A Step by Step Guide on How to Perform Third Party Risk Assessment

Let’s say you’ve built an AI-powered healthcare platform that’s set to become the next big thing in patient care. To handle all that sensitive data, you partner with “Company A,” a cloud provider. Everything seems secure until one day, you suffer a massive breach. Suddenly, millions of records, including yours, are exposed.

Now, you're dealing with regulatory fines, reputational damage, and a loss of trust from your partners. The worst part? The breach wasn’t even from your system, it was your vendor’s failure.

This is exactly why Third-Party Risk Assessment is crucial. Your security is only as strong as the weakest link in your supply chain.

Now, let’s explore third-party risk assessment, how it works, its benefits, and how you can implement an effective third-party risk management program.

What Is Third-Party Risk Assessment?

A third-party risk assessment helps you identify and evaluate potential risks before they become problematic. It examines every third-party relationship in your supply chain and analyzes the risks they pose to your business, including security threats, privacy concerns, compliance gaps, and reputational risks.

When you bring in vendors, suppliers, or service providers, you also bring in their risks, which can impact everything from security to business continuity. That’s where third-party risk assessments become the saving grace.

Risk assessments help you minimize external threats while ensuring that the vendors you rely on will not put your business at risk. You can do this in-house or bring in cybersecurity experts for an independent evaluation, but either way, it’s a critical part of third-party risk management.

The importance of third-party risk assessment

A third-party risk assessment is important because it helps organizations identify, evaluate, and mitigate risks associated with their external partners. 

Prevents supply chain attacks

Many major cyberattacks originate through third-party vulnerabilities. Hackers often target vendors as an entry point to infiltrate larger organizations. A thorough risk assessment identifies weaknesses before they become an issue.

Protects against data breaches

If a third party handles sensitive data like customer information, financial records, or intellectual property, a breach on their end could put your organization at risk too. Evaluating their security practices ensures your data remains protected.

Ensures regulatory compliance

Industries like healthcare, finance, and manufacturing operate under strict compliance frameworks (HIPAA, GDPR, ISO 27001, NIST). If your vendor doesn’t follow these regulations, your organization could face penalties, even if you weren’t directly responsible.

Reduces operational disruptions

A vendor’s financial instability, security breach, or supply chain failure can disrupt your entire business operation. Risk assessments evaluate third-party resilience so you can plan for contingencies.

Examples Of Third-Party Risks

These scenarios highlight just a fraction of businesses' risks when relying on third-party vendors and suppliers. A weak supply chain or service network link can trigger financial losses, reputational damage, and operational disruptions.

• Regulatory compliance risks: If a manufacturing partner engages in unethical labor practices or fails to meet environmental regulations, your organization could face legal action, financial penalties, or brand reputation damage, even if you weren’t directly responsible.
• Cybersecurity incidents: A data breach at a cloud service provider could expose sensitive customer data, leading to compliance violations and loss of consumer trust.
• Supply chain disruptions: A key supplier experiencing factory shutdowns due to extreme weather or political instability could delay product availability, impacting revenue and customer satisfaction.
• Operational failures: Healthcare, finance, or logistics organizations depend on a complex network of vendors. If a transportation service halts due to unforeseen circumstances, deliveries could be delayed, affecting business continuity.
• Financial stability risks: A vendor struggling with cash flow issues may be unable to meet contractual obligations, leading to late payments, service interruptions, or complete business failure.
• Product integrity issues: A component supplier providing substandard materials could lead to product malfunctions, safety recalls, or failed product launches, damaging your brand reputation.

Key Components Of Third-Party Risk Management Program

A good TPRM program ensures that your company can proactively identify, monitor, and mitigate risks associated with vendors, suppliers, and service providers. However, it is supported by important components that safeguard business operations, security, and compliance. Let’s take a look at those components:

1. Framework and policies

You can’t manage third-party risks without a solid foundation. That means having a clear framework defining who is responsible for vendor oversight, assessing risks, and what happens when something goes wrong. 

Things slip through the cracks without structure, vendors get onboarded without proper checks, risks go unnoticed, and security issues become reactive instead of proactive. 

2. Due Diligence and vendor selection

Not all vendors are created equal; some pose more risk than others. Before bringing a third party on board, ask the right questions: Can they keep your data safe? Do they follow industry regulations? Are they financially stable? 

