Quantify Financial Risk to Prioritize Third-Party Risk Management

4 minute read

November 2023

When you quantify financial risk across your third-party ecosystem and prioritize the most critical remediation actions, you can efficiently secure your finances. While financial risk can enter your organization through a variety of third-party vectors—legal issues, compliance violations, supply chain disruptions, financial failure and data breaches—the methodology for identifying, tracking and managing financial risk can be applied across domains to ensure that your team won’t be caught off-guard by an unexpected event. This blog will cover the process of building a third-party financial risk register and prioritizing the risks you face so you can take the most impactful actions first and efficiently secure your organization’s finances.

1. Build a risk register

Before you begin identifying and choosing risk management actions, it’s necessary to build a risk register to track the risks you face and your progress in addressing them. As you collect risk assessments from your third parties, you can assess the gaps in your vendors’ controls and identify the potential risks to your organization’s finances. In the realm of third-party financial risk, it’s important to track potential risks at the vendors that could open you up to regulatory penalties and data breaches, or that could cause your operations to halt for a period of time. These are the risks that are most likely to impact your financial viability, so organizations with the potential to cause disruptions or violations in these areas should be closely assessed.

Judging control gaps in your third-party ecosystem is context dependent. Where it’s crucial that a cloud computing vendor must implement industry-standard access controls, you wouldn’t expect the same from the company that handles landscaping for your business. A gap in your third-party controls should be judged based on both the controls the vendor has in place and the kinds of risk they could reasonably introduce to your organization based on the access they have.

2. Prioritize risks

Once you’ve identified the risks you face, the next step is to prioritize which threats must be addressed the most urgently. This involves evaluating each risk based on:

  • Likelihood of an occurrence
  • Potential impact on your organization
  • Financial losses in the event of an occurrence

Likelihood and impact can be rated on a five-point scale from “Very Unlikely” to “Very Likely,” then arranged in a heat-map so you can quickly identify the events that are most likely to have a severe impact on your organization.

When judging likelihood of an event, it’s worth considering the frequency of that kind of incident in your industry, your organization’s internal vulnerability to incidents of that kind, and the degree to which a given third party opens you up to further risk: How likely is an organization of your size, in your industry, to be targeted by a threat actor in that area? If you were attacked in that area, given your controls and those of your third parties, would that attack be likely to pose a serious risk? When judging the potential financial impact of an event, it’s useful to consider which customer and vendor relationships would be affected and how those changes would affect revenue generation: Would this impact the number of customers who are willing to work with you or the kinds of vendor relationships you can keep up? How would a risk event impact operations?

3. Calculate Financial Impact

While determining the likelihood and impact of specific risks is essential, attaching a dollar amount to each potential event makes your action items more specific and convincing to executive leadership. Calculate the potential financial impact by considering:

  • Impact on revenue generation
  • Affected revenue sources
  • Impacted customers
  • Estimated duration of the impact

Additionally, it’s worth factoring in possible regulatory fines, reputational damage, and the way the event could impact customer and vendor relationships moving forward. The financial impact of a given event could best be summed up as: (Impact on revenue x Duration of Impact) + Regulatory Penalties. Once you’ve analyzed the potential impact across these factors, you can work with your finance team to calculate a specific dollar amount and document it along with the rest of your risk data.

Finally, having calculated both the cost of a risk event and the likelihood that it will occur, you can identify the risks that are the most likely to cost your organization the largest sums of money. With ProcessUnity for Third-Party Risk Management, you can utilize a heat map, which organizes your risks by likelihood and impact to make it easier to choose the most critical, costly risks and plan remediation. Once you’ve chosen which risks to prioritize, you can keep track of both the risk posed to your organization and the progress of your remediation efforts in a single centralized repository. Learn more by reading our white paper, “Quantify Third-Party Financial Risk to Efficiently Address Threats.”

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About Us

ProcessUnity is a leading provider of cloud-based applications for risk and compliance management. The company’s software as a service (SaaS) platform gives organizations the control to assess, measure, and mitigate risk and to ensure the optimal performance of key business processes. ProcessUnity’s flagship solution, ProcessUnity Vendor Risk Management, protects companies and their brands by reducing risks from third-party vendors and suppliers. ProcessUnity helps customers effectively and efficiently assess and monitor both new and existing vendors – from initial due diligence and onboarding through termination. Headquartered outside of Boston, Massachusetts, ProcessUnity is used by the world’s leading financial service firms and commercial enterprises. For more information, visit www.processunity.com.