6 Third Party Risk Management Best Practices for Enterprises

Working with third-parties is nothing new and has been a major part of the business world for decades. It gives businesses the benefits of specialized skills and expertise that cannot be found in-house without the need to hire full-time employees, it helps them scale their operations, and it can provide greater flexibility to meet growing customer demands efficiently.



The benefits of third-party relationships are clear but what about the risks?

In this blog post, we will explore the importance of managing third-party risks and provide some tips on how to make this process more effective and efficient.

What is Third Party Risk Management?

Third-party risk management is an essential component of any business strategy. It's all about identifying, assessing, and managing the risks associated with engaging third-party vendors, contractors, and other outside parties to provide services or products to your organization. By understanding the potential security risks that come with third-party partnerships and taking proactive measures to reduce them, enterprises can add value to their business by mitigating the impacts of these risks. To do this effectively, organisations need to have an understanding of the different types of third-party relationships and the risks associated with each. 

Evaluating potential third-parties for security and compliance requires thorough vetting processes such as background checks, interviews, and due diligence investigations into their policies and procedures. Additionally, organisations must monitor and audit existing partnerships on a regular basis in order to stay abreast of any changes in those relationships or activities that could impact their risk profile. Finally, implementing strong controls around security policies and procedures can help ensure that they are well-positioned to respond quickly to any emerging issues or threats.

The typical third-party risk management lifecycle consists of the following stages:

1. Risk Assessment: The first step is to identify and assess the potential risks associated with the third-party relationship. This includes assessing the third-party's financial stability, reputation, legal compliance, and security posture.
2. Due Diligence: Once the risks have been identified, due diligence is performed to gather more information about the third-party. This involves conducting background checks, reviewing financial statements, and analysing the third-party's security controls.
3. Contract Negotiation: Based on the risk assessment and due diligence, the contract with the third-party is negotiated to include specific clauses and controls to mitigate the identified risks.
4. Ongoing Monitoring: After the contract is signed, ongoing monitoring of the third-party's activities and controls is conducted to ensure continued compliance with the contract terms and regulatory requirements.
5. Termination: If the third-party relationship is no longer beneficial or if the risks associated with the relationship cannot be mitigated, the relationship is terminated in a way that minimizes any potential impact on the organization.
   

Who is a Third Party and What Risks Do They Pose?

In the context of TPRM, a third party is any external vendor or supplier that a company engages with to perform a business function. Third-party relationships may include IT service providers, cloud service providers, payment processors, logistics and transportation providers, among others. Third parties are also known as vendors, suppliers, service providers, contractors, partners, or consultants.

Third parties pose various risks to companies, such as:

• Compliance/Legal Risks: when a third party violates laws or regulations, resulting in legal or regulatory action against the company;
• Reputation Risk: when a third party's actions reflect negatively on the company, damaging its brand and reputation;
• Financial Risk: when a third party fails to deliver on contracted services, leading to financial losses for the company;
• Operational Risk: when a third party fails to meet service level agreements, resulting in delays or disruptions to business operations;
• Infosec Risk: when a third party's network or systems are compromised, leading to the disclosure of sensitive information;
• Strategic Risk: when your third-parties objectives or business strategies conflict with your own.

Suppose a company contracts with a third-party vendor to provide cloud storage services for their business documents and data. The vendor has access to the company's sensitive information and is responsible for maintaining the security of the data.

However, the vendor's security measures may not be as robust as the company's, and their employees may not follow proper security protocols, such as using strong passwords and regularly updating software. This could leave the data vulnerable to cyberattacks, such as hacking or phishing attempts.

Additionally, the vendor's own network could be compromised, which could then allow attackers to gain access to the company's data through the vendor's system. The vendor could also experience data breaches due to their own third-party relationships, such as with a subcontractor who has access to the vendor's system.

Note about fourth parties

Fourth parties refer to vendors or suppliers that are contracted by third parties engaged by a company. These companies can introduce further unexpected risks into your organization's supply chain. 

For example, if a company contracts a cloud service provider, the cloud service provider may contract with a data center provider. The data center provider is a fourth party to the company. 

