Blog, Learning Center January 31, 2022

What is Third Party Due Diligence? What You Should Know

Due diligence is one of the most important steps before starting a partnership with a third-party business, as it reveals any hidden risks or vulnerabilities that could harm your network. In this blog, we will define third-party due diligence, explore the benefits of conducting cybersecurity due diligence, and describe how to get started.

What is third-party due diligence?

Third-party due diligence is the investigation that a person or business is expected to take on before entering into a contract or agreement with another party. When a business seeks to outsource work or take on a new supplier or vendor, they conduct third-party due diligence in order to understand any problems or risks associated with this new relationship.

The process of third-party due diligence involves first inventorying all prospective third parties and assessing risk for each. Risk assessors collect any relevant data or information about a potential vendor’s business structure, reputation, ownership, and operations, then take a deeper dive into relevant areas such as compliance or potential for bribery.

Exact areas of exploration during the process vary depending upon the organizations involved. Depending upon the situation, factors such as regions an organization operates, the third-party’s business relationships, and more may all come into play. The due diligence itself may be conducted by the organization or with the help of a service provider that specializes in these sorts of investigations.

Conducting third-party due diligence is important for businesses to make informed decisions about who they work and contract with so as to avoid potential problems associated with compliance, regulations, and public image. It can help the organization understand its potential for liability and risk before engaging in a formal agreement, as well as provide information about what mitigation measures may need to be in place.

Why is third-party due diligence important?

As businesses evolve in a global marketplace, they must be cognizant of various regulatory environments, data privacy rules, sanctions, export laws, and common types of corruption including money laundering and bribery. And with a greater number of regulatory and compliance resources available, companies today are held to higher standards by regulators, which means business leaders are increasingly motivated to prioritize due diligence.

Third-party relationships also introduce a number of risks beyond legal and compliance to include exposure to cyber threats and negative publicity. For larger businesses with thousands of third-party relationships, the total risk also compounds and could spell disaster if due diligence is not carried out each time.

In other words, third-party due diligence is important because not performing it opens organizations up to potentially devastating consequences that may not be recoverable from in a competitive and increasingly complex global market.

Benefits of third-party due diligence

Digging a little deeper, the following sections outline a number of benefits associated with performing thorough third-party due diligence:

Visibility into vendor history

When you conduct due diligence, you gain information and insight into each prospective vendor’s history. This includes information such as the vendor’s financial strength, brand reputation, legal history, and any compliance issues it may have had in the past. Not only does this information allow you to determine the risk associated with this vendor, but it can help you better decide between vendors as well as inform any negotiations you may enter into.

Identifying things like corporate structure, beneficiary ownership, negative media, and so on is vital for protecting your company’s integrity. Once you onboard a new vendor, you should also establish a practice of ongoing due diligence to stay abreast of any changes to status or risk.

Identify inherent risks

Because third parties are separate entities from your business, you simply don’t have the oversight and control that would allow you to ensure their practices align with your business’s morals and goals. They may bend rules you wouldn’t be comfortable bending or making public statements or political endorsements that are in direct opposition with your mission.

Conducting third-party due diligence is what helps you discover any and all prospective problems before they can impact your business. It enables you to establish a clear picture of who the third party is, as well as who they work and align with. Your investigation may uncover inherent risks associated with operations, cybersecurity, and corruption. In particular, corruption is of major concern because you don’t want issues related to money laundering, trade sanctions, or antitrust laws to blow back on your business.

You should also aim to understand your business’s compliance and regulatory obligations, which may be different from those of your vendor or any third parties you engage with. These issues will need to be shored up and mitigated as you establish new relationships.

Protect company reputation

For many companies, reputation is paramount. Not only could legal problems and compliance issues tarnish your reputation, but simple social media faux pas may do so as well. Any thorough due diligence investigation will include looking into the media presence and reputation of prospective third parties in order to protect your company’s reputation. Note that articles, information, and social media in foreign languages about the company should also be investigated.

In addition to media, you may also gain insight into who the third-party engages with, where it is located, who the employees are, and so on–all of which may impact that company’s reputation either positively or negatively. For example, certain types of bribery or corruption are more common in certain countries, so it’s important to be aware if a prospective vendor is located in such a region.

Risk mitigation and management

Completing a thorough due diligence investigation helps make sure your business adheres to all laws and regulations without overlooking gaps or problems that come in through your contracts and relationships with third parties. You will mitigate your total risk exposure, make it less likely that you’ll be blindsided by bad publicity, and prevent future issues associated with bribery or corruption.

How Security Scorecard can help

Security Scorecard’s Third-Party Risk Management (TPRM) solution helps you understand the security posture of your third parties by obtaining visibility into all of your vendors’ and partners’ risk. You can rate the security posture of any entity on-demand, allowing you to operate at scale while communicating expectations, reporting compliance, tracking progress, and building trust.

Features include continuous monitoring via scanning of the global IP space daily, the ability to leverage intuitive workflows as you invite vendors to collaborate on cybersecurity initiatives, and the ability to stay ahead of zero-day exploits and other attacks that appear elsewhere in your industry. Learn more about your vendors, drive engagement, collaborate seamlessly, and cut assessment time in half with Security Scorecard’s TPRM.

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