This due diligence process helps you spot red flags before they become real problems. It’s about choosing trustworthy vendors, not just those with the lowest price tag.

3. Continuous monitoring

Just because a vendor passed your initial checks does not mean they will always be in good standing. Risks evolve, regulations change, and vendors can get lax over time. That’s why ongoing monitoring is critical. 

Regular audits, performance tracking, and real-time security assessments help you catch problems early instead of scrambling after a breach or compliance failure.

4. Contract management

A handshake agreement is never enough when it comes to third-party risk. Everything needs to be in writing. Strong contracts clearly outline expectations, security requirements, and compliance obligations. 

They should also include data protection clauses, breach notification policies, and contingency plans if something goes wrong. A well-structured contract protects both sides and ensures no confusion about who’s responsible for what.

5. Service level agreements (SLAs)

An SLA is your guarantee that a vendor will meet their commitments. It spells out performance benchmarks, security standards, and compliance requirements in measurable terms. If a vendor fails to meet their SLA, there should be consequences, financial penalties, or contract termination. SLAs keep vendors accountable and give you leverage if things don’t go as promised.

6. Incident response and contingency planning

Even with the best precautions, things can and do go wrong. A vendor could suffer a data breach, experience downtime, or fail a compliance audit. 

If you’re not prepared, these issues can spiral out of control. Having an incident response and contingency plan means knowing exactly what to do when something goes wrong, who to contact, how to escalate issues, and how to minimize damage. 

The faster you respond, the less impact it has on your business.

Third-Party Risk Assessment Process

Let’s walk through the key steps and see how a third-party risk assessment process is carried out:

Step 1: Pinpoint your high-risk vendors

As you know, not all vendors carry the same level of risk. Some may handle sensitive customer data, process financial transactions, or play a direct role in your daily operations. These are the critical third-party vendors that need the most oversight.

If you haven’t already categorized your vendors, there are two primary methods to identify critical ones:

• Relationship questionnaire: These help assess how essential a vendor’s role is in your business operations.
• Attack surface scanning: This examines a vendor’s digital security posture, identifying any existing vulnerabilities.

Once you’ve identified which vendors matter most, the next step is to define exactly what risks you need to assess.

Here’s an example of a relationship questionnaire:

Step 2: Define vendor risk criteria

Every industry has unique risks, but some risk factors are universal. Here’s what businesses should consider:

• Operational risk: How essential is the vendor to your day-to-day operations?
• Data/Privacy risk: Does the vendor collect, store, or process sensitive customer data?
• Transactional risk: Do they handle financial transactions for your business?
• Replacement risk: If the vendor went out of business, could you replace them quickly?
• Downstream risk: Does the vendor rely on subcontractors or other third parties (fourth and fifth parties) to deliver services?
• Compliance risk: What industry regulations must you follow when working with this vendor?
• Geographic risk: Is the vendor in a region with high cybersecurity or regulatory risks?

Step 3: Build custom risk assessment templates

Not every vendor presents the same risks, so a one-size-fits-all assessment won’t work. The most effective third-party risk programs tailor assessments based on the vendor type and the specific risks they introduce.

For example, a cloud storage provider handling sensitive medical data requires a more detailed security assessment than a vendor providing office supplies. 

Custom risk assessment templates ensure that vendors are evaluated based on the relevant factors, making the process more efficient and accurate.

Step 4: Risk evaluation and scoring

Once the assessments are complete, it’s time to score and evaluate vendor risks. This is where businesses use a combination of:

• Quantitative analysis: It assigns numerical scores based on objective factors like security certifications, compliance records, and financial health.
• Qualitative analysis:  Expert evaluations that provide context and deeper insights, especially when risks don’t fit neatly into predefined categories.

Step 5: Send out third-party risk assessments

With everything in place, the actual assessments are sent to vendors. These questionnaires and risk evaluations are customized based on industry regulations and internal risk priorities.

At this stage, organizations also set clear expectations for vendors, ensuring they understand:

• What’s being evaluated
• Why it matters
• What steps do they need to take if issues are found

Step 6: Automate for efficiency and scalability

Manually assessing hundreds or even thousands of vendors isn’t practical. That’s where automation makes a difference.

