Third Party Risk Management Process: A Comprehensive Guide

Third party risk management is a critical process for any organization that relies on external vendors or partners to deliver goods or services.

Effective third party risk management involves identifying and assessing potential risks associated with these external parties.

According to the risk assessment process, a thorough risk assessment should be conducted for each third party, considering factors such as their business practices, financial stability, and regulatory compliance.

This assessment helps organizations to identify potential vulnerabilities and develop strategies to mitigate them.

A well-structured third party risk management process should include regular monitoring and evaluation of third party performance, to ensure ongoing compliance with agreed-upon standards.

Suggestion: Sample Risk Assessment Report

Third-party risk management is a continuous process of identifying, analyzing, and controlling risks presented by third parties to an organization. It's essential for controlling the risk that arises from outsourcing services and products.

A third-party risk assessment is a vital component of third-party risk management practices, and it involves analyzing vendor risk posed by a company's third-party relationships along the entire supply chain. This assessment serves as an internal function to mitigate the risks as much as possible.

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The primary purpose of a third-party risk assessment is to identify and evaluate the potential risks that each of the third-party relationships poses to a business. This assessment is conducted in-house or by an independent safety or cybersecurity professional.

Third-party risk management allows organizations to shed light into areas of potential business risk, including security, privacy, business continuity, and reputation risks.

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A vendor risk assessment is an audit of a vendor's processes, policies, and financial health. It helps understand how much risk you'll take on when working with a specific vendor.

You can't completely eliminate all vendor risk, but you can manage it by assessing all the risks that come with each vendor as part of your due diligence process. This involves auditing their processes, policies, and financial health.

A third-party risk assessment framework is a high-level guide that details exactly how vendor risk management will be handled. This guide will help to provide steps for senior management in different lines of business to follow.

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To start, review any past application vulnerability assessments you’ve done, and see where those vendors had issues. This will give you a good idea of what to look out for when assessing new vendors.

A third-party risk management program manages risks associated with third-party vendors, customers, or regulators end-to-end. This involves collecting critical vendor information, assessing their security posture, tracking what data and systems they have access to, understanding what regulations and internal policies apply to them, and more.

Having a defined process for assessing third-party risk is essential for managing vendor risk. This process should be outlined in a framework that details exactly how vendor risk management will be handled.

A needs assessment is a crucial step in the third-party risk management process. You should make a list of your vendors and classify them to identify the most important to your success and the ones that present the most risk.

Having hundreds or thousands of vendors can make it challenging to assess all of them, so you should make informed decisions about which vendors to work with. This is a critical step because it allows you to focus your resources on the most urgent needs.

To prioritize your vendors, consider the following steps:

This process will help you identify the key elements of third-party risk management and enable you to minimize the threats that face your organization.

Creating a questionnaire is a crucial step in the third party risk management process. You can create it in-house, use a resource you find online, or take advantage of vendor risk management software.

Keep your questionnaire simple and concise. Don't include too many items on the questionnaire.

You should use the questionnaire to find out more about your vendors' policies, processes, and procedures. This will help you determine their additional risks.

Don't be afraid to ask for proof of the company's standards in areas you may have concerns.

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To effectively analyze the results of your third party risk management assessment, you'll need to examine each vendor's answers and assign a risk rating based on the level of risk and potential risks they pose to your business.

This risk rating will help you identify which vendors require more attention and scrutiny. After evaluating the risks, you'll need to decide what risk management strategy is best to mitigate them.

In some cases, this may involve requesting the supplier to address any significant concerns. This could be a simple matter of adjusting their processes or procedures to better align with your business needs.

In more severe cases, you may want to consider asking for an on-site audit to gain a deeper understanding of how the vendor operates. This can provide valuable insights and help you make more informed decisions about their level of risk.

In rare situations, the risks posed by a vendor may be so high that it's necessary to remove them from your list altogether. This is usually the case when there's little to no way to mitigate the risks, and it's better to err on the side of caution.

You need to evaluate the risks posed by each vendor and decide what risk management strategy will be appropriate to mitigate the risk and take action based on the results.

In some cases, you may want to ask for an on-site audit that will allow you to understand better how a vendor operates and do a more in-depth evaluation. This is especially true for high-risk situations where practically nothing can be done to mitigate risks.

You may need to request the supplier to address any significant concerns, and in rare cases, remove the vendor from your list altogether. This can happen in high-risk situations where practically nothing can be done to mitigate risks.

To take action, you'll need to assign each vendor a risk rating based on the level of risk and the number of potential risks they pose to your business. This requires examining their answers and analyzing the results after each vendor completes the assessment.

Remediation involves actively addressing any issues that you discovered, by adjusting your security controls and operating policies, and closing operational gaps. This is a crucial step in reducing the chances of serious breaches, security incidents, compliance failures, or business disruption.

Mitigation means minimizing the potential impact of risks that can’t be fully eliminated, usually by strengthening contractual obligations on your third parties, adding additional controls, or creating contingency plans.

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Supplier management is a critical aspect of third-party risk management. A solid risk assessment strategy will help you create and maintain relationships with suppliers and ensure your business has the greatest chance of success in the long term.

To get started, compare your list from the Accounts Payable department to your vendor list, making sure you haven't overlooked any vendor when completing risk assessments. Perform a risk assessment on an entire vendor relationship and at the product and service level to get a wholistic view of all potential risks.

