No matter what industry you’re in, 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?
One or more parties must do third-party due diligence before entering into a contract or agreement with another. 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 that a corporation operates in, the third party’s business relationships, and other factors may all be significant. The company can do the actual due diligence on its own or with the aid of a provider of services specializing in these investigations.
Businesses need to conduct third-party due diligence when deciding who to cooperate with and enter into contracts with to reduce any concerns with compliance, legislation, and public perception. In addition, it may help the firm understand its potential for responsibility and risk before entering into a formal agreement and provide details on what mitigation measures would 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 is what makes it so important, particularly in today’s highly competitive and intricate global marketplace.
Where Do I Start Third-Party Due Diligence?
The first step to any vendor due diligence program lies in cataloging your business partners. Starting with the ones most critical to business processes is easy. 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.
For each third-party relationship, 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 a high level of 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 variety of 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 it 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 you to review 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. You must explain everything from the vendor’s access level to the data breach notification schedule to protect your business.
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.
How to maintain third-party due diligence
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 constant due diligence 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 maintain third-party due diligence beyond the onboarding procedure.
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 about their risk mitigation procedures.
Understand the hazards to 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 surveillance
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 by 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, it’s crucial to monitor the steps taken to ensure that third parties correctly handle any liabilities.
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. 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.
How ZenRisk 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 that help manage the influx of alerts.
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 small number of vendors can be overwhelming.
ZenRisk 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 ZenRisk can streamline your Governance, Risk Management, and Compliance (GRC) process.