Fourth-party risks can be challenging to manage since the company may not have any direct relationship or control over them. As per recent reports, 38% of organizations reported that third party breaches were caused by one of their "nth" parties, indicating that risks could come from your third-party vendors, fourth, fifth and sixth parties, etc. A good third party risk management strategy will also vet fourth parties your vendors work with.

Impact of Third Party Risks on Your Business

Outsourcing and working with third parties is common for today's businesses but so are data breaches - and many of them come from third-parties. 

Some of the biggest data breaches in history have been attributed to third parties - Equifax, Target, Home Depot, to name a few. And more recently, SolarWinds, Colonial Pipeline, and Okta. While third-party breaches were always a concern, the pandemic and remote work has made them even more of a threat. 

Reports show that over 50% of organizations experienced a third party breach in 2022. And as businesses become more dependent on third-parties to deliver on their mission, this number could grow.

The impact of a third-party breach is nothing short of disruptive and has far-reaching consequences for the affected business. The impact could range from failure of internal controls, operational disruptions, internal and external outage, lawsuits, regulatory fines, and loss of trust among customers and employees. That's why you need a solid third-party risk management program in place to mitigate the risks of outsourcing.

Why It's Essential to Have a Solid TPRM Strategy

Now that you know how important it is to have a solid third-party risk management strategy, let's dive deeper into the benefits.

Safeguarding Data

In today’s digital world, safeguarding data is essential. With TPRM strategies in place, enterprises can better evaluate whether vendors are handling their data responsibly and securely—helping protect data from unauthorized access or manipulation while maintaining transparency around vendor management processes.

Gain a Competitive Advantage

Not only does TPRM help mitigate risks, but it also creates a competitive advantage for your company by helping you maintain compliance with industry standards such as GDPR and CCPA, as well as build trust with customers and partners. Leveraging these strategies can also lead to tangible business benefits such as increased revenue, improved customer satisfaction scores, and improved market share.

The bottom line is that having a sound TPRM strategy will help your business be more secure and profitable in addition to the following benefits:

• Help mitigate risks associated with cyberattacks and data breaches;
• Help protect customer data from unauthorised access and manipulation;
• Ensure compliance with industry standards such as GDPR and CCPA;
• Build trust with customers and partners;
• Create tangible business benefits such as increased revenue, improved customer satisfaction scores, and improved market share.
  

Continuous Monitoring and Third-Party Risk Management

Continuous monitoring allows for tracking of your risk posture across your enterprise, regularly to continuously detect changes and trends. This enables you to identify, assess and address risk in a timely manner.

Continuous monitoring for your third party vendors allows for an early detection of any changes that could impact your supply chain, business partners, vendors, or other third parties.

Real-time Threat Detection

One of the most critical aspects of third-party risk management is real-time threat detection. In an era where cyberattacks are on the rise, organisations must have the capability to identify potential threats as they occur. Utilising advanced threat detection tools and technologies, companies can proactively respond to emerging risks, protecting their data and reputation.

Vendor Performance Metrics

Managing third-party relationships is not solely about risk avoidance; it's also about optimising performance. Establishing vendor performance metrics allows organisations to evaluate their partners' efficiency, reliability, and quality. This data-driven approach can help in identifying underperforming vendors and making informed decisions about the continuation of the partnership.

Data Breach Prevention

Data breaches are a constant threat in today's digital world. An essential aspect of third-party risk management is ensuring that vendors adhere to stringent data security measures. By implementing strict data protection protocols and fostering a culture of cybersecurity, organisations can significantly reduce the risk of data breaches originating from their partners.

Proactive Risk Mitigation

The best defence against third-party risks is a proactive offence. Organisations should anticipate potential risks and develop mitigation strategies accordingly. This could involve everything from conducting thorough due diligence before entering partnerships to having a robust incident response plan in place should a breach occur.

Compliance Tracking

Staying compliant with industry regulations and standards is non-negotiable. Effective third-party risk management includes continuous monitoring of vendor compliance. Automated tracking systems can help organisations ensure that their partners adhere to the necessary regulations, reducing the risk of legal and financial penalties.

