Building a framework for a third party vendor risk management program.
Consistent risk assessment, scoring and classification are foundation activities.
Once you have your initial data about the third party, it is time to assess the risk and assign a risk classification to each vendor or third party. You will need to be methodological in your approach as regulators are expecting to see a robust, well designed structure. A risk assessment can be conducted in many ways including manual classification with documentation on why you have taken a particular risk view, to questionnaires to third parties with scoring, to more robust scoring using a risk matrix with a weighting of factors.
Risk assessment is different for every business but there are some fundamentals that apply to all organizations. Typically, you will be monitoring for larger red flag issues. While this may differ by industry, your common sense assessment will generally include the following:
Type of service being provided
Access to internal data involved in providing the service
Nature of data set involved (client confidential, private data, financial transactions, identifiers, passwords, etc.)
Data and information security expectations (related to nature of data)
Financial standing of the vendor
The size of the contract
History of the relationship
Identifying the beneficial owners of the third party business
Location (country or region) where services are provided from or where the firm is headquartered. Some jurisdictions have looser regulations, a noted tendency to corruption in the market, opaque business practices or a lack of enforcement of good corporate governance
The strategic importance of the third party to your business or service proposition
Risk scoring is the process of giving a value to the level of risk a third party represents. The total risk score is built on multiple values. Depending on your model, the structure and content of the total score may be a complex process but it is essential if you are to deliver an accurate assessment that will protect the organization. The MCO solution delivers the risk score through our Risk Transparency Matrix (patent pending) which allows an organization to evaluate a vendor on anywhere between 1 to 10,000 data points!
This initial risk classification will typically deliver a small number of levels of assessment of the third party such as low, medium and high. Others segment into low, medium, high and critical classifications. The solution should be able to grow as often you will want more sensitive classifications as the of the third party risk management program matures. The initial classification during the setup process would typically determine the degree of ongoing due diligence and monitoring within the program. Higher risk classifications may also initiate a deep dive assessment of the vendor.
Once you have assessed, scored and classified your third parties, you will then want to implement your ongoing due diligence and monitoring processes.
For more information on the other elements of a third party vendor risk management framework, click on the links below.
Identifying the risks created by your firm’s use of third parties
Defining your policies and procedures for monitoring third parties