What is a third-party risk assessment?

Third-party services are inevitable for modern businesses. From the cloud provider that hosts the data to the marketing agency that manages the customer list, organizations rely on a complex network of suppliers, service providers, and partners. Though the use of these third-party platforms makes processes easier, they also introduce their share of significant risk.

These issues can be identified using the process of a third-party risk assessment. It helps organizations to identify, analyze, and mitigate any risks, ensuring operational resilience, regulatory compliance, and the security of their most critical assets.

This guide breaks down what third-party risks are, what a third-party risk assessment is, why it's a non-negotiable business function, and how to implement it effectively.

What is a third-party risk?

It is the potential threat an organization faces from the external entities they have collaborated with. It encompasses any risk introduced by vendors, suppliers, contractors, partners, or service providers that have access to your systems, data, or workplace. This isn't just about your direct suppliers; it extends to their suppliers as well, creating a complex digital supply chain where a vulnerability in one link can impact the entire chain.

How can third-party risks impact an organization?

Unmanaged third-party risks can result in tangible consequences. Through external vendors, a spectrum of risks can impact your organization’s health and stability:

• When a key supplier service is impacted by an outage, like a logistics partner whose systems go down, it can halt your production line or prevent you from delivering services to your own customers.
• A vendor's system with weak security controls can provide attackers with an entry point into your network, leading to devastating data breaches that compromise your customer information and intellectual property.
• If a vendor mishandles data in a way that violates regulations like the GDPR or the CCPA, your organization can be held liable for massive fines, even if the failure wasn't directly your own.
• A public issue involving one of your partners—whether a security breach, an ethical lapse, or poor service—can tarnish your brand by association, eroding customer trust that took years to build.

Why do third-party risks demand your attention?

The strength of your security and compliance posture can be impacted by your weakest vendor. Continuation of business operations and resilience are dependent on proactive risk management. From regulatory penalties and costly service outages to the long-term erosion of your brand and market position, there are many negative impacts from these risks that are often unnoticed. With a proper third-party risk management (TPRM) program, risks can be transformed from a liability into strategic advantage, demonstrating to customers and regulators that you are a trustworthy and resilient partner.

What are the types of third-party risks?

Understanding the different categories of risk is the first step toward managing them. Here are the primary types:

• Operational risk: Risks due to the vendor's inadequate or failed internal processes, people, and systems.
• Cybersecurity risk: Risks arising due to unauthorized access, data theft, or system disruption originating from a third-party’s security vulnerabilities.
• Compliance risk: The risk that a vendor's actions might cause your organization to violate laws, regulations, or internal policies.
• Financial risk: The risk that a vendor's financial instability could lead to service degradation, contract failure, or sudden termination of services.
• Reputational risk: The risk that negative actions or publicity surrounding a vendor will damage your organization’s public image and customer trust.
• Geopolitical risk: The risk associated with a vendor's location, including political instability, trade sanctions, or regional conflicts that could disrupt their operations.

Here are the categories of risks and the way they are assessed:

• Cybersecurity risks are assessed via security questionnaires, penetration test results, security ratings tools, and evidence of certifications (for example, SOC 2, ISO 27001).
• Operational risks are assessed by reviewing business continuity and disaster recovery plans, SLAs, and operational procedures.
• Compliance risks are assessed through audits, certifications, and verification of adherence to specific legal and regulatory frameworks.
• Financial risks are assessed by analyzing financial statements, credit reports, and public financial records to ensure the vendor is a viable, long-term partner.
• Reputational risks are assessed by reviewing news reports, legal proceedings, and industry watchlists for negative public information.
• Contractual and concentration risks are assessed by reviewing contracts for adequate risk mitigation clauses and evaluating your organization’s over-reliance on a single vendor for a critical function.

How can you reduce third-party risks?

Minimizing risk is about managing it intelligently, and this requires a structured and planned approach.

1. Manage an updated and comprehensive vendor inventoryThe foundational step is to create and maintain a centralized inventory of all third-party relationships. This list should detail the vendor, the service they provide, the data they access, and the internal business owner. This visibility is crucial for effective oversight and eliminates the shadow IT problem, where departments engage vendors without proper review.
2. Implement a standardized approach to evaluate vendorsClassify vendors into risk tiers (for example, high, medium, and low) based on their criticality and access to sensitive data. High-risk vendors, like a payment processor, require a far more rigorous assessment than low-risk vendors, like an office supply company. This approach allows you to focus your resources where they are needed most.
3. Create a TPRM programA single assessment is never enough. Third-party risk management is a continuous life cycle. A full-fledged TPRM program integrates policy, technology, and cross-departmental collaboration (involving IT, legal, procurement, and compliance) to manage risk systematically from vendor onboarding to off boarding.

What is achieved through a third-party risk assessment?

A third-party risk assessment is the core part of any TPRM program. It systematically evaluates the potential risks a vendor might cause before they are onboarded and throughout the process. This assessment scrutinizes a vendor's controls, policies, and overall health to determine if they meet your organization's security and compliance requirements.

What is the importance of a third-party risk assessment?

