What is third-party risk management?

Your relationship with third parties comes with countless risks: they’ll violate the terms of your contract, suffer a data breach or incur business disruptions affecting your supply chain.

These occur a lot more often than you might think. A 2019 Deloitte report found that 83% of organisations experienced a security incident caused by a third party in the previous three years.

Of those incidents, 11% had a severe effect on the organisation’s customer service, finances, reputation or regulatory compliance.

In this blog, we help you understand the risks associated with third parties and explain how you can protect yourself.

What is third-party risk?

In the context of information security, a third-party risk is a weakness in the way an organisation you work with handles sensitive information. This includes employee and customer data, as well as financial information and business-critical systems.

There are six different types of third-party risk:

  1. Information security risk

This describes events in which a third party threatens the confidentiality, integrity or availability of information you use.

For example, criminal hackers might break into an organisation’s systems and steal sensitive data or plant malware on its systems.

However, information security risks aren’t always the result of malicious actors. An employee may accidentally send data to the wrong person or fail to password-protect a database containing sensitive information.

  1. Strategic risk

Strategic risks arise from decisions your board makes regarding business objectives. In this context, choosing the wrong third party to perform certain tasks could result in major problems.

For example, a marketing firm that you hire may violate data privacy requirements, which would leave you – as the data controller – potentially liable for regulatory action.

Another example would be a software provider that gains a huge market share and increases its price. The organisation is either stuck paying this price or faces disruption while it finds an alternative provider.

  1. Reputational risk

If an organisation you work with does something that damages its reputation – whether it’s suffered a data breach, handled a security incident poorly or violated people’s data privacy – your reputation may also suffer.

  1. Operational risk

This encompasses any incident in which your business processes are disrupted due to a third-party security incident.

This includes cyber attacks as well as infrastructural damage, such as a fire or flood that damages the third party’s systems.

  1. Transactional risk

These are events in which a third party could damage your organisation’s financial performance.

For example, if a vendor suffered a cyber attack and was unable to provide goods to you on time, your revenue may well be affected.

  1. Compliance risk

These are events in which a third party’s actions affect your compliance with laws and regulations, such as the GDPR (General Data Protection Regulation) and PECR (Privacy and Electronic Communications Regulations).

It also includes your compliance with internal policies and frameworks, such as ISO 27001.

Download our free green paper: Third-Party GDPR Audits – Conducting due diligence

Securing the data supply chain can be a challenge. Under the GDPR, data controllers are liable not just for their own compliance, but also for that of third-party processors.

Contracts and questionnaires, while useful components of any due diligence process, are necessarily limited. Auditing third-party processors is the most effective way to ensure ongoing compliance.

Read Third-Party GDPR Audits – Conducting due diligence to find out how to get started.

How should organisations address third-party risks?

You can identify, assess and control third-party risks by implementing a TPRM (third-party risk management) framework.

It should contain policies, procedures and systems that help you understand your third-party contracts, ensuring that any risks are outlined and addressed at the outset of the relationship.

A TPRM framework should use standardised, risk-mitigating contractual terms and provisions, including the agreement to conduct risk-based monitoring and to give the organisation oversight regarding the way sensitive information is handled.

Third-party risk management best practices

Here are five tips to help you create a TPRM framework.

1. Perform due diligence on third parties

Creating a TPRM framework will be much easier if you perform due diligence on potential partners before committing to a relationship.

Doing so helps you see what information security practices they have in place and how much work is required to get their set-up to an acceptable standard.

If your due diligence process reveals major gaps, you may decide that you’d be better off working with a different organisation.

2. Consider fourth parties

Just as your business can be affected by incidents that occur at third parties, so too can your third parties be affected by organisations they work with. Such organisations are known as fourth parties.

Although you don’t need to be as rigorous in assessing fourth parties, you should gather and manage information on those organisations as part of the third-party ecosystem.

If you discover anything concerning, you again may decide that you’d be better off finding a different partner.

3. Get board-level support

For your TPRM framework to be successful, you must have board-level support. The board is responsible for ensuring that the organisation has the tools and resources to tackle information security risks.

The person leading the framework’s implementation should work with the board to secure the necessary investment. They should also be expected to provide regular progress updates to the board.

4. Use technological solutions where appropriate

There are plenty of technologies that can help you tackle third-party risks, such as information security risk assessment tools, data monitoring software and automation tools.

Technology can also streamline your onboarding and due diligence processes, audits and compliance management. So don’t feel as though you have to complete the TPRM framework from scratch.

5. Evaluate the effectiveness of your TPRM framework

You must regularly review your TPRM framework to ensure that it’s working as intended and identify improvements.

This should include an evaluation of your policies, codes of conduct, processes, controls, audits and compliance practices.

The evaluation process should take place annually or whenever you make any major changes to your organisation.

Get started with DQM GRC

As we’ve outlined in this blog, there’s a lot that goes into third-party risk management. For those looking for more help, DQM GRC’s third-party assurance service is an ideal solution.

We will design an assurance programme around your risks and controls, provide answers from your suppliers and processors about their practices and deliver a report explaining how well what they do meets your expectations.

Where they fall short, we can recommend improvements that will bring them into compliance.

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