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Third-Party Risk Management – What is it & How to Manage Third-Party Risks

By Anas Baig | Reviewed By Adeel Hasan
Published April 16, 2024

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Suppose a company takes its users' data privacy incredibly seriously. It changes its data processing and collection processes to ensure compliance with every major data protection law globally—the company's business and customer confidence in the company boom as a result.

However, there is a data breach. Not at the company itself but at a vendor it used to source some of its research data. Considering the frequent exchange of data between the company and the vendor, questions are raised over whether company A took the necessary steps to ensure adequate privacy and protection of all its user data.

This is a consequence of having a poor Third-Party Risk Management (TPRM) or Vendor Risk Management (VRM) system. Even though company A did nothing wrong, even though its practices were fully compliant with every data protection law out there, and even though it put its users' data privacy above all else, the lack of TPRM jeopardizes the goodwill it had worked so hard to cultivate.

As puzzling as it may seem, not only do businesses need to eliminate any discrepancies in their own practices but also take active measures to ensure none of the third parties they deal with are involved in practices that may hurt their standing with customers indirectly.

A TPRM system is by far one of the most effective and efficient methods to evaluate any such risks from any third party. Having a sound TPRM system and practices within your organization can give you peace of mind about the risks involved in doing business with your current vendors and suppliers and give you a competitive advantage in the long run.

What is Third-Party Risk Management?

Third-Party Risk Management (TPRM) is a type of risk management that involves mitigating the risks of using third parties, such as vendors, suppliers, service providers, etc. TPRM's purpose within an organization is to ensure that factors related to third parties do not harm, threaten, or jeopardize the organization's internal and external operations.

The implementation of the TPRM goes beyond an organization's own assessments. It involves understanding what relevant safety precautions and safeguards a third party might have in place. This allows an organization to know exactly where each of the third parties they do business with withstands across different categories regarding their own risk management practices.

Also known as vendor risk management (VRM) or supply chain risk management (SCRM), TPRM is an umbrella term for a management system that can help any organization ascertain any risks it might be exposed to directly or indirectly.

Why is Third-Party Risk Management Important?

Understanding TPRM is only the first step in implementing it across your organization. It is additionally vital to understand what makes TPRM so crucial for businesses. Reliance on third parties is not a new phenomenon. Outsourcing and leaps in supply chain management have allowed businesses to become more efficient and offer better goods and services at a fraction of the cost to users.

But that has come at a cost. Today, organizations rely more on third parties, such as their vendors, suppliers, and other service providers. Naturally, anything that could hurt the smooth functioning of these third parties will directly impact the businesses reliant on them.

An easy example is something as simple and vital as communication via Slack or G Suite. Suppose Slack's servers crash. An organization with employees working across the globe who rely on Slack to maintain consistent communication with one another might find themselves scrambling for a way to resume their communications. It's the same case with G Suite.

Suppose there's an all-important meeting coming up, and a potential client expects a thorough presentation with relevant information and analysis. The final presentation is saved on Google Slides, with the apropos analysis on Google Docs. But now that G Suite is down, the presentation and the analysis are unavailable.

Regardless of how well done the presentation might have been or how meticulous the analysis was, it's useless since it's not accessible. The result? Catastrophic for your chances of landing that client.

This was just one example of how a breakdown at a third-party service provider could impact your ability to conduct business. Considering how businesses rely on third parties to ship their goods, manage their payrolls, oversee their cybersecurity, and so much more, it becomes abundantly clear how important TPRM can be to know exactly what risks you may be vulnerable to.

What are Some of the Best TPRM Practices?

Of course, simply understanding why having a TPRM system is essential is only the start. The next logical step is to understand what practices a company precisely must adopt to maximize the benefits of its TPRM system. Some of the best practices that any company can adopt include the following:

Know Exactly Who Your Third Parties Are

This may come as a surprise, but this should undoubtedly be at the top of any organization's TPRM best practices checklist. After all, before taking any steps to implement a TPRM system within an organization, it is important to know exactly which third parties an organization is dealing with and what information is being shared with each one.

Considering how most organizations have several departments that deal with various third parties on their own, in some instances, individual employees dealing with third parties on their own, there is likely a lack of oversight about which third parties an organization deals with.

In some cases, a vendor may not be considered a third party. The best way to get started is to educate your employees on a department-by-department basis about who qualifies as a third party and then request that they provide their details in a centralized sheet for the entire company.

Once such a list is created, it is easy to see which third parties an organization is dealing with, what kind of access to information each third party has, and what steps you can take to deal with them individually.

Prioritize, Prioritize, Prioritize!

Once you have a centralized list of third parties your organization deals with, a common problem is determining priority. In some cases, it should be easy to assign a high priority to your cloud services provider and a low priority to the vendor providing the least business-critical services.

However, in most cases, you'll find prioritizing to be particularly challenging. A good criterion to prioritize your third party is assigning them a risk rating. You can easily assign each of your third parties a risk rating based on two factors:

  • The likelihood of a data breach on their end, and
  • The potential cost of their data breach on your business.

