To put it simply, third-party risk management is a segment of the risk management discipline that focuses on the security risk posed by third parties. It's commonly used with vendor risk management and similar terms. An excellent third-party risk management program espouses the idea of whole enterprise risk management.
WHY THIRD-PARTY RISK MANAGEMENT IS CRITICAL
Virtually every business outsources some part of its operations. It's one of the most common ways to control cost and scalability. A 2016 study revealed that 87% of the companies had suffered an incident caused by a vendor that negatively impacted their operational ability. That's an extremely low level of confidence in the systems supposed to protect something so widespread.
The California Consumer Privacy Act, GDPR, and other data privacy statutes show how the pendulum is rapidly shifting to protect individual privacy rights for personal data. Data breaches and cybersecurity incidents have become almost commonplace in our society. Over the last two years, it is estimated that a third party caused more than 50% of the cybersecurity incidents. Combining the staggeringly low levels of confidence in risk controls with the astoundingly high level of liability that your third-party vendors can leave you open to, it becomes apparent why it is so important to manage your third-party risk effectively.
AREAS OF RISK
We've covered how common third-party compromise is, but what does that compromise put you at risk of? The potential for civil liability goes without saying, but these other risk areas can be just as damaging, if not more.
REPUTATIONAL RISK
Damage to your reputation is difficult to gauge and even more challenging to repair. While many people remember the massive Target data breach, how many know that this resulted from a compromised HVAC vendor's computer system? As the primary stakeholder, you inherit most of the reputational risk should something go awry.
REGULATORY RISK
Those in the finance or healthcare industry are familiar with navigating the complicated regulations that they are subject to. Failure to comply with those same regulations by a poorly vetted or improperly supervised vendor can leave you at risk of civil fines, penalties, and other sanctions.
OPERATIONAL RISK
This almost goes without saying, but if a critical vendor is compromised, your entire business could be held hostage. Even without the ever-growing threat of ransomware, something like the loss of your web host could cripple operations. The same could be said for breached cloud-based data solutions if you rely heavily on those.
KEY COMPONENTS
Some of the significant areas of focus are:
- Risk assessment
- Contract structuring
- Onboarding vendors
- Conducting ongoing monitoring
You can see how wide a net the vendor risk management program casts. We recommend integrating employees from many company areas into the TPRM process instead of isolating risk management into its silo. This not only enhances the due diligence process but is also one of the best emerging third-party vendor risk management trends.
CHANGES AND IMPROVEMENTS TO DUE DILIGENCE
It's not just the threat landscape that has changed in recent times. The entire third-party ecosystem has evolved to the point where checkboxes and emailed annual questionnaires aren't going to cut it anymore. That's not to say that questionnaires don't have a place in the risk assessment process, but you can use many more effective techniques.
One of the most important considerations is the risk assessment of your fourth party vendors and further down your supply chain. Determining who your third-party vendors use to fulfill their obligations to you and then assessing their security risk allows for a better evaluation of the genuine threat to your company. Coupled with on-site visits, a review of their regulatory filings, and a contractual obligation to comply with your agency's data management policy, this can go a long way towards a healthy approach to TPRM.
VENDOR MANAGEMENT PROGRAM AUTOMATION
An exciting development in the vendor risk management field is the increasing use of technology to automate some processes. Nothing will genuinely replicate experienced personnel, but in a time of decreasing budgets and increased profit pressure, automation can free up needed capital down the line even if it comes with a higher start-up cost.
Management can release questionnaires on a set schedule, contact information and contracts can be stored, and vendors can even be asked to upload certain documents to comply with program requirements. Even cutting-edge programs use artificial intelligence and data analytics to evaluate submitted information for security and fraud risks.
COMMON AREAS OF WEAKNESS
Now that we've discussed what TPRM is, why it's crucial, its significant components, and some recent developments, what are some areas of weakness or common challenges faced in vendor risk management?
INCONSISTENCY
While there is a tendency to discount the risk posed by smaller or "inconsequential" vendors, assessing the appropriate level of risk takes criticality. Even the lowest risk vendors must still have the proper due diligence checks performed. Applying your standards uniformly across your vendor pool and adding specific tools and tasks is the way forward.
FAILURE TO APPLY CONTEXT
This is an area where criticality assessments are even more critical. You may have three IT vendors that you're tasked with risk assessments. It may be tempting to lump them all together under the umbrella of IT vendors and move on, especially if they check all the right boxes for your low-risk category. However, one of those vendors may simply import text and image data into WordPress for your blog, while another may be the web host for your patient portal or loan application services.
The latter two are inherently more critical, and therefore, they deserve a higher level of risk management even though they are otherwise low risk. Critical vendors are due for closer scrutiny, thanks to the impact their compromise could have on your business continuity.
IMPROPER TRACKING
You have an automated third-party risk management program that sends out questionnaires and contact update forms and requires specific document submissions from critical vendors. Do those forms populate into searchable databases? Does a human actively review them? You're failing a significant part of a successful vendor management program if they're not. Why take the time to implement the program and collect the data if no meaningful review or change tracking over time occurs?
TPRM can be a time-consuming and complex task. This holds for small businesses up through major corporations and regardless of industry. Venture Lynk can provide experts in cybersecurity and intelligence analysis that will take your third-party risk management to the next level. They provide wholly customizable services based on your industry, business size, and risk appetite, and they can even handle your vendor management within your preexisting VRM program.
