In an analysis by Cyentia Institute, the average firm had around 10 third-party relationships and nearly all firms (98%) had at least one third-party partner who had suffered a breach.
That’s why effective third-party risk management is so crucial in today's interconnected business landscape. Most organizations rely on a network of external partners to supply and deliver products and services, which introduces dependencies and exposures.
In this post, we’ll cover what you can do to protect your organization against risks that are inherent to third-party relationships.
What is third-party risk management?
Third-party risk management (TPRM) is a process organizations use to identify, assess, mitigate, monitor, and resolve the risks associated with their relationships with third parties. Third parties include vendors, suppliers, contractors, partners, software providers, open source projects, and other external entities.
Because these external entities often have access to an organization's systems, data, processes, or facilities, these relationships introduce various types of risks that may impact the organization's security, operations, reputation, and compliance.
Failure to manage these risks can result in data breaches, regulatory violations, financial losses, reputational damage, and legal liabilities.
Why is third-party risk management important?
Third-party risk management is important for protecting your organization’s operations, assets, compliance status, reputation, and supply chain. Let’s take a closer look at these key reasons below.
1. Data security and privacy
Third parties may have access to your organization's sensitive data and systems. If they have inadequate security measures, then you’re vulnerable to data breaches that may expose valuable information about your organization, employees, customers, or partners.
Data breaches caused by third parties are also more expensive, according to IBM research. In 2022, data breaches cost organizations an average of $4.35 million but data breaches caused by third parties cost $4.37 million on average — or an additional $247,624 to be exact.
Third-party risk management can therefore reduce the probability and costs of third-party data breaches.
2. Reputation management
Data breaches, compliance violations, unethical practices, and other issues caused by third parties can damage your organization's reputation and erode customer trust and confidence in your brand. Third-party risk management can help prevent or mitigate these negative consequences.
3. Compliance with laws and regulations
If your organization is subject to regulatory requirements regarding data privacy and security, then you may also be responsible for ensuring your third-party partners meet these requirements as well. For example, PCI DSS requires that all third-party service providers demonstrate PCI DSS compliance through regular risk assessments.
Third-party risk management can help you identify and manage compliance risks inherent to third-party relationships.
4. Business continuity
Relying on third parties for critical services or supplies means that any disruptions to their operations could impact your organization's ability to operate. Effective risk management, business continuity planning, and ensuring notifications of appropriate personnel can help prevent these disruptions or ensure your organization is able to resume operations during and after disruptions if they occur.
5. Supply chain resilience
Similarly, third-party risk management can help you identify and manage risks and vulnerabilities throughout your supply chain to improve its resilience. This is particularly important as supply chains become more complex and global, introducing new environmental, strategic, and operational risks, among others.
Supply Chain Risk Management: A Breakdown of the Process + Policy Template
Third-party risk management framework
Having a comprehensive third-party risk management framework can help you capture the full lifecycle and range of third-party relationships.
This framework should:
- List all third-party relationships
- Segment relationships based on the level of risk they pose
- Establish due diligence tests and onboarding teams
- Inventory all risks, escalation triggers, and controls
- Establish how to monitor third-party performance and compliance (eg. scorecards and risk assessments)
- Assign an owner for third-party risk management
- Include a third-party risk management policy
- Incorporate tools that help track and monitor data, automate workflows, alert/notify appropriate personnel, and provide an accurate picture of risk in near real time
Third-party risk management best practices
Implementing effective third-party risk management involves following a set of best practices to identify, assess, mitigate, and monitor risks associated with third parties. We’ll cover some of those best practices below.
- Identify and categorize third-party risks: Maintain a comprehensive inventory of all third-party relationships and categorize them based on the criticality of their services and the sensitivity of data they access. They should be separated into three risk tiers: High, Medium, and Low.
- Establish criteria for vendor selection and conduct due diligence: Establish clear criteria for vendor selection and conduct thorough due diligence before entering into contracts with third parties. Due diligence might involve evaluating their financial stability, security controls, compliance history, and reputation.
- Specify requirements in contract: Contracts should outline minimum security standards and controls and any compliance requirements that third parties must adhere to. These should be based on your organization’s risk tolerance and data security and privacy policies. Contracts should also clearly define the roles and responsibilities of both parties regarding risk management.
- Perform risk assessments: Risk assessments must be conducted for all high-risk third parties. They should consider whether the vendor is customer-facing, receives or stores confidential data, presents a supply chain risk, has security controls and measures in place, and has undergone third-party audits, among other factors.
- Establish performance metrics: Establish key performance indicators (KPIs) for third parties and regularly review and assess their performance against these metrics. They can relate to service delivery, risk, security, compliance, and more.
