Understanding Third-Party Due Diligence: A Comprehensive Guide

Why Is Conducting Due Diligence of Third Parties Important?

Effectively managing third-party risk is a significant challenge for almost all organizations. Managing third-party risk requires an approach that aims to understand and mitigate risk throughout the vendor risk lifecycle. Conducting effective due diligence on third parties allows you to identify risks before signing contracts and committing significant financial resources and time.

Third-party due diligence also uncovers hidden risks in the supply chain, like poor ESG practices or concentration risk. A mature program uses due diligence to gain visibility into its third-party ecosystem, identify unacceptable risks, and require remediation.

What Types of Risks Can Third-Party Due Diligence Identify?

Effective third-party due diligence is key to identifying numerous risks to your organization. Here are a few key categories of risk to consider:

Third-Party Due Diligence & Information Security Risk

While your organization may invest significant resources into its IT security program, it can still be enormously challenging to secure your cyber supply chain against third-party data breaches, ransomware attacks, and other security risks. This task gets even more difficult as your supply chain becomes more complex or relies heavily on multinational partnerships.

Your third-party due diligence process should assess potential suppliers and vendors for unacceptable degrees of cybersecurity risk that could jeopardize your critical data or IT infrastructure. This should incorporate an initial vendor risk assessment followed by continuous risk monitoring of the Internet and dark web for information on new vulnerabilities, data breaches, and evidence of leaked credentials.

Consider leveraging a commonly accepted cybersecurity framework such as NIST, ISO, the Shared Assessments SIG, or SOC 2 to scope your vendor risk assessment questions. Then, frame the results of this assessment against a best practice framework that aligns with the rest of your organization’s enterprise risk management strategy.

Third-Party Due Diligence & ESG Risk

Corporate environmental, social, and governance (ESG) concerns are increasingly taking center stage for both consumers and corporate investors. ESG is a particular concern for organizations with many suppliers since extended global supply chains can sometimes involve forced labor, environmental degradation, and/or corruption. Before onboarding a potential vendor or supplier, here are a few questions that can be useful:

• Does the vendor or supplier regularly publish information on its supply chain practices as required by ESG regulations?
• Does the vendor or supplier have a history of poor ESG practices or violations that could pose a reputational or ethical risk to the organization?
• Does the vendor or supplier have governance processes in place to manage ESG risk throughout its extended supply chain?
• Does the supplier have a heavy concentration of third-party suppliers or vendors in countries with a history of corruption, environmental degradation, or human rights abuses?

Third-Party Due Diligence & Operational Risks

Operational risks can take many forms but typically boil down to the third party being unable to perform its contractual obligations. Some third parties, such as those providing non-critical goods and services, may pose relatively low operational risks. However, others such as IT vendors, SaaS vendors, and suppliers of critical components may pose a great deal of operational risk and should have the appropriate business resilience measures in place to ensure continuity.

Consider asking questions during third-party due diligence to gauge the degree of operational risk that the organization poses:

• Does the third party have a high degree of debt compared to revenue?
• Does the third party have robust business continuity and disaster recovery planning in place? Is it routinely tested using tabletop exercises?
• Is the third party heavily reliant on certain vendors or suppliers that could impact its ability to provide goods and services if there was an outage or disruption?
• Is the third party based in an area with a high degree of environmental risk such as hurricanes or earthquakes?

Best Practices for Third-Party Due Diligence

Third-party due diligence can be an expensive, lengthy, and time-consuming process. This particularly applies to organizations that rely heavily on vendors for data handling and processing due to security implications, as well as to those with extended supply chains. Here are a few best practices you can employ to improve the efficiency and efficacy of your third-party due diligence process.

Tier Vendors for Efficiency

Tiering third parties by their risk level helps focus your resources more effectively during the due diligence process. During sourcing and selection, gauge the criticality of the goods and services the third party will provide, as well as the level of IT and data access they will need to perform the contract. This information will enable you to tier vendors and “right-size” your due diligence program based on the degree and types of risks that they pose.

Couple Vendor Risk Questionnaires with Continuous Risk Monitoring

While vendor risk questionnaires are critical for effective third-party due diligence, they don't capture all necessary information on their own. Add continuous risk monitoring to validate vendor-supplied data and flag new and emerging issues such as data breaches, IT security vulnerabilities, operational disruptions, reputational incidents, and financial problems.

One-time Due Diligence Is Not Enough

Organizations with less mature risk management programs might assume they have finished their work after completing initial due diligence on a third party. However, new risks can surface throughout the vendor risk lifecycle, including after offboarding and termination. Continuously monitor your third parties for changes in their risk profiles after onboarding, and routinely conduct risk assessments based on the vendor's criticality to your business.

Choose a Repeatable Framework to Simplify Risk Assessments

Consider structuring your third-party due diligence assessments around a common industry framework. Doing so will enable your team to assess vendors consistently using similar criteria and provide familiar best-practice remediation recommendations.

Enhance Third-Party Due Diligence with Prevalent

Manual approaches to third-party due diligence make it complicated to coordinate vendor assessments, meet compliance requirements, and satisfy different departmental needs. The Prevalent Third-Party Risk Management Platform automates and accelerates the due diligence process while providing a centralized view of supplier and vendor risk to stakeholders across your organization. Learn how Prevalent can simplify your third-party due diligence initiatives by requesting a demo today.