Global third-party suppliers have become an essential resource for many companies, providing crucial strategic and competitive support. Outsourcing, however, is not without its dangers. As dependency on third parties grows, so do the chances of supply chain, compliance, or reputation risks that hit your organization through those third parties. Your management team will need to address those risks somehow.
Establishing a third-party risk management (TPRM) framework is a complicated process. It can require you to monitor hundreds, if not thousands, of suppliers across several continents. A corporation must examine numerous risks for each vendor it hires, including financial risks, cybersecurity vulnerabilities, lawsuits, and performance failures that could disrupt its business continuity.
What Is Vendor Risk Management?
Third-party risk management, also known as vendor risk management (VRM), identifies and mitigates the risks of outsourcing to third-party vendors or service providers. For example, third parties might have access to your company’s trade secrets, personnel information, security procedures, finances, customer data, or other sensitive data.
Due diligence is essential to establish a third party’s fitness for a particular activity and whether the party has adequate information security standards. Third-party due diligence is the process of assessing whether a third party is suitable for a specific assignment.
Vendor due diligence is a continuous process that includes assessment, monitoring, and management communication through every step of the third-party relationship lifecycle, from onboarding to offboarding. The vendor risk management program‘s purpose is to limit the chances of data breaches, operational failures, vendor insolvency, and regulatory compliance failures.
Common Types of Third-Party Risks
Adopting a risk-based approach to vendor management requires an understanding of the many categories of vendor risk. This knowledge allows enterprises to assess third-party risk effectively and then to categorize vendors depending on the danger they pose to your business. Next, security teams can implement remediation steps to address those threats.
Consider the six primary forms of vendor risk listed below when considering third-party providers.
With the increasing sophistication and speed of cyber attacks, assessing your vendor’s cybersecurity is more vital than ever. To estimate vendor cybersecurity risk, you must first determine your organization’s risk tolerance. Once you’ve determined acceptable risk thresholds, you can evaluate third-party security performance and make improvements as needed.
When assessing performance, concentrate on potentially infected devices within vendor network settings. While hacked systems might not result in data loss, they can reveal how vendors detect and mitigate intrusions.
The risk of non-compliance arises from infractions of policies, regulations, and internal processes that your corporation must follow to conduct business. The rules that apply to each company will differ depending on its industry; some requirements, however, apply to all sectors, such as the General Data Protection Regulation (GDPR) and the Payment Card Industry Data Security Standard (PCI DSS).
Non-compliance with these standards typically results in significant fines. So you must assure that your vendor’s compliance activities align with your regulatory requirements.
The general opinion of your company is the focus of reputational risk. Third-party suppliers can hurt your reputation in various ways, including interactions that depart from the company’s requirements, sour customer opinion, or cause infractions of laws and regulations.
Review your third party’s corporate governance, compliance, and ethics policies for handling complaints or disputes. In addition, internal audits of complaints against a third party are a handy technique to identify any red flags.
Third-party financial risk emerges when contractors fail to fulfill your organization’s financial performance criteria. As a result, vendors face two types of financial risk: higher costs and missed revenue.
Unnecessary expenses, if not addressed, can stymie corporate growth and lead to excessive debt. To keep the costs under control, you should perform frequent audits to assure that vendor expenditures follow your contract terms. Managing lost revenue begins with determining which vendors directly influence your organization’s revenue-generating operations; then give those vendors the most attention.
Operational risk is the threat that a third party might somehow disrupt your business operations. For example, contracted labor might not meet desired performance levels, or not enough contracted employees might arrive to do the job at hand. Or an IT vendor might suffer an outage and leave your systems unable to execute transactions.
To reduce operational risk, your company should develop a business continuity strategy so that you can continue to operate in the case of a vendor closure.
Strategic risks develop when vendors make commercial decisions that do not coincide with your company’s strategic objectives. Strategic risk may affect compliance and reputational risk, and it is frequently a determining element in a company’s total worth.
Setting key performance indicators (KPIs) enables enterprises to monitor strategic risk by providing ongoing information about vendor operations and procedures.
How to Conduct Risk Assessments for Vendors
Conducting vendor risk assessments may be a time-consuming and labor-intensive operation. Then again, failing to do so may result in reputational harm, lost business, legal bills, and regulatory fines.