- Develop an exit strategy: Develop procedures for terminating a relationship with a third party. These procedures should ensure proper data transfer or deletion and minimize risks and be documented in contracts with third parties.
- Involve key stakeholders: Effective third-party risk management processes involve internal stakeholders across the organization. For example, stakeholders from legal, compliance, and IT departments should be aligned and coordinate on risk management activities.
- Document all of the above: Document all assessments, due diligence, contracts, communication, and risk mitigation activities related to third parties. This documentation will serve as evidence of compliance efforts.
- Set up a process for continuous monitoring: Implement a process for ongoing monitoring of third parties to detect any changes in risk factors or performance. This will enable you to reassess risks, change mitigation strategies, and terminate relationships if needed.
- Use automation: Third-party risk management can be manually intensive — but it doesn’t have to be. Automation can help reduce the time and resources needed for data collection, risk assessment, personnel management, continuous monitoring, and other activities related to third-party risk management.
By implementing these best practices as part of your third-party risk management program, you can help safeguard your organization's data, operations, reputation, and security and compliance posture while maintaining your relationships with external entities.
Third-party risk management lifecycle
1. Identification of existing and new third parties
Identify all existing third parties with whom the organization has a business relationship. This includes vendors, suppliers, service providers, contractors, consultants, and other external entities.
2. Evaluation and selection of new third parties
Any new parties should be evaluated before moving forward to the next step. Your organization may use requests for proposals or security questionnaires if evaluating multiple parties for the same service. The decision to move forward with a third party may be based on a range of factors that align with the organization’s needs, such as cost.
3. Risk assessment and due diligence
Next, conduct a risk assessment and appropriate due diligence before entering or extending a contract with third parties and granting access to your systems. These should be performed to determine the possible risk and impact each third-party relationship poses to your organization.
This assessment and due diligence should answer the following questions:
- Is the third party of a customer-facing nature?
- Would the third party be involved in receiving and storing confidential data (eg. customer data, employee data, regulatory data, or financial data)? If so, where does the third party use, access, and store such data?
- What security controls and measures does the third party have in place?
- What security policies does the third party have in place? Request to review them.
- Has the third party undergone third-party audits (such as SOC 2®, HITRUST, ISO 27001)? Request to review the reports.
- Is there a risk of regulatory scrutiny and customer harm associated with the third party?
- What is the operational reliance of the third party?
- Does the third party present supply chain risk?
4. Contract review and procurement
Next, establish contractual agreements that outline responsibilities and expectations regarding security controls, data protection, compliance, and incident response. These responsibilities and expectations should apply to your organization as well as the third party. Submit to the third party for review and signature.
5. Risk mitigation
Risk mitigation can occur in tandem with contract review and procurement. After conducting risk assessments, you can begin mitigating the risks you identified and are taking on by entering into third-party relationships. This stage might involve risk quantification or scoring, risk treatment, and risk monitoring.
6. Ongoing monitoring
Third-party relationships must be continuously monitored to reasonably ensure third parties remain in compliance with state and federal law and that services are being provided as intended. This means conducting vendor reviews at least annually, which must be documented and retained for audit purposes.
Results of these reviews must be compared to in-place agreements and/or SLAs. If third parties are found to be in violation of any executed agreement(s), action plans and processes may be initiated to remedy the issue(s) or access to your company’s systems may be removed immediately.
7. Third-party offboarding
The final stage of the third-party risk management lifecycle is offboarding, or termination. If you end a business relationship with a third party, you should have procedures in place to ensure that data is securely transferred or deleted and that potential risks are minimized during the transition.
Third-party risk management policy template
Whether you’re creating a third-party risk management policy for the first time or looking to strengthen your current policy, use this template to help build a solid foundation for managing your third-party relationships.
Third-party risk management software
Third-party risk management software can can help simplify and streamline the following tasks:
- Third-party reviews: An automation platform can allow you to easily store and review documentation to ensure your third parties are compliant.
- Vendor risk assessments: Some automation platforms can provide risk recommendations based on the third-party assessment information you provide to help simplify the risk assessment process.
- Third-party personnel access tracking: You can easily monitor and track third-party personnel system access using an automation platform.
- Continuous monitoring: An automation platform can continuously monitor your third parties’ security posture and their compliance with regulatory and industry frameworks.
When evaluating third-party risk management software, look for one that offers an easy-to-use platform in addition to a team of security and compliance experts to guide your organization through every step of the third-party risk management process.
How Secureframe can help you manage third-party risk
Secureframe helps companies automatically monitor and rate their third-party partners’ security performance and automate security questionnaires that make the third-party risk management process all the more manageable. Secureframe also offers up-to-date security reports of each third party with risk levels and in-depth descriptions.
Looking to safeguard your third-party relationships and better manage your security? Schedule a demo with our team today to see how we can fit your exact needs.