No matter your industry, business relationships with third-party vendors are the most significant risk to your information landscape. Increasingly, companies are adding more Software-as-a-Service (SaaS) vendors to streamline business processes. However, vendor due diligence becomes more complicated as you add new services.
What is Third-Party Due Diligence?
Third-party due diligence is the process of vetting suppliers, distributors, and service providers using a risk-based approach to uncover any red flags that may indicate a danger to your business.
For instance, if a company wants to outsource work or hire a new supplier or vendor, it will do third-party due diligence to determine any risks or possible issues with this new partnership.
Making a list of all prospective third parties and assessing their risk is the first step in the third-party due diligence procedure. Before delving further into crucial subjects like compliance or the potential for bribery, risk assessors first acquire pertinent information or details about a potential vendor’s ownership, management, operations, and company structure.
The participating organizations choose particular research fields before the procedure. Depending on the situation, the geographical areas a corporation operates in, the third party’s business relationships, and other factors may all be significant. The company can do the due diligence independently or with a provider of services specializing in these investigations.
Businesses must conduct third-party due diligence when deciding who to cooperate with and enter into contracts to reduce compliance, legislation, and public perception concerns. In addition, it helps the firm understand its potential for responsibility and risk before entering into a formal agreement and provides details on what mitigation measures need to be implemented.
As they expand in a worldwide economy, businesses must be aware of various regulatory frameworks, data protection laws, penalties, export limitations, and common types of corruption, such as money laundering and bribery. Additionally, due diligence is prioritized by corporate executives because of the higher standards that regulators now hold firms to, owing to the increased resources available for regulatory and compliance.
In addition to legal and regulatory concerns, third-party agreements can provide several risks, including exposure to cyber-attacks and negative news. For more renowned companies with thousands of third-party contracts, the overall risk might be severe if due diligence is not completed each time.
In other words, the risk that third-party due diligence exposes organizations to makes it so important, particularly in today’s highly competitive and intricate global marketplace.
Why You Need a Security-First Due Diligence Process
Starting with security enables you to protect your information and reputation better. By locking down your entire environment and supply chain, you make sure that data protection comes first. The old(ish) saying goes, “if you build it, they will come.” However, in cybersecurity, you need to update it to “if you build it, they will come, but they won’t get in.”
Due diligence in vendor management requires you to maintain that security-first approach and find organizations that also take cybersecurity seriously. Prominent vendors may seem secure, but their size often means they have a large perimeter to protect.
On the other hand, Small vendors may have cutting-edge technology, but their agile development may lead to a hole in security. You must ensure that all vendors begin with safety as a primary concern.
Common Third-Party Security Risks and Challenges
The top five obstacles companies experience during the Third Party Risk Management (TPRM) process are listed below. While not a complete list, these are some of the more substantial and usual TPRM issues.
Detecting Cybersecurity Threats
With the expanding digital world across all business sectors, cybersecurity is one of the most challenging obstacles for enterprises when setting up and carrying out their third-party risk management program.
Often, enterprises need more resources and awareness to address cybersecurity measures in third-party vendors. Webinars and resources may only go so far and sometimes leave firms unable to respond when cyber assaults affect a third party and their own.
Amount and Complexity of Third-Party Partnerships
Modern corporations have hundreds, if not thousands, of third-party collaborations. Suppliers, vendors, contractors, consultants, and others are among them. New merchants may be added daily, and established vendors can be deleted.
Furthermore, fast-growing businesses may swiftly add new providers. The number and complexity of third-party collaborations for modern enterprises is a critical problem in controlling third-party risk.
The number of third parties a company collaborates with makes it incredibly difficult to track possible risks or regulatory compliance.
Third-party risk management demands companies monitor and identify risks across all third parties while completing various due diligence and decision-making degrees. If even one is overlooked, that vendor may be exposed to a risk that, if exploited, might result in significant damage.
A good TPRM program should enable businesses to view their third-party risks across all service providers quickly and simply.
However, companies frequently lack a comprehensive perspective of their third-party connections and associated dangers. This makes tracking individual vendor performance, security postures, risk mitigation, and regulatory compliance across all third parties challenging.
As with other aspects of business, having clear insight into day-to-day workflows and management procedures is critical to ensure that operations operate smoothly and that any concerns are resolved as soon as possible.
