With organizations relying on external partners for so many services, but 54 percent lacking a complete list of third parties accessing their network, the risk of cyber threats via your third parties looms large. Hence third-party cyber risk management (TPCRM) is so important to safeguard operations.

This article explores what third-party risk management is, how to conduct third-party risk assessments, and best practices for third-party cyber risk management.

What Is Third-Party Risk?

Third-party risk refers to the potential threats that arise when an organization engages in business relationships with external entities, known as third parties. These third parties typically include suppliers, vendors, contractors, and service providers.

A third-party risk management program is a systematic approach organizations use to identify, assess, monitor, and mitigate the various risks associated with their third-party relationships.

The objective is to safeguard the organization’s interests, data security, and reputation by understanding and controlling the risks that these partnerships may introduce.

One of the primary reasons why third-party relationships carry risk is that these external entities often have access to sensitive data or critical systems of the organization. As a result, those third parties become potential vectors for data breaches, cyber-attacks, and other security vulnerabilities that could compromise the organization’s data security.

What Does Third-Party Risk Management Do?

Third-party risk management (TPRM) aims to reduce the risks to your organization from third-party relationships. It involves identifying, assessing, prioritizing, and controlling risks throughout the third-party lifecycle, from procurement to offboarding.

A successful TPRM plan addresses strategic and operational risks, including information security and cyber incidents. Cyber threats such as data breaches, malware, ransomware, and phishing are common risks when working with third parties.

Implementing a comprehensive TPRM program can be a daunting task, due to resource limitations, communication issues, compliance requirements, and lack of workflow automation. That said, the effort is worth it; an effective TPRM program can protect your business from potential harm caused by cyber threats. It also assures business continuity and strengthens the overall risk profile of your organization.

How Do You Conduct a Third Party Risk Assessment?

Conducting a third-party risk assessment is a vital part of the third-party risk management process. Here are the steps to conduct a comprehensive third-party risk assessment:

  1. Identify third parties. First, compile a list of all the third parties with whom your organization has business relationships. This can include vendors, suppliers, contractors, service providers, and other external entities involved in your operations.
  2. Categorize third parties. Group those third parties based on the criticality of their services and the potential risks they pose. High-risk vendors may have more access to sensitive data or might significantly harm your business if something goes wrong.
  3. Collect information. Request detailed information from the third parties about their security practices, data protection measures, financial stability, compliance with regulations, and any previous security incidents or breaches they may have experienced during the due diligence process.
  4. Create an assessment questionnaire. Develop a standardized questionnaire that covers various aspects of risk, including cybersecurity, privacy, compliance, financial stability, and business continuity. Share this questionnaire with third parties and request that they fill it out completely.
  5. Score the risks. Develop a risk scoring framework with appropriate metrics to evaluate the responses from third parties. Assign numerical values to different risk categories and assess each third party’s risk level based on its answers and any available risk intelligence or public information you also gather.
  6. Review contracts. Thoroughly review the contracts and agreements with each third party to assure they include appropriate language regarding security, data protection, compliance with regulations such as the European Union’s GDPR, breach notification, and liability for any security incidents.
  7. Implement ongoing monitoring. Set up continuous monitoring mechanisms to keep track of any changes in the third parties’ risk profiles, such as security incidents, financial troubles, or non-compliance risks. Continuous monitoring assures that the risk assessment process remains up-to-date.
  8. Communicate and follow up. Regularly communicate with the third parties about the assessment results, risk mitigation measures, and any necessary improvements they need to make. Follow up to verify that they are making progress in addressing the identified risks.
  9. Prepare executive reports. Create comprehensive reports for the organization’s executives and key stakeholders summarizing the overall third-party risk exposure, mitigating actions taken, and ongoing cybersecurity monitoring efforts.

What Are the Six Risks in Managing Third Parties?

