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What is Third-Party Risk?

The statement that appeared in Thomas Reid's "Essays on the Intellectual Powers of Man" published in 1786 "a chain is only as strong as its weakest link" is as true now as it has ever been. When a single weak point in this contemporary cyber system is discovered, anything from personal bank accounts to national security secrets might be stolen. For your organization maybe third parties are the weakest link in your cyber network.

Third parties are those who work on behalf of one or more people engaged in a transaction. If someone or a company is doing something on behalf of us, they will bring the risk together.

In general, the company is the first party, the customer and employees are the second party, and product and/or service providers, such as suppliers, consultants, or intermediaries, who assist the parent company in achieving its sales, marketing, and company goals are referred to as third parties.

One of the most significant threats to your company's security and financial well-being is a third-party risk. Due to third parties who have access to their network and process sensitive data on their behalf, the ordinary company has a broad interface vulnerable to possible cyber-attacks.

Third-party risk is the possibility that your business will suffer a negative event (like a data breach, operational interruption, or reputational damage) if you choose to outsource certain services or utilize software developed by third parties to complete specific activities.

What does Third-Party Risk Mean?

Companies have been collaborating with suppliers, outsourcers, licensees, agents, and other third parties for years. What has evolved, however, is the volume and scope of third-party usage, as well as the regulatory attention on how businesses manage third parties to mitigate the risks.

The potential risk that occurs from institutions depending on third parties to conduct commercial services or operations on their behalf is referred to as third-party risk.

What are Types of Third-Party Risks?

Taking a risk-based approach to outsourcing necessitates a thorough awareness of the many types of third-party risk. Knowing this helps businesses to effectively assess third-party risk and classify providers according to the level of harm they offer. After that, security teams may create remediation strategies to ensure that all threats have been handled.

When considering third-party providers, be aware of the 5 main types of third-party risk listed below.

  1. Operational Risk
  2. Legal, regulatory, and compliance risk
  3. Cybersecurity Risk
  4. Financial Risk
  5. Strategic Risk

1. Operational Risk

The risk of loss coming from insufficient or failing internal processes, people, and systems, as well as external events, is known as operational risk.

Many businesses have outsourced a large portion of their operations. Because third-party connections frequently support an organization's processes, people, and systems, this implies that third-party interactions might expose a company to greater operational risks. Suppliers that have a high chance of experiencing an operational risk might have a negative influence on the revenues of companies that rely on their products.

As a result, it's necessary to assess the operational risks connected with your third-party and supplier base, especially those that are critical to your business operations.

When a provider breaks a rule or regulation, its customers may be considered complicit and held legally accountable. For example, if a vendor violates information security rules such as HIPAA or PCI-DSS, your company might be held accountable and fined.

This type of risk is a major problem for modern businesses, as 80 percent of data breaches now involve a third party. Third-party violations of environmental or labor laws can potentially lead to regulatory/compliance risk.

3. Cybersecurity Risk

With cyber-attacks becoming more sophisticated and faster, it's more critical than ever to keep an eye on the cybersecurity posture of your third-party service providers. To calculate vendor cybersecurity risk, you must first determine your organization's risk tolerance. After you've determined acceptable risk levels, you can begin assessing third-party security performance and making modifications as required.

Focus on compromised systems within provider network settings while measuring performance. While data losses are not always the consequence of system breaches, they do give insight into how providers detect and mitigate attacks.

4. Financial Risk

A third-party activity that harms an organization's financial status is referred to as financial risk. This harm might take the shape of poor vendor work or a malfunctioning component that slows down operations and decreases revenue. Fines or legal expenses can also be used to cause economic harm.

Excessive expenses and lost revenue are the two basic types of financial risk.

Excessive expenditures can limit corporate growth and lead to excessive debt if they are not handled. You should perform frequent audits to ensure that vendor expenditure is in compliance with the terms of your contract to avoid incurring extra charges.

Managing lost revenue begins with determining which vendors have a direct influence on your company's revenue-generating operations. A third-party system that monitors and analyzes your company's sales activities is one example of this. Any issues with these suppliers and systems might result in lost or delayed income, so it's critical to have mechanisms in place to keep track of them.

5. Strategic Risk

The issues that arise when third-party and organizational business plans are not in alignment are referred to as strategic risk. This risk is frequently caused by a third party's bad business decisions.

Third-party risks can have a variety of consequences for firms. Data breaches are an example of a serious risk that straddles several risk categories: they interrupt operations, pose a regulatory threat, and can result in financial and reputational harm.

Why is Third-Party Risk Important?

The consequences of third-party risks can bring companies to irreversible points. The Increased incidents related to vendors, the pressure of regulators on organizations to focus on third party risks, and economic volatility increased the importance of awareness of third party risk.

"You can't manage what you can't measure." - by management guru Peter Drucker.

To be able to measure it you need to know comprehensively all the risks that derived from third parties.

What is Third-Party Risk Management?

Third-party risk management (TPRM) is a type of risk management that aimed to identify and mitigate risks associated with the usage of third-party vendors (sometimes referred to as vendors, suppliers, partners, contractors, or service providers).