TPRM slows down this workflow without visibility, frequently resulting in missed risks and miscommunications across the third-party risk management process.
Regulatory and Compliance Issues
Data privacy and cybersecurity requirements are becoming more stringent as digital data becomes more integrated into company processes. These regulations may indirectly impact your business if you deal with a third party that is required to follow them.
If a third party fails to comply with specific legislation, your company may be held accountable for any ensuing damages.
The General Data Protection Regulation (GDPR) is one example of such legislation. The European Union (EU) established this rule in 2018 to guarantee the privacy of EU people, and it compels enterprises to notify authorities of certain types of personal data breaches within a set timeframe.
If your organization is based in the EU and uses a third party outside the EU to handle personal data, part of your compliance program must consider whether the third party also complies with the GDPR.
Insufficient Continuous Monitoring
Third-party risks evolve with time. An organization may now classify a third party as low-risk, but that classification may change tomorrow. Continuous monitoring is required for a successful TPRM program, but it is challenging to perform correctly.
With their present resources and technology, organizations with several vendors may struggle to monitor each of them constantly. Furthermore, the risk environment continuously changes due to new threats, legislation, and business practices, influencing what continuous monitoring must keep up with.
Where Do I Start Third-Party Due Diligence?
The first step to any vendor due diligence program is cataloging your business partners. Starting with the ones most critical to business processes is easy. To achieve this objective, you must create and distribute due diligence questionnaires. Next, you’ve got networks, servers, and software providers.
The difficulties arise when you start drilling down further. Different business areas require other vendors.
For example, your human resource department possibly links to healthcare insurance providers using a web-based application. Meanwhile, your marketing department uses social media tools to develop your brand.
While some business partners are easy to define, the risks to your data environment come from being interconnected within an overarching ecosystem.
How Do I Analyze Third-Party Risk?
Finding vendors may be difficult, but determining your third-party risk feels insurmountable.
In the due diligence review of third-party relationships, you need to evaluate, at minimum, the following:
- How does the vendor support my overall business objectives and strategic plans?
- How critical to business operations is the vendor?
- How important is the vendor to business continuity?
- What information does the vendor access?
- What networks, servers, software, and devices do the vendor access?
- What level of access do I need to provide the vendor to my networks, servers, software, and appliances?
If a vendor needs high access to private information, they need to be labeled as a high-risk relationship. However, even though a vendor isn’t a high risk to your organization, you may need to look at the various risks associated with the relationship.
How to Create Associated Risk Tiers
Some vendors may not be critical to business operations, but they access private information. Some vendors may access your networks but don’t access your customer information.
For example, social media marketing tools access your networks, but they probably won’t be critical to business operations. Meanwhile, a payment processing vendor will be essential to your business operations and access to customer information.
Finally, if you manage an employee web portal, the data is private information unrelated to customers; it accesses your networks but may not be critical to maintaining business continuity.
All of these associated risks impact your cybersecurity, but not necessarily equally. Considering the amount of access, information, and criticality, create risk-based segmentation of your vendors to help monitor the most impactful risks.
5 Vendor Management Due Diligence Best Practices
After determining your risks, you need to establish strategies that mitigate them. Although you may choose to accept, transfer, or refuse certain risks, ultimately, you can’t get rid of all of them. Strategies for risk mitigation include obtaining self-assessments, site visits, audit reports, and continuous monitoring tools.
Review Employee Conduct
All vendor employees can pose a data risk. Part of due diligence requires reviewing the risks that employees – from senior management to entry-level – pose. For example, a single disgruntled employee can lead to corruption risks arising from the desire to sell information. In addition, if employees leave bad reviews on hiring websites, the company may pose this risk.
Establish Legal Guidelines
Business relationships aren’t friendships. They require legal oversight, such as contractual obligations. A strong vendor management program maintains service-level agreements that define product delivery and cybersecurity requirements. To protect your business, you must explain everything from the vendor’s access level to the data breach notification schedule.
Define Cybersecurity Controls
Your vendors need to align with your cybersecurity stance. You need to define your risk management requirements to avoid liability for their data breach. These requirements include firewall protections and data encryption to monitor their ecosystem.
Many businesses forget that their business partners also use vendors. Those fourth-party risks increasingly boomerang back to you, making you liable for any data breach caused down the supply chain.
