Every business, regardless of industry or size, engages with third-party vendors for operations of specific sorts. However, in each of these collaborations, companies grant third parties access to their network and classified information, expanding the attack surface.
In other words, business owners could end up in the headlines due to suppliers’ lax information security of their, as well as their customers. In fact, abouthalf of businesses worldwide have endured a data breach due to a third party.
When these third parties lack robust cybersecurity protocols or compliance, developing and maintaining a third-party risk management (TPRM) program becomes a critical business decision.
Third-party risk management empowers companies to comprehensively monitor and examine the threats due to outsourcing specific operations by pinpointing the areas of potential weak points. These risks can be environmental, financial, and security-related.
Suppose a retailer works closely with a delivery service provider who can access all the retailer’s customer details. While the retail company might have refined its logistics by offering access to the service provider, it has also exposed itself to possible vulnerabilities because of this collaboration. For instance, one of the delivery agents might accidentally leak customer information online.
With TRPM, businesses can make risk-aware decisions and minimize these risks associated with third parties (for example, law firms, research centers, and financial consultants) to an acceptable level.
Third-party Risk Types
Working with third parties can introduce the following risks:
Financial risk springs up when suppliers fail to meet the fiscal performance benchmarks pre-set by organizations. Such third-party actions damage the financial status of businesses. This damage can come as below-par supplier service or a faulty part that hinders revenue growth. Additionally, companies may have to foot penalties or legal fees. Hence, they must identify which third parties directly affect their revenue or sales, as systems that monitor the sales activity pose an additional security risk.
Third parties pose potential operational risks if they deliver services integral to critical business operations. At times, companies bank on third-party applications to perform routine yet crucial tasks. Unfortunately, third parties can fall victim to cybercrime or natural catastrophe that shut down their service. As a result, businesses may suffer operational downtime, data loss, or privacy breach.
Organizations can manage operational risks through contractually obligated service level agreements (SLA) and business continuity and incident response strategies. Based on the severity of the third party, companies can rope in a backup supplier – a common exercise in the financial service realm.
This risk arises as third parties expose their attack surface due to mismanagement of vulnerabilities or controls, leading to cyber intrusion, security breach, or other risk incidents.
Often, third parties are the soft target for opportunistic attackers, who penetrate supply-chain links, disrupting their devices and systems without getting noticed. Later, they use the affected third parties as a platform to trigger digital attacks on higher-value targets.
Organizations can deal with cybersecurity risks by conducting due diligence before onboarding suppliers and constantly monitoring throughout the supplier lifecycle.
Strategic risk arises due to the non-alignment of third parties and enterprises on mission-critical decisions and goals. Often, this risk stems from inefficient decision-making of third parties. Therefore, constant inspection of outsourced persons is vital to ensure that strategic risks do not result in reputational, compliance, or eventually, financial risk.
Companies experience reputational or brand risks when the third party they are collaborating with has a history of law infringements, security violations, and dissatisfied customers. Organizations receive public backlash as well because of these outsourced individuals, and thus, witness a drop in customer retention in the aftermath.
Human rights, ethical sourcing, and environmental, social, and governance (ESG) have been the topics of discussion in almost every newsroom. Businesses can also be on the brink of reputational risks if third parties do not follow proper labor and sustainability practices.
Compliance or regulation risks stem from third-party security control failure leading to data loss and, ultimately, data privacy infringement, leaving the primary organization subject to liability and penalty. This type of risk is prevalent in healthcare, financial services, and government agencies. Compliance risks are a major concern in today’s business ecosystem, as third parties are the origin for8 out of 10 data breaches.
As more industry norms and criteria consider third-party risk as a compliance requisite, organizations must ensure that they apply their risk appetite to outsourced business partners too.
For instance, if a primary control within a firm updates its security patches every month, the firm should apply that same rule to the third parties and verify their controls’ effectiveness.
Third-party Risk Management Methods
Over the last three years,7 out of 10 enterprises have witnessed a rise in their third-party network. Hence, to devise a leak-proof TPRM strategy that can feed into overall corporate risk management, C-suite executives must include the following steps:
Identify Potential Risks
Before bringing a third party onboard, it is crucial to spot the risks decision-makers would be introducing to their companies and the degree of due diligence necessary. An increasingly common approach to doing this is to utilize security ratings to check whether the external security fabric of the third party passes a minimum acceptable score.
Besides, organizations can create their own questionnaires or use one of the templates available online. They must ensure that the questionnaire includes questions about prevalent compliance norms, hosting details, and the data type involved.
Classify Third Parties
Using the information gathered above, management can group third parties into high risk, medium risk, and low risk depending on the inherent risk they pose to the enterprise.
For instance, third parties must implement corrective measures immediately if they land in a high-risk zone. Similarly, for medium-risk third parties, taking corrective measures within a defined time frame would be enough. Low risks are generally acceptable; however, third parties can devise a response blueprint in the longer term.
Furthermore, enterprises must mention the controls and requirements in the buyer-supplier agreements so that the third parties perform as expected.
If the third party has unacceptable risks, businesses may decide not to work with them until they resolve the detected security issues. In this situation, TPRM software can be beneficial as it automatically prioritizes the most important tasks and ensures faster risk resolution.
After that, organizations must decide whether to onboard the third party or continue looking for a different one based on their risk appetite, the severity of the vendor, and any necessary compliance requisites.
Contracting and Procurement
Sometimes done alongside risk remediation, contracting, and procurement are crucial from a third-party risk viewpoint. Contracts contain information that fall beyond the radar of TPRM. That said, businesses should look for various key clauses, provisions, and terms while inspecting third-party agreements. Some of them include the confidentiality clause, limitation of liability, and defined scope of services/products.
Third-party risks are in continuous evolution due to market conditions, vendors’ financial well-being, or regulatory changes. Hence, constant monitoring throughout the lifecycle of third-party relationships is necessary to ensure that all outsourced workers are fulfilling their commitments and do not represent an unwanted threat to companies.
Businesses can achieve this through more frequent evaluations or external data feeds, such as updated cybersecurity scores. Some important risk-changing events to check include product launches, mergers & acquisitions (M&A), and internal process changes. These changes should automatically prompt analysis and/or issue.
A formal, comprehensive vendor offboarding is paramount, both for recordkeeping requirements and security purposes. Moreover, businesses must maintain an in-depth evidence trail of these procedures to show compliance during regulatory audits. Finally, after retiring the third parties, companies must permanently delete information that is no longer vital.
Beroe offers third-party risk management tools which help businesses monitor, evaluate, and manage their financial as well as cybersecurity-related risks. Organizations can gauge the impact of event-led disruption on their supply chains and gain unprecedented access to their supplier’s compliance credentials covering financial, ethical, and environmental certifications.
Beroe works in line with the ever-changing GRC demands to keep businesses safe and sound. For enterprises ready to lead the way in effectively identifying and managing third-party risks, Beroe’s risk management software can be the go-to solution.