What is Third-Party Risk Management?

What is third-party risk management?

Third-party risk management involves determining what risks supply-chain vendors and other external parties present to an organization, particularly that organization’s systems or data. Systems include any networked or connected computing device. Data includes all information held by the company, such as customer or employee personally identifiable information (PII), customer or user login credentials, financial information, intellectual property, sensitive product information, or scientific research.

Third-party risk management is especially important to ensure external parties, such as supply-chain vendors, maintain the appropriate level of security and controls, based on the services they provide to the organization.

Who are the “third parties”?

Third parties are defined as any entity (i.e., vendor, subcontractor, partner, supplier, etc.) that provides the organization with goods or services. While some third parties offer little risk to the organization, others may offer significant risk based on their access to the organization’s systems and data. Examples include a customer service company that answers phone call inquiries from your customers and has access to the customer order database; a tax accounting firm that has access to financial systems to help with quarterly and annual taxes; or an IT vendor that provides administrative support to internal IT systems.

Why is third-party vendor risk management important?

In our heavily connected world, third-party vendors and suppliers serve a critical and useful purpose in helping a business with day-to-day operations. However, since many third-party vendors have access to corporate data or systems, they can dramatically expand an organization’s attack surface. This underscores the importance of robust third-party risk management services. Any non-existent or complacent security practices on the part of the third-party vendor could lead to short- and long-term impacts for the organization, including expanded cyber risk, contractual breaches, regulatory non-compliance, revenue loss, and reputation damage.  Since an organization’s vendors can potentially have a widespread impact, it is critical they are vetted and required to maintain appropriate security standards.

What is the best way to manage third-party risk?

The first step is to determine a vendor management strategy. From there, to help identify and manage the risks associated with the vendor supply chain, organizations should incorporate third-party risk management into an overall risk management framework. The components of vendor risk management go beyond the basics like compliance, schedules, quality, or key performance indicators (KPIs). A framework provides organizations with a process to identify vendors and assess and manage their risks. They may include steps to:

How do third-party vendor risk management solutions help?

While it is possible to manually execute your third-party assessment process, leveraging software solutions that automate communication, data collection, and providing vendor security posture insights can enable organizations to better manage vendors and effectively scale programs without a continued reliance on increasing headcount.  Vendor risk management solutions provide visibility into supply chain risk by leveraging information and data from the vendor and outside sources. Software solutions can provide many benefits including:

What are the potential impacts to an organization introduced by third-party risks?

The organizational risks associated with third-party security failures usually fall into one of these categories:

• Reputational Risk—Attacks and breaches on a third-party vendor that affect an organization’s customers and operations can reduce trust in that organization.
• Compliance Risk—Failures on the part of a third-party vendor could result in regulatory failures jeopardizing the compliance status of the organizations.
• Data Leakage Risk—Data exfiltrated, used maliciously, or exposed inadvertently by third parties that have access to or interact with sensitive data can cause significant harm to the organization.
• Operational Risk—Attacks on a third party could lead to a lapse in service impacting the organization’s ability to conduct business.

What types of cyber attacks are targeted at third parties?

The types of security threats and attacks associated with third-party include:

Overview of Vendor Risk Management Process

The practice of vendor risk management allows organizations to mitigate risks posed by third parties and revolves around identifying, assessing, and controlling risks. The cornerstone of this process is the third-party risk management definition, which broadly encompasses the strategies and measures taken to manage and monitor risks associated with external vendors and service providers. Proactive third-party risk management can help organizations maintain compliance with regulatory requirements and the integrity of their supply chains.

Step 1: Identifying Third-Party Partners

Organizations need to discover and catalog third-party vendors to maintain a clear overview of their partnerships. Our experts at GuidePoint can help you update your vendor inventory to make it easier to assess each of your vendor's risk profiles as well as ensure that potential risks are always identified and proactively managed. By maintaining a regularly updated inventory of third-party vendors, organizations can also better align vendor capabilities with their most important strategic objectives.