Trust But Verify
Sure, you trust the audit reports of your vendor’s supply. But, unfortunately, those reports only show you a point in time. Cybersecurity threats evolve constantly. As such, your audit reports can be outdated, with one previously unknown vulnerability being exploited by hackers, otherwise known as “zero-day vulnerabilities.” Therefore, you need a way to review the threats to your data continuously to maintain a robust cybersecurity stance.
Continuous Monitoring for Third-Party Vendors
Due to the ability of firms to boost functional efficiency and concentrate on key business goals, outsourcing has grown widespread in the business sector. Nevertheless, if third-party vendor relationships are poorly managed, they can expose businesses to several hazards. While companies evaluate these risks throughout the onboarding process, the emphasis on due diligence typically shifts away after a vendor has been incorporated into business operations.
Without ongoing monitoring, organizations are unlikely to be aware of third-party risks that might cause significant financial and reputational damage to their company. Therefore, companies need procedures that enable them to regularly assess vendor security to reduce risk and implement Third-party risk monitoring.
This will guarantee your company is shielded from vendor obligations and maintains third-party due diligence beyond the onboarding procedure.
How to Review and Improve Your Due Diligence Practices Over Time
The following are a few crucial procedures businesses may use to sustain third-party due diligence.
Consolidate Third Party Data
Businesses’ visibility over their operations may be diminished by having a sizable base of third-party vendors. Therefore, organizations should put procedures in place to preserve crucial information from being lost and centralize third parties’ data.
It will be easier to obtain information by consolidating company information, contacts, previous assessment findings, and third-party roles and duties. This will also help you with suppliers’ risk mitigation procedures.
Understand the Risk Landscape of your Business
When keeping track of third-party due diligence, it’s critical to identify the dangers that represent the most significant risk to your company. Making risk appetite and risk tolerance declarations is one method to do this.
The amount of risk your company is willing to take to achieve your business goals is known as your firm’s “risk appetite.” In contrast, risk tolerance statements quantify the level of risk your firm can accept before failing.
Using these two metrics, you may prioritize vendor risk based on your strategic goals, which will help you complete your due diligence quicker and for less money.
Sort Vendor Risk
Each vendor you work with presents a particular risk to your company. Therefore, it is essential to categorize third-party risk since it enables you to decide what steps should be taken to address certain risk instances.
The following are the most typical categories of vendor risk:
- Strategic Risk
- Reputational Risk
- Operational Risk
- Transactional Risk
- Compliance Risk
Establish a Procedure for Third-Party Monitoring
Establishing a mechanism to track vendor security posture is one of the critical components of third-party due diligence. Third-party risk assessments, created to determine the degree of particular risk vendors bring to a company, can be used to do this.
To make this process as efficient as possible, you should develop procedures for managing vendor risk that all organizational departments can use. This facilitates the assessment process and enables you to conduct more thorough examinations.
Organizations should use automation whenever feasible to conduct evaluations because they need a lot of resources. In addition, companies can standardize assessments through technology, making third-party monitoring and management flexibility possible.
Audit your Due Diligence Procedure
Organizations must track how well and precisely their due diligence systems evaluate vendor risk to sustain owing diligence. You can develop success metrics when reviewing your due diligence procedures using your risk appetite and tolerance statements as a baseline for acceptable risk. By comparing performance to these measures, you can assess how well your firm manages risk and find areas for improvement.
To get the most out of the knowledge your programs can teach you, it is advised that you audit your processes once a year. Once a risk has been recognized, monitoring the steps taken to ensure that third parties correctly handle any liabilities is crucial.
How ZenGRC Enables Security-First Vendor Management
Vendor management means reviewing your third-party providers’ security as diligently as you review your own. First, however, Chief Information Security Officers (CISOs) need tools to help manage the alert influx.
A single person can’t be in contact with every vendor every day. Moreover, even in a small business, maintaining the organization necessary to ensure continuous monitoring and communication with a few vendors can be overwhelming.
ZenGRC offers a Task Management capability, where compliance officers can assign remediation work and capture all the relevant data about that job: the requester, the assignee, the current status of the task, and necessary deadlines.
Now, your CISO can maintain a workflow that enables a robust vendor management program that keeps your organization secure. First, monitor your vendors in real-time, then create a workflow that allows you to maintain ongoing oversight to ensure they remediate issues.
Contact us for a demo today for more information about how ZenGRC can streamline your Governance, Risk Management, and Compliance (GRC) process.