What is Third-Party Risk Assessment and How Can You Do It?

Today, insurance companies and investment enterprises tend to prioritize third-party risk management in the wake of several global trends. Namely, accelerated outsourcing in a milieu of increased prices, dependence on digital technology, and the awareness that many organizational breaches originate from trusted vendors who have themselves been compromised.

Hence, the reason third-party risk assessments and risk management programs have become imperative.

What is Third-Party Risk Assessment?

To understand the definition and necessity of third-party risk assessment, you must first note the causes of third-party risks. Various organizations, depending on their capacity, outsource certain operations to third parties. Those third parties may include suppliers, vendors, sub-contractors, contract manufacturers, resellers, distributors, partners, captives, or affiliates.

Why do some organizations outsource certain operations?

To decrease expenditures; accelerate production, distribution, and sales; or to increase profits, all of which lead organizations to have competitive advantages in their respective industries. Most commonly, organizations outsource to allow them to focus on their core areas of expertise and to leverage the expertise of these providers to incorporate into their overall offerings.

So, once you have these third parties incorporated in support of your service offerings, how can you come up with a risk management program for your organization?

Enter third-party risk assessment, which will aid your organization in gauging how (and on what terms) risky each of these third-parties is. With a well-designed risk assessment program, your business will be able to reduce third-party risks to your operations and growth.

Why Should You Do a Third-Party Risk Assessment?

Creating and maintaining third-party relationships are associated with multiple risks.

What kinds of risks?

Reputation, strategy, management, information security, and economic burdens. Other risks include data compromise, illegal use of information by third parties, the detrimental and damaging effects of non-compliance, and irregularities in supply chain management.

Particularly, the globalization of industrial operations has led third parties to emerge throughout the world. In turn, the graph of operation- and distribution-related risks has seen an upward trend.

Any natural, artificial, or deliberate disruption in any part of the modern world adversely affects the production and services offered by enterprises.

If a multinational enterprise lacks a strong risk management program to tackle such third-party risks, it may suffer economic as well as reputational losses. This creates the need for efficient risk assessment and risk management and entails the search for effective associated assessment services.

How to Perform a Third-Party Risk Assessment

Now that you have a better understanding of risk management and what a third-party risk assessment is, and why you should do one, let’s take a look at the step-by-step process of how you can perform one.

1. Establish Vendor Risk Criteria

Create a list of vendor risk criteria. It should include the most destructive third-party risks that your organization could possibly face.

For instance, enterprises managing or outsourcing confidential data should have various information security risks as part of their vendor risk criteria.

This, in turn, informs your organization’s risk assessment scope. Additionally, it impacts your actions and strategies and the techniques you will use for a third-party or vendor risk assessment. Based on such risk criteria, you can also narrow down your third-party or vendor choices.

This brings you to the next step for your risk management program: classifying vendors. Basically, you create an actionable list of high-risk third-parties with whom you will perform risk assessments.

2. Conduct Third-Party Onboarding and Screening

To predict and protect against any possible risk, you must create a detailed picture of third-party or vendor relations. The first step is to mandate standard processes of risk management throughout your company.

Experts suggest that you construct a third-party risk management program with a framework that will standardize all third-party onboarding and screening. If possible, you can also use a thorough approach of real-time risk checking and containment measures.

Well-designed frameworks for your risk management program offer a win-win situation:

You can keep abreast of any probable third-party risks (and risky vendors) prior to risk assessments. Furthermore, a framework for your risk management program will help you optimize time and undertake insightful risk assessments.

3. Make Risk Assessments Easier to Manage

As the quality of your assessment will directly impact your risk management program, you must ensure the quality of your assessments, simple check-box assessments do not suffice. For this purpose, you must comprehensively analyze if any vendor is risky, why they are, and how you (or they) can address those risks.

Thereafter, an agreement with a risky third-party will warrant meticulous and consistent monitoring.

Next, you will require specialized experts who will aid in the analysis of the data you have gathered. For example, professionals from policy, tech, cybersecurity, or account backgrounds can conduct holistic analyses and issue detailed reports. Today, powerful organizations deploy entire teams for such risk analysis programs.

4. Assess Performance Results, Not Only Risks

Results are symptoms of whether and to what degree your third-party relations are risky. For instance, information security ratings will enable you to consistently supervise your vendors’ compliance and unpredictable risks.

In case you have contracts with multiple third parties, keeping tabs on their information security and compliance scores will:

  • Enhance and ease third-party risk assessment,
  • Note any faults with security posture; and
  • Demand solutions to risky problems of the involved third parties.

5. Leverage the Power of Technology

Capital and resource availability are essential prerequisites for undertaking vendor risk assessments. To save on expenditures, you should consider purchasing and deploying software that eases the entire process of third-party risk assessment and management.

As a technology that provides assessment services, it will also standardize a cross-departmental framework for risk assessment in your organization.

Technology utilization is crucial to conducting holistic and thorough risk assessments and management.


For a number of reasons, including:

  • It gives you control over a platform through which you can regularly supervise any number of third parties and the related risks.
  • It increases your ability to predict and analyze internal and external third-party risks while influencing your assessment scope.
  • It helps you collect and macro-analyze solid data on third-party risks over multiple assessments, which will enhance your organization’s future decisions about any vendor.
  • It enables you to gauge the efficacy of risk assessment metrics, which marks the quality and reliability of your data.

Ready to Get Started with Your Third-Party Risk Assessment?

Regardless of the size of your company, you will likely maintain business relationships with many third parties who will help you streamline your operations.

However, exchanging operational data and confidential information with third parties can make that data and information vulnerable to misuse and exploitation, adding risk to the equation. Especially if the parties in question are lacking in optimum information security measures or compliance.

This makes it necessary for you to work on a risk management program.

As a stakeholder, it is your responsibility to conduct thorough third-party risk assessments to protect your company from risky businesses and supervise their operational standards and results at multiple levels.


Cypress Data Defense was founded in 2013 and is headquartered in Denver, Colorado with offices across the United States. Our goal is to help organizations secure their IT development and operations using a pragmatic, risk-based approach. The diverse background of our founders allows us to apply security controls to governance, networks, and applications across the enterprise.

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