What is Third-Party Risk Management and Why Does It Matter?

As threats continue to evolve and grow more creative and sophisticated, cybersecurity remains a paramount concern of organizations everywhere. But these days, it’s not enough to implement the necessary data to protect the data in your systems—more and more, bad actors are targeting third-party providers as a backdoor into their greater supply chains, making third-party risk management (TPRM) more important than ever.

Being long-time cybersecurity assessors, we’ve helped thousands of organizations manage various risks (usually in service of related compliance initiatives). As such, we’ve been in the front row as the criticality of TPRM has risen, and such is the global need that we’re even creating specific services to help our clients shore theirs up.

To help you understand why you too need to look beyond your internal security practices in order to truly secure your organization, in this article, we’re going to define third-party risk management, its importance, and some resources you can potentially leverage to improve yours.

The Importance of Third-Party Risk Management

According to Shared Assessments, TPRM—or vendor risk management—is defined as “the practice of evaluating and mitigating the risks introduced by vendors (suppliers, third parties, or business partners) both before establishing a business relationship and during the business partnership.”

Put more plainly, TPRM is the handling of your organization’s third parties before, during, and after you engage them for goods or services.

Vendors have become so important because, while many organizations would love to do it all themselves, the simple fact is that they can’t. But in relying on others, you also put yourself at their mercy.

Let’s say you have a security system at home that comes complete with alarms and sensors of all kinds, along with a monitoring subscription—all to help keep your valuables and loved ones safe. You likely purchased it because you can’t be at home 24/7 to defend it. So, you rely on the alarm to remain operational and effective, and on a dedicated team of professionals who can alert emergency services in the event of a break-in or fire detection. These vendors are critical to your home security, but what happens if they aren’t who they say they are or don’t meet expectations when it comes to performance? Your home, valuables, and family are now at greater risk.

It’s for these very same reasons and many more that it’s important for organizations to carefully select, evaluate, and continuously monitor the third parties you choose to work with. Initiating work with the wrong third party or failing to track third-party access over time can lead to devastating consequences for your organization and your customers alike.

5 Key Elements of Third-Party Risk Management

To avoid those consequences, you need effective TPRM—but what exactly does that entail? Here are five critical components to every TPRM program.

1. Establishment of Internal Parameters

Before you can even start considering vendors themselves, you need to understand your organization’s needs and limits regarding third parties—you can do that by answering the following questions:

• What are the assets, systems, or data important to your business and/or customers and must remain protected?
• If you were to use a third party in support of those assets, systems, or data, where would you become vulnerable, and how would you fill those gaps?
• Based on the type of service or goods you need, how much risk are you willing to accept and how does that impact what you’re willing to pay or how you handle each third-party relationship?
• Who will be responsible for managing and monitoring each vendor relationship?

Answering these questions will not just help shape the framework, policies, and procedures used to establish your TPRM program, but will point you in the initial direction for suitable vendors.

2. Due Diligence (and Risk Assessment)

Then, of course, you need a comprehensive vetting process, the bulk of which can come in the form of a risk assessment.

Once you’ve identified a potential vendor and classified them based on the criticality of their services to your organization, assess the risk they pose by evaluating their:

• Financial stability
• Operational reliability
• Industry reputation
• Compliance history
• Information security measures

All this may involve—among other elements—conducting on-site visits, checking references, and reviewing vendor financial statements, security policies/business continuity plans, and compliance reports. After considering all this, score each vendor based on your findings—e.g., low, medium, high—as this will play into your broader TPRM program.

3. Contract Management and Onboarding

Once you’ve decided to move forward with a third party, you must define your service level agreement (SLA) as well as specific key performance indicators (KPIs) that will allow you to measure the vendor’s ongoing performance so that you can ensure they meet the agreed standards.

Contractual terms must also include clear language regarding:

• Performance standards;
• Compliance requirements;
• Confidentiality;
• Data protection; and
• Termination conditions.

All these terms and conditions should be influenced by the results of your prior risk assessment.

4. Ongoing Monitoring and Oversight

A common pitfall in TPRM is the idea that once you’ve given a third party access and they’ve begun their work for your organization, your due diligence is complete. But in order to protect yourself, that can’t be true—you must continue to monitor your vendors over time and track the evolution of each’s performance, compliance, and risk profile.

The risk scores you assign during the initial risk assessment conducted as part of the vetting process can help you determine how much oversight each third party needs, but you should continue to perform regular risk assessments on your vendors, as the threat landscape and your business relationship will likely evolve.

To help facilitate this and the monitoring of KPIs—and any other auditing mechanisms you decide to deploy for TPRM—designate an oversight committee that can ensure that your TPRM practices remain solid and aligned with organizational goals (and any applicable regulatory requirements).

5. Incident Management and Response

All this should help your organization remain insulated from the fallout of breaches originating at chosen third parties, but you should still be prepared in the event something does happen.

That means you must have processes in place and communicate them to your vendors regarding how they should report incidents to you—including timing deadlines—as well as an internal response plan to follow so that your staff can more rapidly and easily address and mitigate the impact of any breaches involving third parties, including communication strategies and corrective actions.

Taking Steps Toward a More Secure Supply Chain

As you can see, while there’s a lot that must go into an effective TPRM program, it’s a critically important aspect of your cybersecurity. Remember—you wouldn’t trust just anyone with the protection of your home without some due diligence, so why wouldn’t you want to do the same for your business and customers?

While what we’ve outlined here is hopefully a helpful start in understanding what TPRM is and why it is an important feature of any organization, it may still be difficult to find all the necessary time, effort, and resources necessary to make your TPRM effective and efficient. If that’s the case, you may instead want to opt to bring in external help to help you either gain a baseline of your program or stabilize it.

To learn more about the different kinds of these solutions and which might be suitable for your organization, reach out to us today—our team is happy to answer any questions and find the right solution for you.