What is third party risk assessment?

What is third party risk assessment?

Third party risk assessment is a process that organizations use to identify and evaluate the potential risks associated with working with external parties, such as vendors, suppliers, contractors, and partners. This process involves evaluating the third party's financial stability, cybersecurity practices, business continuity plans, and other factors that could affect the organization's operations, reputation, and compliance.

What are the types of third party risks?

There are several types of risks that organizations may face when working with third parties. Some common types of third party risks include:

1. Financial risk: This includes the risk that the third party will not be able to meet its financial obligations, such as paying for goods or services.
2. Cybersecurity risk: This includes the risk that the third party's poor cybersecurity practices will result in a data breach or other cyber attack that could affect the organization.
3. Reputational risk: This includes the risk that the third party's actions or reputation will damage the organization's reputation.
4. Compliance risk: This includes the risk that the third party will not comply with relevant laws, regulations, or industry standards, which could result in fines or other penalties for the organization.
5. Operational risk: This includes the risk that the third party's actions will disrupt the organization's operations or cause delays or other issues.
6. Legal risk: This includes the risk that the third party will take legal action against the organization, or that the organization will be found liable for the third party's actions.
7. Political risk: This includes the risk that the third party's actions or the political climate in which they operate will affect the organization's operations or reputation.

By identifying and evaluating these types of risks, organizations can develop strategies for managing and mitigating them.

Why are third party risk assessments important?

The goal of third party risk assessment is to ensure that the organization is able to manage and mitigate any potential risks before entering into a relationship with a third party. It’s important to carry out these assessments for the following reasons.

1. To protect the organization's reputation and assets: Third parties that do not adhere to the organization's standards or that engage in risky or unethical behavior could damage the organization's reputation and financial health. By conducting a risk assessment, the organization can identify and mitigate these risks before entering into a relationship with the third party.
2. To comply with regulations and industry standards: Many industries have specific requirements for working with third parties, such as financial institutions and healthcare organizations. By conducting a risk assessment, the organization can ensure that it is in compliance with these requirements.
3. To ensure business continuity: Third parties that are not able to meet their obligations or that experience disruptions in their operations could negatively impact the organization's ability to continue operations. By conducting a risk assessment, the organization can identify and mitigate these risks.
4. To improve efficiency and effectiveness: By carefully evaluating the risks associated with working with third parties, the organization can select partners that are better able to meet its needs and goals, improving efficiency and effectiveness.

Overall, conducting a third party risk assessment is an important part of managing and mitigating risks associated with working with external parties. By identifying and evaluating these risks, organizations can protect their reputation, assets, and operations, and ensure compliance with industry standards.

How to carry out a third party risk assessment?

The important steps in carrying out a third party assessment include the following. 

1. Identify the third parties that the organization works with: This includes vendors, suppliers, contractors, and partners.

2. Determine the level of risk associated with each third party: Factors that may influence the level of risk include the type of services or products the third party provides, the level of access they have to the organization's systems and data, and the impact that any potential issues with the third party could have on the organization's operations.

3. Develop a risk assessment questionnaire: This should include questions about the third party's financial stability, cybersecurity practices, business continuity plans, and other relevant factors.

4. Collect and review the information: The questionnaire should be sent to the third party and their responses should be reviewed to determine the level of risk associated with working with them.

5. Evaluate the risk: Once the information has been collected and reviewed, the organization should evaluate the risk associated with each third party. This may involve assigning a risk score to each third party based on the information collected.

6. Develop a risk management plan: Based on the level of risk identified, the organization should develop a plan for managing and mitigating any potential risks. This may include implementing policies and procedures for working with third parties, conducting due diligence on potential partners, and regularly monitoring the third party's performance.

7. Review and update the risk assessment regularly: It is important to regularly review and update the risk assessment to ensure that it reflects any changes in the third party's operations or the organization's risk profile.

Final thoughts

Organizations may conduct third party risk assessments as part of their risk management process, or as a standalone activity. It is important for organizations to carefully evaluate the risks associated with working with third parties, as this can help to ensure that the organization is able to protect itself and its stakeholders from potential harm.

Third party risk assessments need to be conducted regularly and they might seem like a complex, time-consuming activity. But since they are important for security as well as compliance, they are integral to your third party risk management strategy. At 6clicks we help you automate third party risk assessments so that the effort to carry out these assessments goes down significantly without compromising on the benefits. Check out more on our solution page - Vendor Risk Management.

6clicks helps you automate assessments and compliance associated with multiple standards all on a single platform. To know more about the 6clicks platform, book a demo with us and let our experts show you how we are using ground-breaking technology to make a difference in the risk and compliance industry.