With the help of AI-driven risk assessment tools, businesses can:

• Continuously scan vendors for security vulnerabilities
• Automate questionnaires and streamline responses
• Detect risk trends in real time
• Scale assessments without overloading internal teams

Benefits Of Third-Party Risk Assessment

The key benefits of a third-party risk assessment include proactive risk identification, regulatory compliance, data protection, and cost reduction. Here are some of them:

• Detects potential risks in vendor relationships and enables proactive mitigation
• Ensures vendors align with industry regulations and compliance requirements
• Identifies security vulnerabilities in vendor systems to safeguard sensitive information
• Prevents financial losses by addressing risks early, reducing the chances of breaches or disruptions
• Protects the organization’s image by vetting vendors and minimizing third-party misconduct risks
• Strengthens communication and collaboration through clear security and compliance expectations
• Tracks vendor security posture over time to detect new or evolving risks
• Encourages proactive risk management by increasing awareness across the organization
• Helps prioritize high-risk vendors based on their impact on business operations

Best Practices of Third-Party Risk Management

Here are some of the industry-leading best practices that experts swear by to help you prepare for the third party risk assessment:

Know where your data goes and map it out

If you don’t know what data your vendors have or how they’re using it, you can’t secure it. One of the biggest oversights in third-party risk management is failing to track data flow beyond your organization.

Start with a data map, a clear, structured breakdown of:

• Which vendors have access to consumer data
• What type of data they handle (financial, healthcare, PII, etc.)
• How they store, process, and share it

This insight is non-negotiable when putting agreements in place. Without it, you’re asking vendors to comply with security standards without even knowing what you’re trying to protect.

Keep your vendor inventory up-to-date

You can’t manage third-party risks if you don’t know who your third parties are. The problem? Many organizations lose track of vendor relationships over time. Shadow IT, outdated contracts, and forgotten service providers create hidden risks.

Regularly updating your vendor inventory ensures:

• You’re aware of every third-party relationship in your ecosystem
• You can reassess vendor security postures over time
• You have the necessary contracts and agreements in place

Use industry standards

Creating a vendor assessment program from scratch is tough. Instead of guessing, borrow from industry leaders who have already built robust third-party security frameworks.

For example, Adobe and Microsoft both have detailed vendor assessment programs that outline:

• What security controls vendors must have
• How vendor compliance is continuously monitored
• What happens if a vendor fails to meet security standards

Vendor onboarding and offboarding

Most companies have a structured process for hiring employees—but when it comes to vendors, it’s often a free-for-all. That’s a huge mistake.

A strong vendor onboarding and offboarding process ensures:

• Vendors understand your security policies before they start working with you
• Compliance expectations are clearly outlined and agreed upon
• Offboarding includes revoking access to sensitive data and systems to prevent security risks

Make TPRM a company-wide effort

A third-party risk management strategy is only effective if everyone follows it. If only your security team considers vendor risk, you’re leaving yourself exposed.

Here’s why organization-wide adoption matters:

• Employees play a major role in preventing cyber threats. Phishing attacks often come through third-party services, so awareness is key.
• Legal, procurement, and IT must be on the same page. Risks get locked in if a vendor isn’t assessed properly before signing a contract.
• A company-wide security culture reduces blind spots. The more employees understand third-party risks, the better they can spot potential issues.

Challenges In Third-Party Risk Assessment

Managing third-party risks comes with many challenges. Let’s examine some of the biggest challenges and why they matter.

Keeping track of vendors is harder than it looks

One of the biggest struggles in third-party risk management is knowing exactly who you’re working with. Large organizations partner with hundreds or thousands of vendors, and keeping an accurate list of all third-party relationships isn’t easy.

Why does this matter? 

Because if you don’t have full visibility over your vendor network, you’re likely missing critical risks. 

A supplier or service provider you haven’t accounted for could be the weakest link in your security chain. Without a centralized, constantly updated inventory, blind spots creep in, and untracked vendors can expose your business to risks you never saw coming.

How to fix it:

Use a TPRM platform to maintain an up-to-date inventory of all vendors. That’s where Atlas Systems and its ComplyScore® TPRM platform come in.

Case in point: One of Atlas Systems’ clients, a large U.S. bank undergoing rapid acquisitions, struggled with an outdated TPRM system that lacked automation and regulatory support. They needed an integrated, rule-driven platform for workflow automation.

