Why is Third-Party Risk Management Important?
To be competitive in today’s business environment, enterprises must leverage third parties to reduce costs, improve back-office operations, and improve performance. But these third-party vendors and services come with financial, reputational, and security risks because they often need access to sensitive data. On average, 13 million records are exposed from a third-party breach.
To protect your enterprise, third-party risk management (TPRM) becomes critical to your organization’s risk management strategy. We’ll explain why TPRM is essential and offer some strategies for building a framework to reduce risk and increase the security of sensitive data.
What is Third-Party Risk Management?
Third-party risk management is the process for assessing risks from working with third parties, creating a plan and establishing protocols and systems to reduce these risks, and continually monitoring and auditing your third-party vendors and services for new risks and threats.
You’ll want to establish a process for mitigating any risks that arise from using a third-party service, such as:
- Cybersecurity risks: These are threats to your data and system security from using a third-party vendor.
- Operational risks: These risks disrupt operations, which are usually managed through service level agreements (SLA), and incident response plans.
- Compliance and regulation risks: These are third-party risks that affect your ability to comply with government regulations and laws.
- Financial risks: These are third-party risks that can negatively impact your revenue or ability to produce or sell goods and services.
- Reputational risks: These are any risks that can affect public opinion about your company or ruin credibility with your customers.
- Strategic risks: These risks may arise from a third party that compromises or affects whether your organization can meet objectives and performance goals.
A Risk Management Framework
A third-party risk management framework defines policies and procedures for mitigating risks and proactively addressing potential threats. To create an effective risk management framework, you’ll need to establish:
Clear Roles and Responsibilities
Your organization needs to designate risk managers and compliance officers. These individuals should have clearly defined responsibilities for identifying, monitoring, and reducing risk with third-party vendors and services. The risk managers and compliance officers should be empowered to hold third parties and internal employees accountable for specific service levels and tasks.
When risks are identified, the risk manager should delegate responsibilities and expectations to create a collective responsibility for managing the risk. By creating accountability, individuals and third parties should maintain service levels and be more proactive about reducing risk situations.
Workflows to Assess and Mitigate Risk
By defining and assessing how your automated workflows integrate with all third-party tasks, you can identify what risks may emerge and how to mitigate them. Your risk management team will need to design the integrated workflow and assess it for compliance and security.
You’ll want your risk management team and IT to create a logical sequence for the workflow to prevent duplicate work and backtracking that can leave your workflow vulnerable to attack. You’ll need to address any vulnerabilities and put systems in place to handle any third-party risk management requirements.
Monitoring and Reporting
You’ll need to utilize a monitoring and tracking system to identify risks, assess accurate data, and regularly report to compliance officers or operations officers. Establishing clear, measurable service level agreements with your third parties is essential. The third parties should also provide monitoring tools for transparency.
What Makes a Third-Party Risk Management Program Successful?
A successful TPRM program should follow this process continually:
- Analysis: Before onboarding a new third party, your risk management team should complete a high level of due diligence to identify any potential risks with the third party and evaluate their security rating.
- Engagement: Once vetted, the third party should provide clear insight into their workflows and security controls. They should also offer service level guarantees with proper monitoring tools to ensure SLAs.
- Remediation: You need a remediation plan when you identify hazardous risks that could jeopardize your enterprise. Having tools that prioritize risks and provide audit trails can help. If the vendor meets your risk tolerance levels, then you can onboard.
- Monitoring: You’ll want systems and tools in place to keep a vigilant eye on your third parties and their access to your systems, data, and business processes.
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Why You Should Invest in Third-Party Risk Management
Third-party risk management can benefit your business in several key areas:
While TPRM can be an initial and ongoing investment, it will save money in the case of a data breach. Enterprises can spend an estimated $4.24 million to recover from a data breach involving a third party. And it can take an average of 287 days to identify and contain the breach, costing resources and money.
By putting a TPRM plan in place, you can dramatically reduce the cost of the data breach and the time to contain it by continually auditing and evaluating your third-party risks.
Knowledge and Confidence
By implementing third-party risk management strategies, you’ll make more informed decisions about which third-party services you integrate. You’ll also have more confidence in your vendors and their ability to protect your data.
Risk management due diligence on all third-party vendors reduces the risk of new security breaches because you can assess vulnerabilities before onboarding. And you can continue to evaluate and audit third-party services as new security threats and risks arise. By being proactive, you can fortify systems and data before a breach becomes an issue.
Many industries require TPRM as part of their regulatory compliance to protect intellectual property, personally identifiable information (PII), protected health information (PHI), and other sensitive data. And many laws have been put in place to protect the organization from third-party data breaches, such as:
- The Shield Act
By implementing and maintaining TPRM, your organization will be industry compliant and protected from fines and penalties associated with a third-party data breach.
It is critical to have a third-party risk management framework to reduce risks that could compromise your systems, data, and reputation in today’s environment. By adopting these TPRM strategies, your enterprise will fortify its cybersecurity strategy and have a plan for handling third-party risks.
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Related Link: Top 10 Cybersecurity Software Solutions for MSPs in 2022