Mastering 3rd Party Risk Assessment

Building a successful and resilient global organisation requires more than just internal controls. With opportunities come risks, and managing third-party risks has become a pressing concern for organisations across industries.

Here I aim to provide some valuable insights into establishing and optimising a 3rd party risk assessment function within global organisations through experience I have gained working with some of the UK’s largest banks and retail organisations. The aim is to equip cybersecurity professionals getting started in this area with the knowledge and tools to navigate 3rd party risk assessments.

1. The Importance of 3rd-Party Risk Assessment

1.1 Understanding the Evolving Threat Landscape

The growing reliance on third-party vendors and partners introduces new vulnerabilities that must be addressed to ensure the overall security posture of the organisation. You can build and implement robust security controls in your organisation only to find that one vendor you ship data to simply for shipping labels doesn’t have the same maturity or resources you would expect.

1.2 Legal and Regulatory Compliance

And then there is also meeting regulatory requirements and industry standards, which necessitates a robust third-party risk management framework.

1.3 Safeguarding Reputational Integrity

We always fall back to this in cybersecurity, it is the reputation of an organisation that really is important, you can have all the security controls in place, but if the public perception is something different this can be significantly impactful on the business. It makes it harder when it is by the actions and behaviours of third-party entities. This makes effective risk assessment vital for protecting the brand image and customer trust.

2. Establishing the 3rd Party Risk Assessment Function

2.1 Defining Objectives and Scope

Clearly outlining the goals, scope, and responsibilities of the 3rd party risk assessment function ensures alignment with overall organisational objectives. Clearly articulate the overarching objectives of the 3rd party risk assessment function. These objectives may include enhancing the security and resilience of third-party relationships, identifying and mitigating potential risks, ensuring compliance with relevant regulations and standards, and safeguarding the organisation’s reputation.

2.2 Building a Cross-Functional Team

Assembling a multidisciplinary team with expertise in cybersecurity, legal, procurement, and compliance fosters a comprehensive approach to third-party risk management. They don’t all need to sit together in the same team but designing a process which engages each of these functions as part of an assessment ensures that business risk is assessed diligently.

2.3 Developing a Risk Assessment Framework

Creating a robust risk assessment framework tailored to the organisation’s specific needs enables systematic evaluation of third-party risks. Define a clear and structured methodology for assessing third-party risks. This methodology should outline the steps involved in conducting risk assessments, including gathering relevant information, analysing risks, and determining risk levels. Consider leveraging established frameworks such as ISO 31000 or NIST SP 800-30 for guidance.

2.4 Integrating 3rd Party Risk Assessment with Vendor Management

Aligning the risk assessment function with vendor management processes streamlines efforts and promotes consistent risk mitigation strategies. Fostering collaboration between the risk assessment team and the vendor management team, establishes open lines of communication and encourages regular knowledge sharing to facilitate a shared understanding of third-party risks. This collaboration ensures that risk assessments are based on accurate and up-to-date information about vendors.

3. Best Practices for Effective 3rd-Party Risk Assessment

3.1 Conducting Due Diligence Thoroughly vetting potential third-party partners before engaging in business relationships is essential to identify any existing or potential risks. Due diligence is a crucial aspect of 3rd party risk assessment and plays a significant role in establishing effective governance practices. Conducting thorough due diligence on potential third-party vendors and partners is essential to identify any existing or potential risks. This process involves evaluating various aspects of the vendor’s operations, practices, and compliance with regulations.

When conducting due diligence, organisations should consider the following key factors:

Background Checks:

Conducting comprehensive background checks helps verify the vendor’s track record and reputation. This includes reviewing their business history, financial stability, and any past legal or regulatory issues.

Compliance Assessment:

Assessing the vendor’s compliance with applicable laws, regulations, and industry standards is critical. This ensures that they adhere to legal requirements and maintain appropriate governance practices.

Financial Stability:

Evaluating the vendor’s financial stability and viability is essential to ensure that they can fulfil their contractual obligations. This includes reviewing their financial statements, and creditworthiness, and assessing any potential financial risks.

Security and Data Protection Practices:

Assessing the vendor’s cybersecurity measures, data protection policies, and incident response capabilities is crucial to determine their ability to safeguard sensitive information. This includes reviewing their security frameworks, encryption practices, access controls, and data breach response procedures.