With a robust assessment process, critical business benefits can be achieved:

• Staying away from operational disruptions: By evaluating a vendor’s operational resilience and business continuity plans, you can avoid partnerships that might pose a threat to your service delivery.
• Mitigates security breaches: Analyzing a vendor’s cybersecurity posture is crucial to fill security gaps before attackers exploit those.
• Adherence to compliance: Assessments verify that vendors comply with relevant industry and government regulations (for example, HIPAA, the GDPR, the PCI DSS), protecting you from regulatory penalties.
• Ensures brand reputation: Due diligence ensures you partner with reputable, stable, and secure organizations, safeguarding your brand from negative association.
• Supports business continuity: A strong assessment process is a cornerstone of a resilient business model, ensuring your critical functions remain secure and operational.

How does a third-party risk assessment fit within the TPRM life cycle?

Here are six key steps for maintaining the TPRM life cycle:

1. Discovering and cataloging all third parties.
2. Conducting the initial in-depth assessment before finalizing a contract.
3. Working with the vendor to address and close any identified gaps or vulnerabilities.
4. Continuously tracking the vendor’s risk posture using automated tools and periodic reassessments.
5. Having a plan to respond if a third-party incident affects your organization.
6. Regularly refining the TPRM program based on new threats and lessons learned.

What frameworks are commonly used for third-party risk assessment?

Organizations use frameworks to create risk assessment processes that can help meet regulatory demands, security needs, and operational priorities. Organizations often combine these frameworks to build a comprehensive third-party risk program. Some of the common third-party risk assessment frameworks include:

• Shared assessments are part of a TPRM framework that specializes in third-party risk management. It uses standardized processes and tools, such as the Standardized Information Gathering (SIG) questionnaire, to focus on vendor risk life cycle and governance.
• NIST 800-161, which is a supply chain risk management framework focused on cybersecurity, is widely used in highly regulated industries and government.
• ISO 27036 provides the guidelines for information security risks related to supplier relationships and contract management.
• NIST Cybersecurity Framework (CSF) that provides broad cybersecurity risk management best practices, including third-party risks, often integrated into TPRM programs.

Differences between third-party risk assessments and security questionnaires

These processes are often confused, but they are not interchangeable.

• Security questionnairesThese are self assessments completed by the vendor, typically in the form of a spreadsheet or a portal (for example, SIG, CAIQ). They provide a vendor's stated security controls and compliance efforts. Questionnaires represent a single point in time and rely on the vendor’s honesty.
• Third-party risk assessmentThis is a broader, multi-dimensional evaluation. It includes the questionnaire but supplements it with independent data sources like external security ratings, financial reports, independent audits, and threat intelligence. An assessment provides a comprehensive, verified, and ongoing view of risk, not just a self-reported snapshot.

Steps in third-party risk assessment

A structured assessment process ensures thoroughness and consistency.

1. Begin with your vendor inventory and classify it based on the level of risk it poses to your organization.
2. Collect key documents from high-risk vendors, including security policies, certifications (SOC 2, ISO 27001), business continuity plans, and insurance certificates.
3. Use a standardized framework and questionnaires to systematically review the vendor’s cybersecurity controls, compliance posture, operational reliability, and financial health.
4. Validate the vendor's answers using external security ratings tools, independent audits, and technical assessments where necessary.
5. Review all contracts to ensure they include strong risk mitigation clauses, clear SLAs, data protection obligations, and the right to audit.
6. If you find gaps, work with the vendor to create a formal remediation plan with clear timelines.
7. Schedule periodic reassessments and use continuous monitoring tools to track their security posture in real time.

What are the challenges with third-party risk assessments?

Organizations often face common hurdles:

• Manual assessments can be time consuming and susceptible to human errors.
• A lack of a central vendor inventory makes it very difficult to know the full scope of third-party risk.
• Different departments using different assessment methods lead to inconsistent and unreliable risk data.
• Conducting a one-time assessment at onboarding and then failing to monitor the vendor leaves the organization blind to new risks.
• Vendor-side delays can impact the process.

Third-party risk assessments: Best practices

Several optimal methods should be evaluated and implemented as applicable for your organization. These include:

• Adopt industry-standard frameworks like NIST CSF or ISO 27001 to ensure your assessments are structured and thorough.
• Use TPRM platforms to automate questionnaire distribution, security ratings monitoring, and risk reporting.
• Focus your most intensive assessment efforts on high-risk vendors.
• Include the findings from third-party assessments into your internal security strategy and incident response plans.
• Communicate your security-related expectations clearly to your vendors and collaborate on risk remediation.

How often should you assess third-party risks?

Third-party risk assessment is a continuous process. The frequency of these assessments should be done should align with the vendor’s risk profile, business criticality, and regulatory requirements. Assessments for vendors that handle sensitive data or core services should be conducted annually or more frequently. Assessments for medium-risk vendors can be performed every 18 to 24 months, while low-risk vendors might only require assessments every two to three years or before contract renewal.

By moving beyond manual, compliance-driven steps to a strategic, continuous, and automated approach, you can build resilience, meet regulatory demands, and build customer trust. Use risk assessment tools like Site24x7's Digital Risk Analyzer to stay updated on your security posture, to enhance it, and to ensure operational continuity.