Using the example above, a data breach at your cloud services provider can have a devastating impact on your ability to function appropriately versus a data breach at a company that provides your organization nothing more than cleaning services.

Depending on your needs from your third parties, you can factor in other key elements, but a risk rating would be the best way to start.

Automate Whenever Possible

This is arguably the easiest way to bolster your TPRM system's efficiency and effectiveness. Once you've begun reviewing your third parties' risk ratings, you'll quickly realize just how cumbersome and labor-intensive the whole process is.

You'll probably be working through multiple third parties, and chances are most of these will be using manual tools like an Excel spreadsheet to maintain their own TPRM systems. Aside from being repetitive and labor-intensive, such manual tools are also prone to human errors. And as mentioned earlier, a single error could prove fatal to the effectiveness of your TPRM system.

Fortunately, there's an easy way to avoid all that: automated vendor assessment. It will save you and your third parties time and eliminate human error while delivering the best results for your TPRM.

Collect Consistent Data

Lastly, you have to ensure you collect regular data from third parties. This is because organizations often only get to look at a snapshot of their third parties' practices. However, regular data collection will allow you to notice a trend and see precisely what your third parties' risk management practices are over an extended time.

Secondly, even when you do collect data regularly, all the data may not be entirely in the same format. Since most TPRM require questionnaires, some of your third parties may choose to answer yes/no, while others may give a detailed answer.

To create enough consistency, you can do either of two things: First, get someone to manually go through the responses and create consistency in them, or second, have an automated vendor assessment tool that properly structures all the collected data.

What is the Third-Party Risk Management Lifecycle?

It should be abundantly clear that TPRM is a process. One that takes both time and patience to implement correctly, especially if you want the desired results. Like with any other process, the TPRM process has a lifecycle. Within this lifecycle, an organization pinpoints its relationship with each third party, how much risk each third party poses, and what to do once you have identified the risks involved. This is what a typical TPRM lifecycle may look like:

Vendor Identification & Evaluation

The most basic avenue to start your TPRM process is to identify exactly which third parties you're dealing with. A highly effective way to catalog your third parties is via the finance department. Since you likely have almost all your third parties on retainer, the financial information should be vital in helping you correctly identify your third parties.

You can start evaluating the risk posed by each party based on the risk rating discussed earlier. Additionally, some other factors you can consider when evaluating each third party includes:

  • Type of data involved,
  • Relevant certifications held by the third party,
  • Information held by the third party, and
  • Hosting information.

Risk Assessment

The most important part of the entire TPRM process is assessing the risk each third party exposes you to. The preliminary evaluation should be enough to elaborate on which third parties pose the highest risk based on their practices.

The next step is to create a map of just how vulnerable your own business is based on the practices of the third party. An automated solution, such as a vendor assessment tool, would be highly efficient and effective at this point to help your risk mitigation efforts.

A vendor assessment tool can continually monitor third parties for possible data risks, validate each third party's risk based on your own criteria, and flag any high-risk activities. As a result, your company's TPRM will be in a much better position.

Risk Mitigation

Risks can be identified and mitigated after a risk assessment has been done. Risk reduction workflow frequently involves identifying the risks and assigning a risk level or score. It is up to the organizations to decide if the risk is acceptable within their specified risk range, and a risk owner must confirm that the necessary protections are in place to reduce the risk.

Organizations must monitor risks at this stage for any occurrences that could escalate the risk level, resulting in a data breach. It's crucial to monitor vendors throughout a third-party relationship and adjust when new problems appear. For instance, new laws, bad press, high-profile data breaches, and changes in how a vendor is used can all affect the risks associated with your third parties.

Offboarding

At this point, an organization will know which third parties pose a significant risk based on their practices. While the automated vendor assessment tool should highlight potential risks associated with each party, you should sever ties with the third parties that pose the most alarming risk.

Ensure that you communicate the discontinuation of your relationship internally with all your staff and the third party involved through proper channels. Ensure that the third party in question is sent a detailed report highlighting the findings of your vendor assessment and the precise reasons for your decision to discontinue your relationship.

Creating an offboarding checklist is another way of demonstrating compliance in the case of a regulatory investigation or audit. A checklist will confirm that all necessary steps were performed by sending an internal and external evaluation.

Additionally, maintain a detailed log of all your communications for both compliance and regulatory audit reasons. Establishing auditable documentation makes it much simpler to report on important program elements and pinpoint opportunities for improvement.

Risk Mitigation

Risks can be identified and mitigated after a risk assessment has been done. Risk reduction workflow frequently involves identifying the risks and assigning a risk level or score. It is up to the organizations to decide if the risk is acceptable within their specified risk range, and a risk owner must confirm that the necessary protections are in place to reduce the risk.

At this stage, organizations must monitor risks for any occurrences that could escalate the risk level and result in a data breach.

Which Organization’s Department Owns TPRM?

Third-party risk management cannot be approached in a one-tier or universal manner. Since every business is unique, no one department has established roles for managing vendor risk.