Ethical and Sustainable Business Practices:

Evaluating the vendor’s commitment to ethical and sustainable business practices helps align organisational values and ensures responsible sourcing and environmental stewardship.

By conducting comprehensive due diligence, organisations can gain a clear understanding of a vendor’s capabilities, risks, and overall suitability for a business relationship. This information forms the basis for informed decision-making and enables organisations to establish a governance framework that mitigates potential risks effectively.

3.2 Implementing Risk Scoring and Categorisation Assigning risk scores and categorising third-party relationships based on their criticality and potential impact allows for prioritised risk mitigation efforts. Once third-party vendors have been selected and due diligence has been conducted, it is essential to implement a systematic approach for risk scoring and categorization. This process involves assigning risk scores and categorizing third-party relationships based on their criticality and potential impact. By implementing risk scoring and categorization, organisations can prioritise their risk mitigation efforts and allocate resources effectively.

To implement risk scoring and categorization effectively, organizations should consider the following steps:

Identify Risk Categories: Start by identifying the risk categories relevant to your organization and industry. These categories may include data breaches, compliance violations, operational disruptions, financial risks, reputational risks, and more. By defining these risk categories, you can ensure a comprehensive assessment of potential risks.

Assess Risk Impact and Likelihood: Evaluate the potential impact and likelihood of risks within each category. This involves analysing factors such as the sensitivity of the data involved, the criticality of the vendor’s services, the geographical location of the vendor, and the vendor’s cybersecurity maturity. By assessing impact and likelihood, organisations can gauge the potential severity and probability of risks.

Assign Risk Scores: Assign numerical or qualitative risk scores to each risk category based on the assessed impact and likelihood. This scoring system helps quantify and compare risks across different vendors and relationships. The risk scoring scale can be customised to fit the organisation’s needs, such as using a numerical scale from 1 to 5 or a qualitative scale such as low, medium, and high.

Categorise Vendors: Categorise vendors based on their risk scores and criticality to the organisation. This step involves grouping vendors into different tiers or levels, such as low-risk, medium-risk, and high-risk. The categorisation should align with the organisation’s risk appetite and guide the allocation of resources for risk mitigation.

Define Risk Tolerance Thresholds: Establish risk tolerance thresholds for each risk category and vendor category. These thresholds determine the acceptable level of risk that the organization is willing to tolerate. For example, high-risk vendors may require additional due diligence, monitoring, and contractual controls, while low-risk vendors may undergo less intensive oversight.

Review and Update Risk Assessments: Regularly review and update risk assessments to account for changes in vendor relationships, industry trends, and evolving risks. As new information becomes available or risk profiles change, organisations should reevaluate risk scores and categorisations to ensure they remain accurate and up to date.

Implementing risk scoring and categorisation enables organisations to focus their risk management efforts on the most critical and impactful areas. By prioritising resources and actions based on risk scores and categories, organisations can allocate their time and attention effectively, ultimately strengthening their overall risk posture.

3.3 Continuous Monitoring and Auditing

To ensure the ongoing effectiveness of third-party risk management efforts, continuous monitoring and auditing are essential. Continuous monitoring involves regularly assessing and reviewing third-party activities, while auditing involves conducting periodic evaluations to ensure compliance and identify emerging risks. By implementing continuous monitoring and auditing practices, organisations can stay proactive in their risk management approach and detect any deviations or vulnerabilities in real time.

When establishing continuous monitoring and auditing processes, consider the following steps:

Define Monitoring Parameters: Determine the key parameters and indicators that need to be monitored for each third-party relationship. These parameters may include security controls, data protection measures, regulatory compliance, financial stability, and operational performance. By defining specific monitoring parameters, organizations can track the critical aspects of each vendor’s activities.

Establish Monitoring Mechanisms: Implement tools and systems that enable continuous monitoring of third-party activities. This can include automated monitoring solutions, security information and event management (SIEM) systems, vendor risk management platforms, and other relevant technologies. These mechanisms help organisations collect, analyse, and interpret data to identify any anomalies or deviations from expected behaviour.

Regularly Review Performance Metrics: Regularly review and analyse performance metrics provided by third-party vendors. These metrics may include service level agreements (SLAs), incident reports, audit findings, and compliance documentation. By closely monitoring these performance indicators, organisations can identify any areas of concern or potential risks.

Conduct Periodic Audits: Conduct periodic audits of third-party vendors to assess their compliance with contractual obligations, industry standards, and regulatory requirements. These audits can be performed internally or by engaging independent auditors. The scope of the audits should cover critical aspects such as data security, privacy controls, business continuity planning, and adherence to legal and regulatory frameworks.

Address Identified Issues: When monitoring or auditing identifies any issues or deviations, organisations should take immediate action to address them. This may involve engaging with the vendor to resolve the issues, implementing additional controls or remediation measures, or considering termination of the relationship if necessary. Prompt response and remediation are crucial to mitigate potential risks and maintain a secure vendor ecosystem.

Maintain Documentation: Ensure proper documentation of monitoring activities and audit findings. This documentation serves as evidence of due diligence and compliance efforts, and it helps organisations demonstrate their commitment to risk management and regulatory requirements.

By implementing continuous monitoring and auditing practices, organisations can maintain visibility into their third-party relationships and promptly detect any emerging risks or non-compliance issues. These proactive measures enable organisations to address potential vulnerabilities and take necessary actions to protect their data, reputation, and overall security posture.

3.4 Effective Communication Channels

Establishing clear and effective communication channels with third parties is essential for successful third-party risk management. Transparent communication helps set risk expectations, ensures compliance with requirements, and promotes collaborative risk mitigation efforts. By fostering open lines of communication, organizations can work together with their third-party partners to address potential risks and maintain a strong risk management posture.

Consider the following practices for establishing effective communication channels:

Risk Expectations: Clearly communicate your organisation’s risk expectations to third parties. This includes outlining the level of risk tolerance, security standards, data protection requirements, and compliance expectations. By setting clear expectations, third parties understand the risk landscape and can align their practices accordingly.

Compliance Requirements: Clearly communicate any specific compliance requirements that third parties must adhere to. This may include regulatory obligations, industry standards, and internal policies. Regularly reinforce the importance of compliance and provide guidance on how to meet these requirements.

Incident Reporting Mechanisms: Establish well-defined incident reporting mechanisms for third parties to report any security incidents or breaches promptly. Provide clear instructions on how to report incidents, including contact information and escalation procedures. Encourage third parties to report incidents in a timely manner to enable prompt response and remediation.

Regular Meetings and Updates: Schedule regular meetings or calls with third parties to discuss risk-related matters, ongoing compliance efforts, and any updates or changes to requirements. These interactions help maintain open lines of communication and provide opportunities to address concerns or provide clarifications.

Collaborative Risk Mitigation: Foster a collaborative approach to risk mitigation by engaging in constructive discussions with third parties. Encourage them to share their own risk management practices, challenges, and suggestions. By working together, organisations and third parties can collectively identify and address potential risks.

Training and Education: Provide training and educational resources to third parties to enhance their understanding of risk management principles, best practices, and emerging threats. This helps ensure that third parties are equipped with the knowledge and skills to effectively contribute to risk mitigation efforts.

Regular Communication Channels: Establish reliable and secure channels of communication for ongoing discussions and information exchange. This can include email, secure portals, or dedicated communication platforms. Regularly check the effectiveness of these channels and address any issues promptly.

By maintaining effective communication channels with third parties, organisations can enhance transparency, collaboration, and overall risk management. These channels enable timely reporting of incidents, facilitate compliance efforts, and foster a shared responsibility for risk mitigation. Effective communication builds trust and strengthens the relationship between organisations and their third-party partners.

3.5 Encouraging Third-Party Accountability

To ensure effective third-party risk management, contractual agreements should include clear risk management obligations and consequences for non-compliance. By incorporating these provisions, organizations can promote accountability among their third-party partners and create a framework for addressing potential risks.

Consider the following practices when establishing risk management obligations in contractual agreements:

Risk Identification and Assessment: Clearly outline the requirement for third parties to identify and assess risks associated with their activities. This includes conducting regular risk assessments, addressing vulnerabilities, and implementing appropriate controls.

Compliance with Security Standards: Specify the security standards that third parties must adhere to, such as data protection requirements, industry-specific regulations, and best practices. Ensure that these standards align with your organization’s risk tolerance and industry standards.

Incident Response and Reporting: Establish expectations for incident response and reporting. Define the process and timeframe for reporting security incidents or breaches to your organisation, including the level of detail required. Prompt reporting enables timely response and remediation.

Business Continuity and Disaster Recovery: Include provisions related to business continuity and disaster recovery planning. Require third parties to have robust plans in place to mitigate the impact of disruptions and ensure the timely recovery of operations.

Subcontractor Management: Address the management of subcontractors or sub-vendors. Require third parties to perform due diligence on their own vendors and ensure that subcontractors adhere to the same risk management obligations and standards.

Performance Monitoring and Auditing: Specify the right to monitor and audit third-party performance and compliance. Clearly state the frequency and scope of monitoring activities, including periodic assessments and on-site audits. This helps ensure ongoing adherence to contractual obligations and regulatory requirements.

Consequences for Non-Compliance: Clearly articulate the consequences for non-compliance with risk management obligations. This may include contractual penalties, termination rights, or other measures deemed appropriate. Consequences serve as deterrents and incentivise third parties to prioritise risk management.

Contractual Reviews and Updates: Include provisions for regular contract reviews and updates to reflect evolving risks and compliance requirements. Schedule periodic discussions with third parties to assess the effectiveness of risk management measures and make necessary adjustments.

By incorporating risk management obligations and consequences for non-compliance into contractual agreements, organizations establish a framework for accountability and reinforce the importance of effective risk management practices. These provisions promote alignment with security standards, enhance incident response capabilities, and encourage continuous improvement in risk mitigation efforts.

4. Case Studies: Real-World Examples of Effective 3rd-Party Risk Management

To further illustrate the importance and benefits of 3rd party risk management, let’s explore a few case studies where organisations successfully implemented robust processes to mitigate third-party risks. These are not real companies but are based on some real-world scenarios to demonstrate the process (names have naturally been changed to protect client confidentiality).

Case Study: ACME Motorbike Helmet Manufacturing Company

Some of you will know one of my interests is in classic-styled motorbikes, so today let us work with ACME Motorbike Helmet Manufacturing Company, a global manufacturing company, that faced challenges in managing third-party risks due to a complex global supply chain. They implemented a comprehensive 3rd party risk management program to protect their operations and reputation. Their manufacturing process was just in time, each bike was custom-made by 3rd party suppliers and put together at a central supplier and then shipped direct to the customer. As you can imagine this required sharing lots of customer information. Here’s an overview of their approach:

  1. Vendor Due Diligence and Selection: ACME Motorbike Helmet Manufacturing Company conducted thorough due diligence on potential vendors, focusing on financial stability, compliance with regulatory standards, and reputation in the industry. They also considered vendors’ commitment to ethical and sustainable business practices.

  2. Risk Assessment and Scoring: After selecting vendors, ACME Motorbike Helmet Manufacturing Company conducted risk assessments to identify potential risks related to data security, intellectual property protection, and supply chain disruptions. They assigned risk scores to each vendor and established risk tolerance thresholds based on the criticality of the services provided.

  3. Ongoing Monitoring and Auditing: ACME Motorbike Helmet Manufacturing Company implemented regular monitoring and auditing processes to assess vendor performance and compliance. They utilised automated monitoring tools and conducted periodic on-site audits to ensure adherence to contractual obligations and quality standards.

  4. Incident Response and Remediation: In the event of a security incident or disruption caused by a third-party vendor, ACME Motorbike Helmet Manufacturing Company had a well-defined incident response plan. They collaborated closely with vendors to minimise the impact, recover operations, and identify measures to prevent future incidents.

Through their proactive approach to 3rd party risk management, ACME Motorbike Helmet Manufacturing Company enhanced the resilience of their supply chain, reduced operational disruptions, and safeguarded its brand reputation.

These case studies demonstrate the effectiveness of implementing robust 3rd party risk management processes. By following similar approaches and tailoring them to their specific needs, organisations can effectively mitigate potential risks associated with third-party relationships.

5. Popular 3rd Party Risk Management Processes you can implement

5.1 Vendor Due Diligence and Selection Before engaging with any third-party vendor or partner, conducting thorough due diligence is crucial. This process involves evaluating the vendor’s reputation, financial stability, legal compliance, and cybersecurity practices. Key steps in the vendor due diligence process include:

  • Conducting background checks and reviewing the vendor’s track record
  • Assessing the vendor’s financial stability and viability
  • Evaluating the vendor’s compliance with applicable laws and regulations
  • Assessing the vendor’s cybersecurity posture and data protection practices
  • Reviewing the vendor’s incident response and business continuity plans

5.2 Risk Assessment and Scoring Once vendors have been selected, a comprehensive risk assessment process should be implemented to identify potential risks associated with each vendor. This process involves assessing the likelihood and potential impact of various risks, such as data breaches, compliance violations, or service disruptions. Key steps in the risk assessment and scoring process include:

  • Identifying and categorising risks based on their potential impact and likelihood
  • Assigning risk scores to each risk category
  • Evaluating the vendor’s controls and mitigation measures in place
  • Conducting on-site assessments or audits, if necessary
  • Reviewing the vendor’s incident response and disaster recovery capabilities

5.3 Ongoing Monitoring and Auditing To ensure continuous compliance and risk mitigation, ongoing monitoring and auditing of third-party vendors is essential. This process involves regularly assessing the vendor’s performance, security practices, and adherence to contractual obligations. Key steps in the ongoing monitoring and auditing process include:

  • Regularly reviewing vendor performance metrics and reports
  • Conducting periodic cybersecurity assessments and vulnerability scans
  • Monitoring the vendor’s compliance with contractual obligations and regulatory requirements
  • Performing periodic on-site audits or assessments, as needed
  • Staying updated on any changes or incidents that may impact the vendor’s risk profile

5.4 Incident Response and Remediation In the event of a security incident or breach involving a third-party vendor, having a well-defined incident response and remediation process is crucial. This process ensures swift and effective response to minimize the impact and facilitate recovery. Key steps in the incident response and remediation process include:

  • Activating an incident response team and communication plan
  • Assessing the nature and scope of the incident and its potential impact
  • Collaborating with the vendor to contain and mitigate the incident
  • Implementing remedial measures to prevent future incidents
  • Conducting a post-incident review and lessons learned session

These processes form the foundation for effective 3rd party risk management and should be tailored to fit the specific needs and requirements of each organisation. By following these best practices, organisations can minimize the potential risks associated with third-party relationships and ensure a secure and resilient ecosystem.

6. Future Trends and Compliance Considerations

6.1 Emerging Technologies in 3rd Party Risk Assessment such as artificial intelligence (it is everywhere and being integrated everywhere fast), machine learning, and blockchain also have the potential to revolutionise the way organisations assess and manage risks associated with third-party relationships. AI and machine learning can automate and enhance risk assessment processes, enabling organisations to analyse vast amounts of data, detect patterns, and identify potential risks more efficiently. Blockchain technology can provide enhanced transparency and immutability, improving trust and security in the vendor ecosystem.

6.2 The Role of International Collaboration plays a crucial role in 3rd party risk assessment. Sharing best practices, threat intelligence, and regulatory insights across borders can help organisations stay informed about emerging risks and compliance requirements. Collaborative efforts between organisations, industry associations, and government bodies can contribute to the development of standardised frameworks, guidelines, and certifications for third-party risk management on a global scale.

6.3 Regulatory Trends and Compliance Requirements are continuously evolving. organisations must stay updated with relevant laws, regulations, and industry-specific requirements to ensure compliance. Key regulations to consider include the General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA), and industry-specific regulations such as the Payment Card Industry Data Security Standard (PCI DSS) for the payment card industry. Compliance with these regulations is not only necessary for avoiding penalties but also for building trust with customers and stakeholders.

7. Where to next?

Effectively managing third-party risks is an integral part of modern governance and risk management strategies. By implementing comprehensive 3rd party risk assessment processes, global organisations can strengthen their security posture, protect their reputation, and ensure regulatory compliance. It is imperative for cybersecurity professionals to adopt a proactive approach and leverage the best practices outlined in this article. To further support your organisation’s journey towards robust third-party risk management, download our and take the first step towards a secure and resilient future.