Step 2: Selection and Appraisal

As part of the third-party risk management process, the selection of vendors hinges on a few key criteria including:

Strategies include thorough due diligence, evaluating the vendor's track record, and assessing their alignment with the organization's values and operational requirements. Additionally, ongoing performance reviews and risk assessments are crucial for ensuring that the chosen vendors continue to meet organizational needs and adhere to evolving industry standards.

Step 3: Evaluating Vendor Risks

Evaluating inherent and residual risks is a critical step in managing third-party risk, involving a thorough understanding of potential risk levels before controls are applied. Common standards and tools used in the industry for third-party vendor risk evaluation include:

• ISO 27001: International standard for information security management.
• NIST Framework: Provides guidelines for managing cybersecurity risks.
• SIG Questionnaires: Standardized Information Gathering for vendor risk assessment.
• Vendor Risk Management Maturity Model (VRMMM): For evaluating the maturity of vendor risk programs.
• Due Diligence Tools: Platforms for conducting comprehensive vendor background checks.
• Vendor Scorecards: For ongoing performance and risk monitoring.
• Compliance Management Software: To ensure adherence to legal and regulatory standards.

Step 4: Mitigating Identified Risks

Once our experts have helped you identify risks, we'll help you rank them based on potential impact and likelihood. This prioritization will allow you to more sharply focus on the most significant risks first. Strategies for risk reduction include:

These strategies, combined with a proactive and dynamic approach, can significantly enhance an organization's ability to manage third-party risks effectively.

Step 5: Contract Formation and Procurement

Clear contracts are pivotal in third-party risk management solutions as they establish the framework for collaboration, defining roles, responsibilities, and expectations. Critical clauses to manage and mitigate risk include:

These clauses provide a structured approach to managing potential risks, ensuring both parties are aligned and aware of their obligations, thereby safeguarding the interests of the organization.

Step 6: Documentation and Compliance Tracking

At this point, our experts are ready to demonstrate how to meticulously maintain your records of vendors; meticulous record-keeping is both a compliance necessity as well as a cornerstone of effective risk management. This proactive approach allows for the timely adjustment of strategies and helps in maintaining a resilient third-party risk management framework.

Step 7: Continuous Vendor Oversight

It's essential that we help your organization monitor its vendor activities to help you preemptively identify and address risks, which includes the possibility of a third-party data breach. With continuous oversight, we can help you ensure that your vendors adhere to their contractual obligations and are continuously in compliance with their security standards. This vigilance helps in detecting vulnerabilities early, reducing the likelihood of security incidents, and maintaining organizational integrity and trust, crucial in today's data-driven business environment.

Step 8: Concluding Vendor Relations

Ending a relationship with a vendor in third-party risk management requires a strategic and secure approach. First, ensure all security measures are intact to prevent data breaches during the transition. This includes revoking access rights and securing sensitive data. Then, smoothly transition services to another provider or in-house, maintaining service continuity and minimizing disruptions. Document the entire process for future reference, noting lessons learned and areas for improvement. It’s crucial to conduct a thorough review to ensure no residual risks remain post-termination, like lingering data access or unfulfilled contractual obligations. This comprehensive approach safeguards the organization's interests and maintains its risk management integrity.

What are the risk management challenges with third parties?

Typical third-party security concerns that can increase risk levels include:

What are the best practices or workflows an organization can apply to minimize vendor risk?

In addition to working with an organization that has expertise in the field of vendor risk management, businesses should take the following steps:

• Establish a formal third-party risk management program.
• Develop and maintain an inventory of all third-party relationships.
• Tier vendors based on criticality and risk.
• Create assessment criteria for each vendor tier.
• Assess vendors based on tiering and associated defined assessment criteria.
• Contractually require third parties to maintain appropriate security standards based on risk to the organization.
• Engage in ongoing monitoring and reassessment activities of third-party vendors based on tiering criteria.
• Develop and maintain off-boarding processes to remove third-party vendor access to systems and data at the end of the service period.

What are the benefits of a third-party risk management program?

Organizations that create and maintain a third-party risk management program experience:

Third-party Risk Management Provider Next Steps

GuidePoint Security is experienced in assessing and implementing third-party risk management best practices and executing vendor risk assessments. GuidePoint can help organizations of any size or in any industry navigate the complexities of cyber supply chain management.