The discipline is intended to help businesses understand the third parties they work with, how they work with them, and what precautions they have in place. The extent and needs of a third-party risk management program vary greatly based on the industry, regulatory guidelines, and other considerations. Despite this, many TPRM guiding principles are universal and may be used by any business or firm.

Third parties can bring corruption risk, legal risk, reputation risk, financial risk, and cybersecurity risk to your firm's doorstep, and your organization must manage all of these in some way.

Third-party risk management is critical in terms of cybersecurity to assist avoid unwarranted risks and costs involved with third-party cyber hazards. Having a solid TPRM program in place decreases the negative impact your company's technological business decisions may have on both your customers and your financial soundness.

Companies or corporations should prioritize building robust cybersecurity defense-in-depth, but the effort can't stop at the increasingly leaky network perimeter. Organizations that broaden their security posture to include both trustworthy and untrusted third parties that have access to enterprise network resources will be better positioned to resist persistent attackers looking to exploit flaws.

What Does Third-Party Risk Management Cover?

Third-party risk management systems. Should cover below shared 7 essential elements

  • Inventory and Profiles of Suppliers: More than merely allowing risk-based activities, your third-party risk management system should also contain your whole vendor inventory
  • Risk-Based Classification Automation: A workflow-based approach for evaluating new suppliers should include scoring logic to establish an inherent risk level, allowing you to choose the extent of risk-based due diligence to undertake on your providers.
  • Engagement of Suppliers: Your solution should be designed to perform risk-based due diligence assessments based on the vendor's inherent risk level, as well as logic for proper scope. If your vendor will not have access to any of your organization's non-public information (NPI), for example, there is no reason to send them due diligence questions about how they keep, access, or handle your data.
  • Engagement of Employee: When your internal staff has to seek a new vendor or a change in scope for an existing vendor, they should do so through the third-party risk management system. Employees should have access to an employee-only portal that allows them to submit requests and have the proper procedures initiated.
  • Continuous Monitoring: Initial, point-in-time due diligence is no longer sufficient. Your system should be able to support your organization's continual monitoring approach to vendor relationship management. This might include routines for the launch, collection, and evaluation of vendor performance reviews. Integrating with additional third-party intelligence solutions to integrate real-time monitoring of your vendor relationships might also be an option.

  • System Integration: In addition to communicating with third-party intelligence tools, as noted above, your system should be able to easily interact with other operational tools utilized by your business and bring in (or transmit) appropriate information to/from each. You could wish to interface your third-party risk management system with your AP system, for example, to draw in expenditure data. Connect your system to your organization's GRC (governance, risk, and compliance) system to submit vendor-related concerns into your risk register.

  • Reporting: Your system should make it simple to report on vendor management operations, allowing for quick data collecting for reporting to senior management, committees, or your board. It should also enable ad hoc reporting in the event that staff requires information that is particular to their requirements (for example, a list of active vendors in their department).

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

Here are the top six third-party risk management challenges, as well as the best methods your company can use to strengthen your TPRM program:

  1. Lack of Speed
  2. Lack of Visibility
  3. Lack of Context
  4. Lack of Consistency
  5. Lack of Engagement
  6. Lack of Trackability


Figure 1. What are the Common Challenges of Third-Party Risk Management?

These third-party risk management challenges will be outlined below.

1. Lack of Speed

Questionnaires that third parties are required to complete to determine the quality of their security measures have long been an essential aspect of third-party security management. These surveys are frequently in the form of long spreadsheets, resulting in a time-consuming, inefficient, and often unworkable approach that does not scale.

2. Lack of Visibility

Organizations must implement a clear cybersecurity assessment process so that all stakeholders are aware of what is being assessed and how their cyber posture may be improved. It's vital to have a system in place to track how third-party cybersecurity evolves over time.

3. Lack of Context

Many security assessments ignore context, often known as inherent risk, despite the fact that different sorts of vendor relationships (even with the same vendor) can expose an organization to varying degrees of risk. A supplier, for example, may not have an API to internal systems, but another may deal with critical data transfers on a daily basis. While protection from the former may not be a top priority, taking steps to limit the latter's risk is vital, since it offers an obvious hazard.

4. Lack of Consistency

Because of ad hoc third-party risk management methods, not all suppliers are monitored, and those that are aren't held to the same standards as other vendors.

While it's OK, even advised, to give vital suppliers a higher score than non-critical vendors, it's still necessary to evaluate all vendors using the same standardized procedures to guarantee nothing gets overlooked.

5. Lack of Engagement

It may be difficult to communicate successfully with suppliers regarding cybersecurity, especially when numerous teams are involved in the process, each with distinct viewpoints and priorities. It's not unusual for companies to spend weeks or months chasing down suppliers who haven't responded to surveys.

It's critical for businesses to be able to contact suppliers quickly for clarification without having to leave endless phone messages or send several emails.

6. Lack of Trackability

Keeping track of the hundreds, if not thousands, of third parties who work for your company may be difficult.

It's critical to keep track of who your vendors are and who has received security questionnaires, as well as how much they've replied to and when they've been finished.