Third-party risk management needs a new approach because (let’s be honest here) the current approach doesn’t work.
According to Gartner, 83 percent of legal and compliance leaders identify third-party risks after initial onboarding and due diligence. This suggests traditional due diligence methods in risk management policy are failing to capture new and evolving third-party risks.
Organizations need effective third-party risk management (TPRM) policies to establish guidelines and practices for third-party risk assessment, monitoring, remediation, and reporting. But many businesses face difficulties when implementing third-party risk management policies by themselves across their third-party suppliers.
What Does Third-Party Risk Mean?
Third-party risk is the potential threat to your organization’s operations, data, compliance posture, and financial information that arises from your supply chain and other business partners.
A common example of third-party risk is network intrusion, which refers to unauthorized activity on your digital network. One of your third parties is connected to your IT systems but has weak access controls of its own, so attackers first penetrate that third party and then proceed onto your IT network.
Moreover, there are many techniques to carry out network intrusion. For instance, cybercriminals create traffic loads that are too large for systems to screen adequately, inducing chaos and congestion in network environments. This allows them to execute attacks without ever being detected.
This is where a third-party risk management program comes into the picture. With effective third-party risk management policies in place, you’ll be better equipped to mitigate undue risks and excessive costs associated with third-party cybersecurity risks like network intrusion.
Third-party risk management is critical because using third parties (both directly and indirectly) creates cybersecurity risk. TPRM can reduce the possible harm to your company, your customers, and your organization’s finances.
What Types of Third-Party Risks Are There?
Third-party relationships can generate higher profitability, competitive advantage, decreased cost, and faster marketing. But they also expose your organization to multiple risks, such as:
- Financial risk. A third party may fail to deliver a promised good or service, or suddenly go bankrupt or otherwise end the business relationship. In that case, your company might face unpleasant and expensive consequences trying to replace the vendor or otherwise rectify the situation.
- Reputational risk. Third parties might interact with customers on your behalf (say, a delivery service or a call center) and their poor service would boomerang back onto your corporate reputation. Or if your third party experiences a data breach with your customer data, your organization may experience customer distrust.
- Operational risk. These risks arise from inadequate or failed internal processes, systems, and people, or from external events. For example, if a third party experiences a cyberattack that shuts down the service, your organization might face a business interruption.
- Cybersecurity risk. These risks arise from the unauthorized access, use, destruction, disclosure, modification, recording, or inspection of sensitive information, regardless of the form it may take.
- Compliance risk. A company is legally responsible for the conduct of third parties acting on its behalf. So for example, if an overseas distributor bribes government officials to sell your products, you may face liability under the U.S. Foreign Corrupt Practices Act.
How Can You Manage Third-Party Risk?
Companies must manage third-party risk to reduce its harm to your organization. Here are the four steps to address third-party risks:
- Conduct a risk assessment to identify the types of third-party risk you’re likely to encounter and the steps you can take to reduce them.
- Assure your due diligence process is proportionate to the risk.
- Implement a comprehensive electronic workflow system.
- Adopt a company-wide approach to risk management, making it a part of your company culture.
What Are the Best Practices in Managing Third-Party Risk?
In addition to the above steps, you can follow these best practices for managing your third-party vendor risks:
- Identify all third-party vendors and their contact information.
- Learn about your vendor’s own risk management.
- Evaluate all risks associated with third-party, fourth-party, and “nth-party” vendor solutions.
- Leverage automation whenever possible.
- Have the right processes and metrics for the ongoing monitoring of third parties.
What Is a Third-Party Risk Assessment and How Is it Conducted?
A third-party risk assessment involves analyzing risks introduced to your organization via third-party relationships along the supply chain: vendors, software providers, service providers, and other suppliers. It involves the following three steps:
Establish vendor risk criteria
Create a list of vendor risk criteria that includes the most destructive third-party risks your organization could face. Try to compile an actionable list of high-risk third parties with whom you’ll perform risk assessments.
Conduct third-party onboarding and screening
You must mandate standard risk management processes across your company. Use real-time checking and containment measures to create a detailed picture of third-party or vendor relations. This will allow you to predict and protect against any potential risk.
Assess both risks and performance results
Assessing results is the only way to determine to what degree (if at all) a third-party relationship is risky. For instance, information security ratings allow you to supervise your vendor compliance and unpredictable risks consistently.
But why do third-party risk assessments matter?
Foremost, risk assessments are often a regulatory requirement. Risk assessments must be completed on each vendor and on every product or service the vendor provides. They also help determine specific areas of risk that need more thorough and ongoing monitoring, such as the third-party’s cybersecurity or disaster recovery planning.
Using these insights, you can then identify potential risks and determine whether your organization requires additional controls to limit risk exposure.
After identifying and analyzing vulnerabilities, you’ll also need a mitigation strategy to reduce the severity of the identified risks and/or remediate them.
Maintain an inventory of all third-party assets, advocate asset ownership, and create a mechanism (even an internal whistleblower hotline, for example) to communicate third-party risks and threats. Follow this by examining and monitoring access and activities from third-party assets and the third-party itself regularly.
Automate Your TPRM program
RiskOptics’ ZenGRC makes it easier to develop and scale a successful TPRM management system.
ZenGRC offers continuous monitoring features to assure you’re always on top of your third-parties compliance hygiene, as well as provides an intuitive dashboard to give you an at-a-glance view of who’s compliant and who isn’t. With ZenGRC automating your TPRM, you and your team can rise above the rest and focus on other, more important aspects of your business.