6 TPRM Best Practices for Enterprises

Sufficient Due Diligence and Monitoring

According to a recent report by Gartner, 80% of legal and compliance leaders report that third-party risks were identified after initial onboarding and due diligence. This indicates that companies are not adequately assessing and monitoring third-party risks, which can result in data breaches, financial loss, reputation damage, and legal penalties. To mitigate third-party risks, it is essential to conduct sufficient due diligence before onboarding vendors and suppliers. 

Due diligence should include background checks, financial stability, reputation, and security controls. Once a vendor is onboarded, continuous monitoring should be implemented to ensure that they maintain security and compliance standards. This includes regular security assessments, audits, and compliance checks.

Continuous monitoring can help identify and address emerging risks before they become major issues. It also enables companies to respond quickly to any incidents or breaches, minimising the impact on the business.

Implement Access Control for Third Parties

When you engage with third parties for your business, they get access to data and information that is critical to your operations. A 2021 report by the Ponemon Institute found that 54% of organisations did not have a proper list of all the third parties that had access to their data. Moreover, 64% of organisations had not identified which parties had access to their most sensitive data. The report also highlighted that the majority of third-party data breaches were caused by granting too much access to third parties. 

You may not have the capacity to put all third parties under your security umbrella, or have control over the security practices of all third parties. However, you can control what they can access, when, and to what extent. Utilize identity and access management (IAM) and a zero-trust approach to ensure that only authorised users and systems can access sensitive data.

Rely on risk intelligence

As mentioned before, due diligence is something enterprises struggle with when it comes to third parties. However, it cannot be neglected.

While it is a tedious and time-consuming process, you're not alone in your endeavour. Utilize existing information that you have about your third parties to conduct background checks and assessments. In addition, utilize existing technologies to analyse third-party risks. 

Risk intelligence involves monitoring and analysing data from a variety of sources to identify and assess potential risks to the organisation. Organisations should leverage risk intelligence tools and techniques to identify and prioritise third-party risks, such as cybersecurity threats, compliance violations, and reputational risks. Risk intelligence can help organisations to proactively manage third-party risks and respond quickly to emerging threats.

Relationship segmentation

A recent report by Gartner showed that 60% of organizations now engage with over 1000 external third-parties. When you work with such a large number of third-parties, it's impossible to keep track of each one of them. 

In such cases, it is recommended to segment these third-parties into a hierarchy of relationships.  This approach involves grouping third-party relationships into distinct segments based on their risk profiles. The risk profile of each segment is determined by evaluating various factors such as the criticality of the third-party to the business, the amount of data or access they have to sensitive information, their security controls, and the overall regulatory environment in which they operate.

Once the relationships are segmented, organisations can prioritise their risk mitigation efforts, allocating resources where they are most needed. The highest-risk segments will require more rigorous risk assessments and continuous monitoring, while lower-risk segments may only require periodic checks.

Collaborate with internal and external auditors

In any enterprise, the top management is primarily concerned with the enterprise's key relationships. However, being responsible for the success of third party relationships is often seen as a huge liability by key stakeholders in the organization. Lack of accountability is one of the biggest challenges in third-party risk management.

When the task of vetting third parties and managing the risks associated with third parties seems to be too much to handle, it helps to collaborate with experts that can point you in the right direction. Internal and external auditors can help you build a strong third party risk management program and give you the support you need to ensure that your third-party relationships are secure.

Leverage the power of automation

Only 36% of organizations have automated the process of risk identification and mitigation for third parties, according to a survey. As a result, most organisations still rely on manually intensive processes and overworked staff to manage third-party risk. 

Using automation can help automate processes such as data collection, risk assessment, performance monitoring, compliance monitoring, contract management, and vendor onboarding, which can result in better third-party risk management and greater efficiency. Moreover, it can also help unify the risk management function across departments, reduce manual data entry and errors, and help create a centralized risk repository.

Conclusion

For greater success in today's competitive business environment, third-party risk management needs to be a priority. Your supply chain is the lifeblood of your business, and we want to help you protect its integrity and security. 

EvolveSC is our automated supply chain monitoring solution that is designed to to help enterprises stay connected to their supply chains, while ensuring total safety and compliance. To learn more about EvolveSC and how it works, book a demo with one of our security experts today.