Atlas Systems delivered a fully customized ComplyScore® solution, providing:

• A tailored risk assessment framework aligned with financial regulations
• Automated reporting and compliance tracking for seamless audits
• Expert guidance on best practices, improving overall security posture

With ComplyScore®, you get a proactive, AI-driven TPRM solution that minimizes risk, strengthens compliance, and is designed to grow with your business.

Vendor risk levels aren’t always clear

If vendors aren't properly assessed, critical suppliers might slip through the cracks. A high-risk vendor that doesn’t meet compliance standards could be the reason your company faces a major security breach or operational failure. 

Without a structured risk classification system, organizations treat all vendors the same, a recipe for disaster.

How to fix it:

• Categorize vendors based on their risk level (high, medium, low). A cloud provider handling customer data needs more oversight than a vendor supplying office furniture.
• Use a framework (such as NIST, ISO 27001, or HITRUST) to evaluate vendor security practices.

Getting vendors to cooperate isn’t always easy

Risk management is a two-way street. Vendors must collaborate and share information to assess risks properly. But here’s the problem: not all third parties are willing to be transparent.

Some vendors do not share security reports, compliance certifications, or basic risk assessments. Why?

• They worry about revealing sensitive business information.
• They fear that too much transparency might hurt their competitive advantage.
• Legal and contractual obligations might prevent them from disclosing certain details.

Vendors who refuse to share crucial security and compliance details leave your business in the dark. Without proper insight into their security posture, you’re forced to make assumptions instead of data-driven decisions, and that’s a huge risk in itself.

How to fix it:

• Before signing agreements, vendors must submit security certifications, compliance reports, and risk assessments.
• Some vendors worry about exposing proprietary information. A legally binding non-disclosure agreement (NDA) can ease their concerns while ensuring transparency.

The bigger the supply chain, the bigger the headache

Managing a complex supply chain is a challenge, but adding third-party risk management can make things even messier. Businesses today don’t just rely on one or two vendors; they work with suppliers, subcontractors, and external service providers across different industries and regions.

The more vendors you have, the harder it becomes to:

• Track potential risks across the supply chain
• Pinpoint where vulnerabilities originate
• Ensure compliance with different regulatory requirements

And if your supply chain spans multiple countries, things get even more complicated, different regions have different security laws, compliance requirements, and regulatory expectations. Keeping track of all this while managing third-party risk? Not easy.

How to fix it:

• Legal, IT, security, compliance, and procurement should all be involved in risk assessments and vendor approvals.
• Employees must understand vendors' risks, including phishing threats, compliance failures, and data security concerns.

Why Complyscore® Is The Right Platform For Your Third-Party Risk Management

Managing vendor risk should never feel like a never-ending game of catch-up. But for many companies, that’s exactly what it is: chasing spreadsheets, scrambling to meet compliance deadlines, and hoping nothing slips through the cracks. That’s not a strategy. That’s a headache.

ComplyScore® changes that. It’s built to simplify your life by eliminating manual busywork and giving you real-time insights into your vendor risks before they become full-blown crises.

Here’s what makes it stand out:

• End-to-end risk management: Atlas Systems covers the entire TPRM lifecycle from vendor onboarding to risk monitoring 
• Industry-specific compliance expertise: Whether it's healthcare, BFSI, life sciences, or manufacturing, our solutions align with sector-specific regulations. 
• AI-powered insights and automation: AI-powered risk monitoring automates the work of flagging threats, handling workflows, and keeping your team ahead of security gaps.
• Scalability and flexibility: ComplyScore® scales without breaking a sweat, so you don’t have to rethink your entire system whenever you add a new partner.

Ready to simplify your third-party risk management? Let’s start the conversation today.

FAQs About Third-Party Risk Assessment 

1. How does third-party risk assessment impact an organization’s reputation?

A strong Third-Party Risk Assessment program protects an organization's reputation and helps prevent vendor-related data breaches, compliance violations, and service failures. 

2. Is third-party risk assessment a one-time process?

No, Third-Party Risk Assessment is an ongoing process. Risks evolve as vendors update their systems, change security practices, or face new regulatory challenges. 

3. How often should third-party risk assessments be performed?

The frequency of assessments depends on a vendor’s risk level, industry regulations, and business impact. High-risk vendors handling sensitive data or critical services should be assessed at least annually or more frequently. In contrast, lower-risk vendors may require biennial or periodic reviews based on changing risk factors.