Here are some best practices for successful supplier risk assessment:

Developing onboarding and offboarding processes is crucial for effective supplier management. Onboarding, in particular, is the most important step in third-party risk management, as it sets the foundation for a secure and productive working relationship.

A structured onboarding process should include initial security evaluations, due diligence, and contractual agreements around security measures. This helps formalize expectations and ensures that your risk management strategies are aligned.

In your onboarding process, you'll want to make sure vendors understand your information security standards and policies. This includes communicating restrictions on data storage, such as "bring-your-own-device" restrictions.

Developing a standardized onboarding process for vendors is just as important as having an onboarding process for new employees. It helps ensure that vendors are aware of your corporate policies and have agreed to adhere to them.

For instance, if a vendor plans to have individuals conduct work on your behalf on their own devices, you'll need to clearly communicate your data protection measures and incident response procedures.

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A solid risk assessment strategy is key to creating and maintaining relationships with suppliers. This will help your business have the greatest chance of success in the long term.

Compare your list from the Accounts Payable department to your vendor list to ensure you haven't overlooked any vendor when completing risk assessments.

Perform a risk assessment on an entire vendor relationship and at the product and service level to get a wholistic view of all potential risks. This approach will give you a comprehensive understanding of the risks involved.

You can set a risk rating of high, medium, or low to determine the overall level of risk for each vendor. This will allow you to prioritize your vendor risk monitoring strategies and decide what amount of due diligence you'll do for vendors at each risk level.

Here are some key steps to consider when performing a vendor risk assessment:

A third-party risk assessment framework can help you assess vendors on a consistent basis, rather than on a case-by-case basis. This framework should be a high-level guide that details exactly how vendor risk management will be handled.

Here are some key features to consider when selecting a third-party risk management (TPRM) platform:

To get started with the third-party risk management process, you'll want to create a vendor risk assessment template. This template can help you identify potential weaknesses among vendors and partners, allowing you to avoid costly and unanticipated surprises.

The template should include a list of questions you should consider asking your current or potential vendors. You can download a vendor evaluation template at no cost, which contains a list of questions to get you started.

Conducting vendor risk assessments can be a long and tedious process, but tools like START can greatly simplify the tasks of assessing and managing third-party risks. With START, you'll be able to create controls and questionnaires, and customize them to ensure you ask relevant questions.

To illustrate the importance of third-party risk management, consider the HopeWell Foundation, a non-profit organization that relies on third-party vendors to manage donor databases and process donations. The Foundation identified three key risks: data breaches, vendor non-compliance, and operational downtime.

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The key elements of third-party risk management include mapping your vendor ecosystem, assessing potential third-party risks, categorizing and prioritizing risks, ensuring compliance, and preparing incident response plans.

Here are the individual steps involved in third-party risk management:

You need to set up continuous monitoring for all your vendor relationships, which tracks vendor performance and security practices to ensure compliance with internal policies and regulatory requirements.

This can involve regular audits and automated monitoring tools that pick up on changes in the vendor's security posture, financial stability, or regulatory compliance status, generating alerts for you to quickly identify and address new or evolving risks.

Continuous monitoring can be achieved through security ratings and alert mechanisms, which help you constantly reassess the vendor to ensure compliance with agreed security standards.

To track vendor performance and detect any changes, you should perform regular reviews, audits, and assessments throughout the contract's lifetime.

It's essential to define key performance indicators (KPIs) to ensure you meet business objectives and fulfill obligations outlined in the contract.

Determine key risk indicators (KRIs) to continuously determine the level of risk posed by third-party relationships while the contract is ongoing.

Using relevant software containing features such as a third-party portal, document collection and management, a risk scoring engine, and the ability to perform audits, can be an invaluable resource for managing third-party relationships.

You should conduct annual assessments, including risk, performance, and information security reviews, to stay on top of vendor changes.

By having a third-party risk assessment framework in place, you can avoid assessing vendors on a case-by-case basis and ensure a consistent approach to vendor risk management.

A good framework should outline day-to-day vendor risk management responsibilities in explicit detail, so no step is overlooked.

Don't wait until your framework is perfect to start using it – implementing something is better than nothing when it comes to risk management and compliance.

Regulatory compliance is a top priority for businesses, especially in critical industries like finance and health. Ensuring regulatory compliance helps avoid legal penalties, financial losses, and reputational damage.

Regulations like GDPR, HIPAA, and PCI DSS require third-party risk management as part of compliance requirements. This means measuring and monitoring third-party compliance is crucial.

The Digital Operational Resilience Act (DORA) regulates cybersecurity resilience for financial institutions in the EU, including mapping third-party assets and evaluating third-party criticality. The New York Department of Financial Services (NYDFS) regulation protects non-public sensitive information of financial institutions, specifying guidelines for ensuring data shared with third parties remains secure.

The EU's NIS2 Directive outlines the types of security incidents that should be reported, including unauthorized access to services, data breaches, and DDoS attacks. It also emphasizes proactive risk management, including third-party and digital supply chain risk assessments.

Businesses must demonstrate competency in third-party risk management, especially when working with EU residents, as they are liable for third-party providers' actions. This includes keeping customers' data safe and demonstrating due diligence and corporate responsibility.

Regulatory compliance is not just about avoiding penalties, but also about maintaining customers' trust and future business. This is especially true when information breaches happen due to a vendor's security weakness.

Here are some key regulations to consider: