A third-party risk assessment pulls vendor risk data to help cybersecurity teams understand how to best mitigate supplier risks. Though the field of Third-Party Risk Management (TPRM) is evolving to prioritize compliance, security, and supply chain risk, third-party risk assessments could also be used to uncover an organization’s exposure to financial, operational, and reputational risks stemming from its third-party network.
Learn how UpGuard streamlines Third-Party Risk Management >
How does a third-party risk assessment fit in a TPRM lifecycle?
A third-party risk assessment is the lifeblood of a Third-Party Risk Management program, supplying third-party relationship data to just about every phase of the TPRM lifecycle. Here’s how third-party risk assessments integrate the seven stages of a TPRM lifecycle.
Stage 1: Onboarding
Due diligence
Before officially onboarding service providers, a high-level third-party risk assessment is conducted to ascertain the third party’s level of risk and potential impacts on the organization’s security posture. This critical cybersecurity phase, sometimes known as “Evidence Gathering,” is essential for all new vendors to ensure any newly introduced types of third-party risks remain within specified risk appetite limits, as defined by Vendor Risk Management teams.
The due diligence process involves gathering third-party risk data to form a high-level risk profile for each prospective vendor. These data sources could include certifications, completed questionnaires, vendor assessments, or any other readily available data source that could support risk management processes in each vendor lifecycle.
The data security and third-party risk intelligence collected in the Evidence Gathering phase of the TPRM lifecycle forms the basis of an official third-party risk assessment completed in Stage 2
This post about establishing a vendor risk assessment process provides a more in-depth explanation of the workflows involved in the Evidence Gathering phase.
Vendor classification
During the onboarding process, vendors are supplied with a relationship questionnaire to determine the vendor’s level of criticality in a Third-Party Risk Management program. Criticality levels are based on multiple factors, including:
- Degree of access required to sensiitve data to deliver promised service levels.
- Any regulatory requirements or industry standards the third-party party is bound to.
- The third-party vendor’s potential risk of disrupting critical business continuity.
- The third party’s total cybersecurity risks influencing their potential of suffering a data breach.
- The geographical locations of the third party’s data processing and data storage activities, whether they take place in what’s deemed as a high-risk digital ecosystem.
- Whether the vendor operates in a high-risk industry with a higher likelihood of being targeted in a cyber attack, such as healthcare.
Learn how UpGuard helps healthcare services prevent data breaches >
Third-party vendors classified as critical must undergo a full third-party risk assessment. This is almost always the case in a TPRM program, regardless of the nuanced difference of your chosen vendor risk assessment framework template.
Step 2: Risk assessment
Initial risk assessment
The information collected in the Evidence Gathering phase forms a basis for the third-party vendor’s initial risk assessment, which enhances the dimension of a third party’s risk profile. Initial risk assessments provide a deeper analysis of the degree to which the vendor increases your risk exposure across all applicable risk categories.
To further clarify how vendor due diligence efforts feed into initial third-party risk assessment workflows, watch this video:
A TPRM program emphasizing mitigating cybersecurity-related risks will focus on the following vendor management details:
- Security practices - The level of security controls the vendor has in place to mitigate exposure across all relevant third-party risks. This analysis will also provide helpful data on the level of third-party risk management controls your business would need to implement to keep the vendor within acceptable risk limits.
- Regulatory compliance efforts - The third party’s level of alignment with relevant regulations. Compliance efforts are investigated at a deeper level despite the availability of any publically available information the third party might have about their compliance strategies,
- Cyber framework alignment - The third-party vendor’s level of alignment with cybersecurity frameworks, such as ISO 27001 and NIST CSF. This information could also influence considerations of the third-party vendor’s overall degree of security incident and data breach risks.
An initial risk assessment is the first point-in-time risk evaluation of a particular third-party vendor.
Security questionnaires
Security questionnaires are a component of third-party risk assessments. They help narrow the focus of risk assessments toward specific risk categories, such as data breach risks, regulatory compliance risks, information security risks, and supply chain risks. This narrowed focus occurs via questionnaires mapping to specific standards.
For example, some questionnaires map to the cybersecurity standards of specific regulations like PCI DSS or GDPR. Others map to specific risk sub-categories, such as web application or cloud technology risks.
For a complete list of security questionnaires commonly used in third-party risk assessment, refer to this list of questionnaires available on the UpGuard platform.
Each third-party vendor is provided with a unique set of questionnaires in their risk assessment, depending on the specific categories of risk they’re likely exposed to. This unique questionnaire set draws specific third-party risk insights that map to a vendor’s unique risk management strategy.
To understand how security questionnaires play a role in tailoring risk assessment to each vendor’s unique risk context, refer to this vendor risk assessment example.
For an overview of the top features of an ideal risk assessment solution, read this post comparing the top third-party risk assessment software options.
Step 3: Risk analysis and evaluation
Risk scoring
The data gathered from a third-party risk assessment is then processed with a risk-scoring methodology to determine which events need to be prioritized in a remediation strategy. Third-party risk assessments contribute a point-in-time snapshot of risk data to this risk scoring process, that is, cyber risk insights for a particular vendor at a specific point in time.
To support an agile TPRM framework, one that is capable of acknowledging emerging risks between assessment schedules, point-in-time methods should be combined with continuous attack surface scanning methods for real-time third-party risk monitoring, a capability of the most proficient Third-Party Risk Management software solutions.
Step 4. Risk management and mitigation
Risk management framework
A completed third-party risk assessment establishes the framework for a risk management strategy for a particular third-party vendor. With the support of a risk-scoring methodology highlighting critical risks that should be prioritized to meet your specific TPRM objectives, these risk assessments could be adapted to a third-party risk report for stakeholders involved in your TPRM strategizing sessions.
Step 5. Ongoing monitoring and review
Continuous monitoring
After implementing a risk management strategy based on third-party risk assessment data, each assessed third-party vendor undergoes continuous monitoring to track increases in expense across all applicable categories of third-party risks. The most efficient method of real-time continuous monitoring is through security rating technology. Security ratings quantify a third-party vendor’s security posture as either a numerical value, usually ranging from 0 to 950, or a letter grading, usually ranging from A-F.
Security ratings offer the most convenient method of tracking TPRM program performance against industry standards and sudden risk exposure changes requiring deeper investigation with third-party risk assessment.
Learn how UpGuard calculates its security ratings >
Periodic assessments
Continuous monitoring efforts should be grounded in scheduled third-party risk assessments, which encourage ongoing deep levels of third-party risk analysis regardless of any concerning deviations in security ratings. Periodic assessments also provide opportunities for evaluating the impact of implemented risk control against any new regulatory compliance standards.
Step 6: Offboarding
Offboarded vendors must undergo an internal data access evaluation to ensure that all potential pathways to your sensitive resources have been severed. Such evaluations could take the form of offboarding third-party risk assessments completed collaboratively with regulatory teams to ensure that data security regulations aren’t violated during the offboarding processes.
Attack Surface Management strategies could support offboarding assessment by discovering internet-facing assets potentially mapping to terminating vendor relationships.
Watch this video for an overview of Attack Surface Management.
What types of security risks do third-party risk assessments uncover?
Third-party risk assessments could uncover just about any category of risk originating from the third-party network. Below is a list of some of the common categories of third-party risks typically identified through third-party risk assessment.
- Data breach risks - Any risks facilitating unauthorized access to sensitive data, either through third-party software vulnerabilities or misconfigurations leading to data leaks.
- Regulatory compliance risks - Legal and financial penalty risks resulting from third-party vendors not fully complying with regulations such as GDPR, HIPAA, and PCI DSS.
- Information security risks - Technical and operational security vulnerabilities facilitating cyber attacker access to sensitive data shared with third-party vendors. Such risks also heighten threats to the confidentiality of sensitive information.
- Supply chain risks - Vulnerabilities and overlooked attack vectors in the supply chain increasing the risk of being impacted through supply chain attacks. These exposures extend to the fourth-party network (your vendor’s vendors).
- Operational risks - Any threat to service levels caused by third-party vendors. These risks could feed into legal and financial risk categories if they violate service-level agreements with business partners.
- Financial risks - Any threats to financial loss, either resulting from data breach damages, regulatory fines, business continuity disruptions, or cyber threats - an impact that could be estimated through a process known as Cyber Risk Quantification (CRQ).
- Legal risks - Any risks with potential legal ramifications, such as violations of contract conditions, service level agreements, regulatory violations, and data breaches resulting from poor cybersecurity standards.
- Reputational risks - Any threats increasing the likelihood of reputational damage, such as data breaches, data leaks, and general poor cybersecurity standards.
Not all of these risk categories need to be explicitly addressed in a third-party risk management program. Many risk categories share a considerable overlap. As such, it might be more efficient to replace competing risk categories with their overarching risk source.
For example, both financial and reputation risks relate to the overarching effects of data breaches. For organizations outside the financial sector, tightening up their TPRM strategy by focusing on mitigating data breach risks might be more efficient, as this would, by extension, also address financial and reputational risks.
To learn more about evaluating different types of risk, read our post on risk criteria in vendor risk assessments.
What are the common challenges with third-party risk assessments?
Third-party risk assessments form the core of a Third-Party Risk management program. However, their impact is significantly limited by several common process challenges, which, in turn, directly impact the overall efficiency of a TPRM program.
The top three issues plaguing third-party risk assessments and their associated challenges, impacts, and solutions are listed below.
1. Poor scalability
- Challenge: As a business grows, its number of outsourcing relationships increases exponentially. Third-party risk assessment processes grounded on inefficient management practices, such as dependence on spreadsheets, will struggle to keep up with increasing TPRM demands.
- Impact: Without awareness of the actual state of an organization’s third-party attack surface at any point in time, risk assessment processes run the risk of working off outdated attack surface data. During such periods, an organization is unknowingly exposed to a heightened risk of third-party breaches.
- Solution: Implement a TPRM solution applying AI technology to time-consuming TPRM workflows, such as AI auto filing technology for expediting questionnaire completions.
Watch this overview of AI Toolkit by UpGuard for a snapshot of how AI technology could be leveraged to produce a scalable TPRM program.
Learn more about AI Toolkit by UpGuard >
2. Poor visibility
- Challenge: Stakeholders are often unaware of the complete impact of an organization’s TPRM initiatives and their effectiveness against the current third-party threat landscape
- Impact: Poor visibility among stakeholders and board members could result in insufficient resource allocation for future TPRM program initiatives. Limited stakeholder awareness of the company’s overall exposure to third-party risks could also leave poor leadership-level third-party cybersecurity practices, such as shadow third-party solution onboarding, unaddressed.
- Solution: Regularly communicate TPRM practices, including emerging risks and associated mitigation strategies, to the board through reporting tailored for TPRM progress communication. Ensure that TPRM activities are integrated into broader risk management and ESG frameworks to keep stakeholders informed and engaged at every level of risk management.
Watch this overview of UpGuard’s reporting functionality to understand how a TPRM platform can instantly consolidate TPRM-specific data in stakeholder reports.
3. Poor risk assessment collaboration workflows
- Challenge: Collaboration on risk assessments with all involved parties often occurs via email, where critical information can easily get lost or overlooked.
- Impact: Inefficient vendor collaboration workflows across risk assessment and questionnaire tasks lead to delayed risk assessment completions, leaving an organization unknowingly exposed to third-party data breaches through unmanaged risks.
- Solution: Use a TPRM platform with integrated collaboration tools within its risk assessment and questionnaire workflows. Enhanced vendor collaboration will also address a significant bottleneck limiting the scalability of a Third-Party Risk Management program.
Watch this video to learn of UpGuard’s elegant solution to the complex problem of vendor collaboration across multiple security questionnaires.
