Due to the COVID-19 pandemic, supply chain disruptions, and environmental regulations, businesses are changing their business models drastically and more quickly. Increasing change has introduced new risks for enterprises, which makes risk management a critical component while creating enterprise strategy.
Third-party risk management mainly focuses on identifying interactions and mitigating risks integrated with third parties. Third parties may include vendors, suppliers, contractors, or service providers. The scope and requirements of a TPRM program depend on the organization, and it might vary on industry and regulatory factors. Third-party risk management has become an essential component of cybersecurity programs. Overall, it encompasses all types of third parties and risks.
The Importance of Third-Party Risk Management for Businesses
Third parties may include vendors, suppliers, contractors, or service providers. These parties access internal data, systems, processes, and other company information. Though the organization has a strong cybersecurity force, the third parties may not uphold the same standards. These relationships can increase vulnerabilities by providing potential threats to attack security systems. Though numerous risks occur from third-party relationships, many organizations do not manage third-party risks as diligently as internal ones. Failure to manage these risks can lead to regulatory action, financial action, and reputational damage.
Types of Third-Party Risks
Cybersecurity Risk: The use of digital technologies is evolving, and cyberattacks keep increasing. The attackers use a third party as a “platform” to launch attacks on higher-value targets. The risk of loss results from cyberattacks, data breaches, and other security incidents. It is often mitigated by performing due diligence before onboarding vendors and ongoing monitoring over the lifecycle.
Operational Risk: Operational risks can occur by the possibility of a third-party action that might cause operational loss. Service Level Agreements (SLAs) are used to manage these risks. Many financial firms contact backup vendors to prevent operational risks. A vendor becoming a victim of a network attack could lead to a system hack and momentarily stop a company’s business activities.
Legal Risk: Legal or compliance risks are often created by a third-party security control failure resulting in data loss to privacy violation. These risks impact the organization’s ability to comply with local laws, rules, and standards. External factors involving third parties can potentially increase legal risk—a third-party security control failure due to data loss results in a data privacy breach.
Reputational Risk: Every organization strives hard to keep up its reputation. Reputational risks arise from negative public opinion caused by a third party. The consequences of reputational risks include dissatisfied customers, inappropriate interactions, and poor recommendations. The damaging factors can be third-party breaches resulting from poor security controls.
Financial Risk: These risks affect the financial position of your organization. It involves a third-party action damaging the financial position of an organization. Economic damage can also be in the form of penalties or legal fees. This damage can come from substandard work that slows down the business and reduces an organization’s revenue.
Strategic Risk: Strategic risk occurs when the organization fails to meet its business objectives because of third parties. It refers to the problems that arise when the strategies of third parties and corporate businesses are not aligned. Often, it results from poor business decisions made by third parties.
Trending Strategies to Mitigate Third-Party Risk
Risks connected to third parties are increasing daily, and companies should try to mitigate these risks that can affect the organization. Risk managers are looking for better solutions for third-party cyber risk management. Third-Party risk management companies are developing strategies that access value without unnecessary errors. Firms should look more into security visibility and need to prioritize resources, and achieve measurable risk reduction. Risk managers learn how to mitigate third-party risk through automated processes, security ratings, and a clear picture of third-party risk aligned with the organization.
Third-Party Risk Assessment: Third-Party or vendor risk assessment quantifies the risks associated with the third parties. Every organization should gauge the level of risk posed by both the third party and the firm. It evaluates all the considerations in outsourcing a product or a service related to third parties. Inevitably, every outsourced third-party relationship always comes with additional risk. An organization should understand the risks associated with outsourcing decisions.
Third-Party Risk Management Software: TPRM software is an integrated system that protects the organization from third-party’s risk exposure. It automates end-to-end processes for information gathering, real-time monitoring, risk, compliance and control assessments, and risk mitigation. It is a federated approach that helps organizations to manage third-party risks by building third-party relationships. Third-party supplier risk management software protects corporate brands by reducing risks, and integrated TPRM tools help customers assess and monitor new and existing vendors right from the onboarding stage.
Third-party risk management is essential for any organization as it analyses and minimizes the risks related to third parties. These risks occur due to access to intellectual property, sensitive data, personally identifiable information (PII), and protected health information (PHI). It gives organizations an understanding of the third parties and also safeguards them. Third-party risk management (TPRM) software provides an integrated and real-time view of the enterprise. It is mainly set up to protect your business from existing third-party risk exposure. It also helps organizations to manage third-party risks building trust and confidence in third-party relationships.