Here are six common risks associated with managing third-party partners:

  1. Cybersecurity risks. When working with third-party partners (including new vendors), you might share considerable amounts of confidential information. That increases the risk of data breaches or unauthorized access to confidential data. Assuring proper data security measures and compliance with regulatory requirements is vital to enhance the organization’s security posture.
  2. Performance risks. Third-party vendors may not meet the organization’s expected quality standards. This could result in subpar products or services, leading to dissatisfied customers and damaging the organization’s reputation. Regular risk monitoring and vendor risk assessment can help identify and address potential issues.
  3. Legal and compliance risks. You are responsible for the regulatory compliance of third parties acting on your behalf; if they violate those obligations, regulators may take action against you as well as them.
  4. Dependency issues. Organizations may become overly reliant on third-party partners for critical functions within the ecosystem. If the partner experiences disruptions or fails to deliver as expected, that might disrupt your operations and continuity. Diversifying partnerships and having contingency plans in place can help mitigate this risk.
  5. Communication issues. Differences in communication styles, work culture, and language barriers may lead to misunderstandings and conflicts between the organization and its third parties. Effective communication and clear expectations are key to mitigating this risk.
  6. Financial risks. Third-party partnerships can involve financial risks, such as cost overruns, unexpected expenses, or payment disputes. Mitigate these risks by conducting thorough financial assessments of potential partners and establishing clear financial agreements.

Best Practices for Third-Party Cyber Risk Management

Here are the best practices for creating a third-party cyber risk management program for your business.

  1. Build a strong team first

    Assemble a skilled team capable of identifying, analyzing, prioritizing, and mitigating third-party risks.

    Once the team is in place, proceed with the planning phase. Develop a comprehensive third-party cyber risk management plan that outlines roles, responsibilities, and a vendor risk management policy. Additionally, include detailed procedures and policies for each step of the process.

  2. Follow the Steps

    Make a list of all your third parties and all the risks they pose to your organization, so you can begin to analyze them. This is an opportunity for your team to participate in tabletop exercises to understand existing risks and also to consider potential risks that still need to be addressed.

    Then review your service-level agreements (SLAs) for each third-party relationship you have. This is to assure that your vendors are performing as expected and to determine the compliance requirements for your organization.

  3. Analyze and categorize risks

    Next, conduct a third-party risk analysis, either in-house or by an independent cybersecurity professional. A third-party risk analysis will allow you to determine the nature and extent of risk each third-party relationship poses to your business to classify your contractors by risk and access level.

    Once you’ve assigned a risk level and categorized your third-party relationships based on the level of risk they pose, your team will need to prioritize the risks themselves according to their respective severity levels.

  4. Develop effective risk mitigation strategies

    Your team should develop a risk mitigation plan after identifying the cybersecurity risks associated with vendor relationships. In this phase, determine whether to accept, reject, transfer, or mitigate the identified risks. If necessary, consider finding another vendor as the best remediation strategy for certain third-party risks.

  5. Monitor and stay vigilant

    Query your third parties regularly with risk management questionnaires. Whether you use a template from an existing risk management framework or create your own, onboarding questionnaires and queries should be designed to help you scrutinize the security controls your third parties use. During onboarding, you can require that a third party must provide you with an up-to-date security assessment to obtain a contract.

    Any third parties with particularly high levels of risk might also require an audit, depending on their answers to the security questionnaire. You may even need to conduct on-site visits when necessary.

Manage Third-Party Risks with RiskOptics ROAR

Working with vendors is essential, but it also brings risks — and as your company grows, managing those third-party risks becomes more challenging. Then, how can you protect your company without compromising your business objectives? The ROAR Platform is the answer to that question.

The RiskOptics ROAR Platform is a comprehensive solution that allows you to collect all your relationships with third parties in one place. This makes it much simpler to reduce any risks associated with these third-party connections and automate third-party cyber risk management.

Schedule a demo to see how ROAR can assist your organization in effectively engaging with third-party providers.