Every organization works with outside companies, whether for products, services, or support. These external partners are called third parties, and they play a significant role in how businesses operate today.
Working with third parties often introduces risks that can impact security, business operations, compliance, and reputation. Understanding these risks is a core part of responsible business management.
Third party risk assessment is a process designed to identify, analyze, and manage the risks that come from working with vendors, suppliers, or other partners.
Third party risk assessment is how companies check if their vendors might cause problems. Think of it like doing a background check before hiring someone, but for businesses.
When you work with outside companies, you're trusting them with parts of your business. A software company might handle your customer data. A shipping company might deliver your products. If these partners have security problems or go out of business, it affects you too.
Third party risk assessment looks at different types of problems that could happen:
This process is also called vendor risk assessment or supplier risk assessment. The goal is simple: figure out which partners might cause trouble and decide what to do about it.
Companies today rely on more outside partners than ever before. The average large company works with thousands of vendors. Each new partnership creates another way for problems to enter your business.
Data breaches involving third parties have become common. When a vendor gets hacked, your company's information might be stolen too. Service outages at key suppliers can shut down entire production lines.
Regulatory pressure is increasing: Laws like GDPR and CCPA require companies to monitor how their vendors handle sensitive information. Getting this wrong can result in hefty fines.
The rise of remote work and cloud services means companies share more data with more partners than before. This makes third party risk assessment even more important for protecting your business.
Most companies follow a similar process when assessing vendor risks. Here's how it typically works:
First, decide which vendors to assess and what areas to check. Not every vendor needs the same level of scrutiny.
You might focus on vendors that:
Next, gather information from your vendors. Most companies use questionnaires to collect basic details about security practices, financial health, and compliance status.
Common information includes:
Read more about supplier information management software.
Once you have the information, analyze it to spot potential problems. Some companies use simple ratings like "high," "medium," or "low" risk. Others assign specific numbers to different types of risks.
|
Assessment Type |
How It Works |
Best For |
|---|---|---|
|
Qualitative |
Uses descriptive ratings |
Quick assessments |
|
Quantitative |
Assigns numerical scores |
Detailed analysis |
Keep records of what you found and why you made certain decisions. This documentation helps with audits and future assessments.
Share your findings with the people who make decisions about vendors. Include the main risks you found and suggestions for fixing them.
A good questionnaire gets you the information you need without overwhelming your vendors. Here's how to build one that actually works:
Focus your questions on the areas that matter most for your business:
Make your questions specific and easy to answer. Mix different types:
Many industries have standard questionnaires you can adapt. The Standardized Information Gathering (SIG) questionnaire is popular for security assessments. Using recognized standards makes it easier to compare vendors and ensures you don't miss important topics.
Update your questionnaire regularly as new risks emerge and regulations change. Set a schedule to review it at least once a year.
You can't assess every vendor with the same intensity. Smart companies focus their efforts where it matters most.
Group your vendors based on how much they affect your business and how much you spend with them:
|
Vendor Type |
Characteristics |
Assessment Level |
|---|---|---|
|
Critical |
Essential services, high access |
Comprehensive |
|
Important |
Significant spend or access |
Standard |
|
Basic |
Limited access, low spend |
Simplified |
Different vendor types get assessed at different intervals:
Major changes like security incidents or new regulations can trigger additional reviews regardless of schedule.
Modern 3rd party risk assessment relies heavily on technology to handle the growing complexity and volume of vendor relationships.
Automation handles routine tasks: Software can send questionnaires, track responses, and remind vendors about deadlines. This frees up your team to focus on analyzing results instead of managing paperwork.
AI spots patterns humans might miss: Artificial intelligence can analyze large amounts of vendor data to identify unusual patterns or emerging risks. For example, it might notice that a vendor's security posture has declined or flag financial instability before it becomes obvious.
Analytics provide insights: Data analysis tools help you understand trends across your entire vendor portfolio. You might discover that vendors in certain regions have higher risk scores or that specific types of services consistently cause problems.
Third party risk assessment tools combine these capabilities into platforms that centralize vendor information and automate much of the assessment process. Check out the top vendor risk management softwares here.
Third party risk assessment helps companies meet legal requirements and environmental, social, and governance (ESG) standards.
Different laws require different things from your vendors. GDPR focuses on data protection for European customers. HIPAA governs healthcare information in the United States. Your assessment questions should check if vendors meet the specific requirements that apply to your business.
Many companies now assess vendors on ESG factors:
These factors are becoming more important as customers and investors pay closer attention to corporate responsibility.
Third party risk assessment doesn't end when you complete the initial evaluation. Vendor risks change over time, so monitoring is ongoing.
Schedule regular check-ins: Most companies reassess vendors annually, but high-risk vendors might get reviewed quarterly. Major events like data breaches, mergers, or regulatory changes can trigger immediate reassessments.
Use continuous monitoring tools: These tools, like Kodiak Hub, watch for changes in your vendors' risk profiles and alert you when something significant happens. They might detect a security incident, financial trouble, or compliance violation at one of your suppliers.
Collaborate across departments: Procurement, security, compliance, and business units all have different perspectives on vendor risks. Regular communication between these groups helps catch problems early and ensures nothing falls through the cracks.
When vendors don't meet your requirements, you have several options:
The key is having a clear process that everyone understands before problems arise.
Build cross-functional ownership: Include people from procurement, security, compliance, and business units in your risk assessment process. Each group brings different expertise and perspectives.
Use external monitoring services: Third-party services can supplement your internal capabilities by providing alerts about vendor incidents, financial changes, or compliance issues. These services have limitations but can help you stay informed about developments you might otherwise miss.
Set clear expectations: Make sure vendors understand your requirements and how they'll be evaluated. Share assessment results and feedback so they know where they stand and what improvements are needed. Read more about supplier and vendor evaluation.
Several trends are shaping how companies approach vendor risk management:
Real-time monitoring is replacing periodic assessments. Instead of checking on vendors once or twice a year, companies are using tools that provide continuous updates about vendor risk status.
Predictive analytics uses historical data to forecast which vendors might experience problems. This helps companies prepare for potential disruptions before they happen.
Regulatory requirements continue to evolve. New laws about cybersecurity, privacy, and environmental responsibility are being introduced regularly. Companies are using technology to track these changes and adapt their assessment processes accordingly.
Effective third party risk assessment does more than just prevent problems. It helps companies build stronger vendor relationships, maintain operational resilience, and respond better to market changes.
When you have clear visibility into vendor risks, you can make smarter decisions about which partners to work with and how to structure those relationships. This leads to more reliable operations and better business outcomes.
Platforms like Kodiak Hub's SRM solution help organizations centralize supplier information, automate assessments, and use analytics for better decision-making. Book a demo to see how technology can enhance your third party risk management capabilities.
Assessment frequency depends on the vendor's importance to your business and the level of risk they present. Critical vendors typically get assessed every 3-6 months, while lower-risk vendors might be reviewed annually or every few years.
Effective cyber risk assessments examine data security controls, access management procedures, incident response capabilities, and compliance with relevant security frameworks like ISO 27001 or SOC 2.
Use risk-based approaches that apply more detailed assessments to high-risk vendors while using streamlined processes for lower-risk partners. Standardized questionnaires and automated tools help maintain consistency while reducing manual effort.
Keep completed questionnaires, supporting evidence like certifications or audit reports, assigned risk ratings, remediation plans, and records of ongoing monitoring activities. This documentation supports audit requirements and future assessments.
Manufacturing companies often focus more on supply chain disruption and quality control risks, while technology companies emphasize cybersecurity and data protection. However, both industries must address compliance requirements specific to their regulatory environment.