Third-party risk management is important because failure to assess third-party risks exposes an organization to supply chain attacks, data breaches, and reputational damage.
To reduce the inexorable digital risks associated with vendor relationships, regulators globally are introducing new laws to make vendor risk management a regulatory requirement. This can include the management of sub-contracting and on-sourcing arrangements (fourth-party risk).
What is third-party risk management?
Third-party risk management is the process of analyzing and controlling risks associated with outsourcing to third-party vendors or service providers. Increasingly, the scope of vendor management extends to sub-contracting and on-sourcing arrangements to mitigate fourth-party risk.
This means due diligence is required to determine the overall suitability of third-parties for their given task and increasingly, whether they can keep information secure.
Due diligence is the investigative process by which a third-party is reviewed to determine if it’s suitable. In addition to initial due diligence, vendors need to review on a continuous basis over their lifecycle as new security risks are introduced over time.
Cybersecurity risk: The risk of exposure or loss resulting from a cyberattack, data breach or other security incidents. This risk is often mitigated by performing due diligence before onboarding new vendors and ongoing monitoring over the vendor lifecycle.
Operational risk: The risk that a third-party will cause disruption to the business operations. This is generally managed through contractually bound service level agreements (SLAs). Depending on the criticality of the vendor, you may opt to have a backup vendor in place to ensure business continuity. This is common practice for financial institutions.
Legal, regulatory and compliance risk: The risk that a third-party will impact your organization’s compliance with local legislation, regulation or agreements. This is particularly important for financial services, healthcare and government organizations as well as their business partners.
Reputational risk: The risk arising from negative public opinion caused by a third-party. Dissatisfied customers, inappropriate interactions and poor recommendations are only the tip of the iceberg. The most damaging events are third-party data breaches resulting from poor security controls, like Target’s 2013 data breach.
Financial risk: The risk that a third-party will have a detrimental impact on the financial success of your organization. For example, your organization may not be able to sell a new product due to poor supply chain management.
Strategic risk: The risk that your organization will fail to meet its business objectives because of a third-party vendor.
