Effective third-party risk management can make or break your organization’s financial health. Every company has an intricate web of third-party relationships – including software vendors, critical suppliers, and service partners – that perform vital tactical functions. A failure, breach, or vulnerability at any of these entities could introduce substantial risk to the business.

Third-party risks are discovered through a combination of periodic vendor risk assessment surveys and continuous risk monitoring. Once revealed, these risks must be prioritized based on their likelihood of occurrence and their potential impact on the business. The metric that arises from this calculation is known as a risk score, which aims to present an objective measure of risk criticality.

Risks scored as critical or high need to be addressed prior to those scored as medium or low, much like how critical software vulnerabilities should be addressed first. However, risk scores are not the only way to judge the potential impact of a risk.

Risk quantification is the next step beyond risk scoring. Where scores represent likelihood and impact, quantification showcases the financial impact of a risk. This blog post explains why risk quantification is important and how it provides the necessary context for senior leaders seeking to understand the implications of managing third-party risks.

What Is Risk Quantification?

Risk quantification is the process of assigning a financial value to identified risks in your business. It goes beyond risk scoring and requires understanding your business’s specific financial condition to make the most accurate calculation.

However, to accurately quantify a risk’s financial impact, you first need to understand the same information—likelihood and impact—that also make up a risk score. In this way, scoring your risks and assigning a criticality number is the first step in a risk quantification calculation.

Table: Risk Scoring vs. Risk Quantification

Factor Risk Scoring Risk Quantification
Likelihood X X
Impact X X
Financial Value X
Representation Score Monetary Amount

What’s Needed for Calculating Risk Quantification

Risk quantification requires understanding your business’s specific financial condition. After all, quantification is ultimately a financial measure, so you’ll need to examine corporate budgets and spending to calculate the final number.

For example, procurement professionals know they pay a certain amount of money to suppliers for raw materials necessary for their finished product. A risk quantification exercise would ask: if Supplier X can’t provide Y material, then what would the negative impact be on our operations? The answer might be represented in terms of money per day lost due to not being able to finish a product and sell it to customers.

Another example is cyber risk. Quantifying the risk of a cybersecurity incident involves calculating the financial impact of downtime and the cost of recovery from a third-party data breach or a supply chain attack. This is often done with internal systems to advocate for investment in reducing downtime risk, but it can also be translated to the vendor relationship. If a critical technology vendor experiences a cyberattack, you will likely experience the knock-on effects of being unable to do business.

The Role of Risk Quantification in TPRM

Risk quantification simplifies communication of the real financial impact of not addressing critical vendor or supply chain risks. Many third-party risks are frustratingly nebulous in terms of likelihood, and risk scores don’t necessarily communicate how a risk could affect the business if it occurs. That’s what quantification solves for.

More specifically, risk quantification enables:

1. Objective Risk Assessments

Risk quantification provides a standardized method for assessing third-party risks. By using consistent metrics and criteria, organizations can objectively evaluate the financial impact associated with each third-party risk. This removes subjectivity and bias, ensuring that risk assessments are fair and comparable across different vendors and service providers.

2. Prioritization of Risks

Not all risks are created equal. Risk quantification enables organizations to prioritize risks based on their potential financial impact. By assigning a monetary value to each risk, organizations can identify which risks require immediate attention and which can be monitored over time. This prioritization is crucial for efficient resource allocation and effective risk mitigation strategies. This extends beyond risk scoring, which measures likelihood rather than financial impact.

3. Enhanced Decision-Making

Quantitative risk assessments provide a solid foundation for decision-making. Senior management and risk committees can use the financial impact of risk to make informed decisions about third-party engagements. This data-driven approach ensures that decisions are based on empirical evidence rather than intuition or guesswork.

4. Risk Mitigation and Control

Once risks are quantified, organizations can develop targeted risk mitigation strategies. For example, suppose a third party has a high potential financial impact on cybersecurity risk. In that case, the organization can implement specific controls to address this risk, such as requiring the third party to adopt certain security standards. Quantified risks allow for tailored risk mitigation plans that are proportional to the risk level.

5. Continuous Monitoring and Reporting

Risk quantification facilitates ongoing monitoring and reporting of third-party risks. By continuously updating risk impacts based on new information and developments, organizations can track changes in risk levels over time. This dynamic approach ensures that risk management efforts remain relevant and effective as the risk landscape evolves.

6. Regulatory Compliance

Regulatory bodies are increasingly emphasizing the importance of robust TPRM programs. Quantified risk assessments can demonstrate an organization’s commitment to proactive risk management, helping to meet regulatory requirements and avoid penalties. Detailed risk quantification reports provide tangible evidence of compliance efforts.

7. Building Stakeholder Confidence

Stakeholders, including customers, investors, and partners, are increasingly concerned about third-party risks. A TPRM program that incorporates risk quantification can build confidence among stakeholders by demonstrating that the organization is actively managing and mitigating third-party risks. Transparent reporting on quantified risks and mitigation efforts can enhance stakeholder trust and loyalty.

How Mitratech Can Inform Risk Quantification Efforts

The Mitratech Third-Party Risk Management Platform offers extensive capabilities that assess risk likelihood and potential impact, assigning risk scores to each. The risk scores presented in the TPRM Platform serve as the foundation for risk quantification, providing easy-to-understand scoring that indicates which risks TPRM managers should focus on to calculate the financial impact. The risk score functionality includes showing the total number of risks based on specific categories and compliance frameworks within the platform.

Risk Quantification Categories for TPRM Solution

Figure 1: An example overview of risks based on category, including several compliance standards.

With the Mitratech Platform, third-party risk teams gain important insight into their vendor universe as well as a centralized solution for collaboration and communication with internal and external stakeholders. In this way, risk managers can understand how to best prioritize risk quantification efforts and drive the conversation forward on which identified risks need to be mitigated, and how remediations can impact scores.

Built-in scoring methodology can direct your risk quantification efforts to assign dollar amounts to the most critical risks immediately. Leveraging Mitratech’s risk scores as the bones of your risk quantification efforts ensures that you’re getting the most accurate insight immediately.

Example risk scoring matrix graph

Figure 2: How the Mitratech TPRM Platform scores risks.

As budgets tighten and supply chains become more complex, it is vital for organizations to calculate the possible financial impact of vendor risks and mitigate the most impactful ones. Risk quantification calculations ensure that can occur, and the scores built into the Mitratech TPRM Platform ensure that you’re calculating the financial impact of the most important risks. For more information on how Mitratech can help, request a demo now.

 


Editor’s Note: This post was originally published on Prevalent.net and updated in May 2025. In October 2024, Mitratech acquired the AI-enabled third-party risk management, Prevalent. The content has since been updated to include information aligned with our product offerings, regulatory changes, and compliance.