A team for managing vendor risks or third-party risks may exist in certain established firms, although this is not the case for many. Therefore, typical positions and divisions that "own" third-party risk include:

The following list is by no means definitive, but the range of titles and departments can provide some insight into the various approaches to third-party risk management:

  • Chief Information Security Officer, commonly referred to as CISO,
  • Chief Procurement Officer, commonly referred to as CPO,
  • Chief Information Officer, commonly referred to as CIO,
  • Chief Privacy Officer, commonly referred to as CPO,
  • Information Technology (IT),
  • Sourcing and Procurement,
  • Information Security,
  • Risk and Compliance,
  • Supply Chain Manager,
  • Third-Party Risk Manager,
  • Vendor Risk Manager,
  • Vendor Management, and
  • Contract Manager.

What are the Benefits of Third-Party Risk Management Software?

Your organization can create an effective TPRM management program that benefits your bottom line with third-party risk software. The benefits outweigh the costs when utilizing the automation capabilities that purpose-built software offers. These benefits include:

  • Enhanced security,
  • Increased cost savings, time savings, and customer satisfaction,
  • Less duplication of effort for improved data visibility,
  • Quicker onboarding of vendors,
  • Simpler evaluations,
  • Increased reporting capacity,
  • Simpler audits,
  • Fewer dangers,
  • More effective vendor performance, and
  • Fewer spreadsheets.

That said, the effectiveness of even the best risk management practices depends on how well they are implemented. Most third-party breaches are brought on by lax enforcement of current guidelines and procedures. Your expectations for your vendors must be open and clear to them.

How to Evaluate Third Parties

There are numerous tools and techniques available for assessing third parties. The board will typically decide on the most suitable methods according to an organization’s industry, the number of vendors they use, information security regulations within their domain, senior management role, and expectations. Common techniques include:

Security Ratings

The security ratings help an organization evaluate third parties by:

  • Providing a real-time understanding of supply chain, third-party vendor, and business partner relationships,
  • Reducing third-party risks and fourth-party risks,
  • Enabling insurers to better evaluate and price their insurance policies by gaining visibility into the security program,
  • Gaining visibility into a business through a third-party evaluation of a potential investment,
  • Enabling organizations and other entities to monitor and control their cybersecurity posture.

Security Questionnaire

Security questionnaires, also known as third-party risk assessments, are made to assist organizations in finding any vulnerabilities in third-party suppliers, partners, and service providers that might lead to a data breach or other cyberattacks.

Penetration Testing

Penetration testing, often known as pen testing or ethical hacking, evaluates the cybersecurity of a computer system, network, or web application by checking for vulnerable security flaws.

Virtual and Onsite Evaluations

Reviews of policies and procedures and a visual inspection of physical security measures can be included in virtual and onsite evaluations, typically carried out by an outside party.

What are the Common Challenges of Third-Party Risk Management?

Most organizations encounter several challenges when setting up and maintaining a third-party risk management program. These include:

Lack of Speed

Getting a vendor to fill out a security questionnaire and analyzing the answers can take some time.

Lack of Depth

Most organizations overshadow the task of constantly monitoring third-party risks. This is true since a large workforce is required to ensure each process runs smoothly and risk-free. The solution is to automate such processes and elude the chances of human error.

Lack of Visibility

Using traditional risk assessment approaches might be challenging to confirm a vendor's statements about their information security procedures. Third-party risk management teams can have unbiased, reliable, and updated knowledge about a vendor's security procedures by utilizing security ratings.

Lack of Consistency

All vendors are not monitored equally by unstructured/non-automated third-party risk management procedures, meaning not all evaluations might follow the same standards as done for other vendors.

Lack of Context

Even though different forms of vendor partnerships might present varying degrees of risk, many businesses fail to offer context for their assessment. Without proper context, the findings may be taken out of context and not hold value.

Lack of Trackability

Keeping track of their activities can be difficult if your organization has multiple third parties. It's critical to keep a close eye on which vendors you use, who received security questionnaires from you, how thoroughly they were replied to, and when they were finished. Older research findings should serve as a warning sign that calls for reevaluation.

Lack of Engagement

No follow-ups or communications result in a loss of information and context. Organizations should create a centralized portal where security questionnaires can be sent and reviewed, freeing time to manage various files and emails.

How Securiti Can Help You Manage Your Third-Party Risk

Businesses have become interdependent on one another on a scale that could hardly have been possible a few decades ago. It is not uncommon to see a company operating out of New York have its developers based in India, servers based in Finland, and provide a service to a customer based in the UAE. However, such interconnectivity brings the issue of shared risk.

Unlike before, gaping mismanagement on the part of a third party can hurt a business substantially, both monetarily and in terms of public reputation. With each company routinely dealing with thousands of third parties daily, automation holds the key to properly assessing the risk each company exposes itself to.

Securiti is a market leader in enterprise data privacy solutions based on its PrivacyOps framework. Securiti can help you institute highly effective and efficient Third-Party Risk Management across your organization with several artificial intelligence and machine learning-based tools, such as automated Vendor Risk Assessment.

Request a demo today to see how Securiti can help you.

Frequently Asked Questions

Direct business relationships between your organization and third-party vendors are known as third-party. The businesses that have contracts with your third parties are your fourth parties.

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