Before you can start analyzing third parties, you must first understand all of the risks you may incur when getting into a commercial relationship. If something goes wrong, neglecting any of these might leave you scrambling.
Once you’ve identified the possible risk to your business, you may take the following steps:
Determine Your Risk Criteria
After identifying all potential risk categories, you’ll need to create risk criteria for third-party evaluations. Again, these will vary depending on your company and the vendor’s business.
Assess suppliers regularly to locate the vendors that are the best fit for your organization. Create a vendor risk assessment with a consistent methodology and score criteria that you can use for all evaluations.
Gather a Risk Assessment Team
You most likely aren’t an expert in every sort of vendor risk. Enlist the assistance of colleagues from different departments inside your business (or engage with your external network) to help guide your risk assessments. Because those colleagues are familiar with day-to-day threats and best practices in their area, they can analyze a vendor’s potential risk more perceptively than you.
Assess Each Third-Party Product and Service
Third-party risk assessments should be divided into two parts: one for the vendor as a whole, and one for each product or service you want to acquire from the vendor.
A company-level review reveals the risks in dealing with the vendor. For example, what is its performance record? Are its business operations legal and compliant? How responsive and dependable is its customer service? Product-level evaluation gives you the risk of a single product. Does it work well? Will using it introduce other risks to your operating environment? Is it worth the cost?
Considering both the company and the product provides a complete picture of the possible risk. This will help you determine whether you should start or continue doing business with the vendor.
Classify Vendors by Risk Level
After you’ve evaluated a vendor, you should estimate its overall risk level. Separating potential suppliers into risk tiers can streamline the risk mitigation process.
Depending on your risk criteria, assign a risk level to the vendor: high, medium, or low. Then set a business impact score for the vendor. In other words, how critical is the vendor’s product or service to your company?
Finally, decide how much due diligence you will perform on vendors at each risk category. This simplifies the procedure, increasing efficiency and uniformity while removing prejudice.
Prepare Mitigation Strategies
After you’ve assessed the vendor’s risks and decided to use the vendor, it’s time to develop a customized risk management strategy.
Create a strategy for how your organization will manage or mitigate each potential risk posed by a third party. If disaster comes, you’ll then have a plan to respond promptly and minimize the damage. The plan must include possible risks, detailed reaction activities, and the role of the individual in charge of each one.
Enlist the assistance of coworkers from various departments while developing your risk management plan. They can give insight into avoiding and managing these risks, just as they helped uncover possible concerns during the evaluation.
Why Do You Need a Third-Party Risk Management Framework?
Third-party risk is an increasingly important component of any corporate risk management strategy. Companies today rely on a staggering number of suppliers and vendors from all over the world. As a result, businesses are vulnerable to severe disruptions caused by bad events affecting service providers, such as bankruptcy, political disasters, and data breaches.
Vendor risk management frameworks provide valuable controls to help companies reduce their exposure to third-party risk. Senior management must comprehend the risk their companies face from cyber security assaults and data breaches. Frameworks such as NIST 800-161 or ISO 27036 will help develop a solid TPRM program.
Vendor Risk Management Framework Checklist
No single framework will give your company all of the controls it needs to achieve regulatory, risk management, and due diligence objectives. So the first step in selecting the proper framework for your firm is to understand your organizational risks.
TPRM is about recognizing suppliers that lower your business’s risks through their practices, as well as assuring that collaboration does not expose your company to unacceptable potential risks.
Consider the following while choosing frameworks to assist in the development of your TPRM program:
- Is it possible to automate data collection using the framework?
- How does the framework interact with your current workflows?
- Is there a benchmark available for the framework? If so, where can I get it?
- Is the framework updated regularly to reflect changing levels of risk?
- Is it possible to have standardized definitions of high, medium, and low risk?
- What TPRM frameworks do your clients use, and do they have a preference about which one you use?
- Is there a standard remediation method linked with the TPRM architecture in the publications?
- Are there any particular regulatory criteria that must be met? (For example, financial organizations or healthcare providers.)
- How robust is the framework? For example, can it address concerns about fourth-party risk?
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With constant, real-time risk score updates, you’ll always be one step ahead of the competition. ZenRisk improves accuracy by rescoring risks based on updates or modifications to associated items such as controls, threats, and vendors. As safeguards are deployed or retired, controls are judged as successful or ineffective, or new threats are recognized, ZenRisk updates residual risk ratings and your overall risk posture.
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