sure to standardize the criteria you use to rank third parties. This will make it easier to compare vendors and minimize confusion if there are multiple risk assessors.
4. Gather More Data With Risk Assessment Questionnaires
After classifying and further narrowing your list of vendors, your company can begin to gather more data via a risk assessment questionnaire. You can develop a custom risk assessment, or save time by using a risk assessment / due diligence service. Additionally, consider automating the process by sending low-level assessments to the potential third-party vendor and flagging certain questions for further review. Third parties that don’t provide a desired answer can then receive a more detailed, high-level risk assessment.
5. Compare, Rank, and Select Vendors
Now comes the time to actually choose a third-party vendor to work with. Compare each vendor across your chosen standardized criteria and rank. To avoid getting overwhelmed with data, ensure you have a clear and organized method for collecting and storing information. For additional ease, consider putting your data into an automated risk calculator tool to help weigh areas of risk.
Conducting Regular Third-Party Risk Assessments
Your company and its third-party vendors will likely experience changes over time, not to mention changes to industry standards and regulations. After settling on a third-party vendor, your company should continuously monitor risk levels to keep up with the evolving business landscape. In fact, 83% of legal and compliance leaders report identifying third-party risks after initial onboarding and due diligence. This indicates that post-onboarding assessments are critical for accurate and comprehensive risk reduction. While not every third party will require a thorough evaluation, it’s worth reviewing your new and existing third-party vendors to see how they might be exposing your company to risk.
Combating third-party risk doesn’t end with your risk assessment, either. Your company needs strategies in place to manage and mitigate the remaining risk even further. To learn more about risk management tactics, reach out or read our final blog in the series on third-party risk management.
