Third-Party Risk Management Latest 2022
What is Third-Party Risk Management (TPRM) ?
Third-Party Risk Management (TPRM) is the process of analyzing and minimizing risks associated with outsourcing to third-party vendors or service providers.
There are many types of digital risks within the third-party risk category. These could include financial, environmental, reputational, and security risks.
These risks exist because vendors have access to intellectual property, sensitive data, personally identifiable information (PII), and protected health information (PHI).
Because third-party relationships are vital to business operations, Third-Party Risk Management is an essential component of all Cybersecurity programs.
What is a Third-Party?
A third party is any entity that your organization works with. This includes suppliers, manufacturers, service providers, business partners, affiliates, distributors, resellers, and agents.
They can be upstream (suppliers and vendors) and downstream (distributors and resellers), and can include non-contractual entities.
For example, they could provide a SaaS product that keeps your employees productive, provide logistics and transportation for your physical supply chain, or they could be your financial institution.
What’s the Difference Between a Third-Party and a Fourth-Party?
A third party is a supplier, vendor, partner, or other entity doing business directly with your organization, whereas a fourth-party is the third-party of your third party. Fourth parties (or “Nth parties”) reflect relationships deeper in the supply chain that aren’t necessarily contractually contacted to your organization but are connected through third parties.
Why is Third-Party Risk Management Important?
Third-party risk management is important because the use of third parties, whether directly and indirectly, impacts your cybersecurity. Third-parties increase the complexity of your information security for several reasons:
1-Every business relies on third-parties as it’s often better to outsource to an expert in a given field.
2-Third-parties aren’t typically under your control nor do you have complete transparency into their security controls. Some vendors have robust security standards and good risk management practices while others leave much to be desired.
3-Each third-party is a potential attack vector for a data breach or cyber attack. If a vendor has a vulnerable attack surface it could be used to gain access to your organization. The more vendors you use, the larger your attack surface and the more potential vulnerabilities you could face.
4-The introduction of general data protection and data breach notification laws like GDPR, CCPA, FIPA, PIPEDA, the SHIELD Act, and LGPD have dramatically increased the reputation and regulatory impact of inadequate third-party risk management programs.
For example, if a third-party has access to your customer information, a data breach at that third-party could result in your organization facing regulatory fines and penalties–even if you weren’t directly responsible for the breach. A famous example of this is when one of Target’s HVAC contractors led to the exposure of millions of credit cards.
What Types of Risks Do Third-Parties Introduce?
There are many potential risks that organizations face when working with vendors. Common types of third party risks include:
Cybersecurity risk: The risk of exposure or loss resulting from a cyberattack, security breach, or other security incidents. Cybersecurity risk is often mitigated via a due diligence process prior to onboarding a vendor and continuous monitoring throughout the vendor lifecycle.
Operational risk: The risk of a third-party causing disruption to the business operations. This is typically managed through contractually bound service level agreements (SLAs), and business continuity and incident response plans.
Depending on the criticality of the vendor, you may opt to have a backup vendor in place which is common practice in the financial services industry.
Legal, regulatory, and compliance risk: The risk of a third-party impacting your compliance with local legislation, regulation, or agreements. This is particularly important for financial services, healthcare, and government organizations and their business partners.
Reputational risk: The risk of negative public opinion due to 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 data security, 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.
Why You Should Invest in Third-Party Risk Management
There are a number of reasons why you should invest in third-party risk management:
Cost reduction: It’s appropriate to think of third-party risk management as an investment. It costs you money (and time) upfront but saves you money over the long-term.
The average cost of a data breach involving third-parties is $4.29 million. An effective third-party risk management strategy can dramatically reduce the risk of a data breach.
Regulatory compliance: Third-party management is a core component of many regulatory requirements such as FISMA, SOX, HITECH, CPS 234, GLBA, and the NIST Cybersecurity Framework.
Depending on your industry and the type of data you handle (e.g. PII or PHI), you may be legally required to assess your third-party ecosystem to avoid being held responsible for third-party security incidents. The truth is third-party risk management is now part of industry standards in most sectors and non-compliance is not an option.
Risk reduction: Performing due diligence streamlines the vendor onboarding process and reduces the risk of third-party security breaches and data leaks. In addition to initial due diligence, vendors need to be reviewed on a continuous basis over their lifecycle as new security risks can be introduced over time.
Knowledge and confidence: Third-party risk management increases your knowledge and visibility into the third-party vendors you are working with and improves decision-making across all stages, from the initial assessment process to offboarding.
What Does Third-Party Risk Management Entail?
In order to develop an effective third-party risk management framework that can feed into your overall enterprise risk management, it’s important to establish a robust third-party risk management process that includes the following steps.
Step 1: Analysis
Before onboarding a third party, it’s important to identify the risks you would be introducing to your organization and the level of due diligence required.
An increasingly popular way of doing is this is to use security ratings to determine whether the external security posture of the vendor meets a minimum accepted score. If it does, you then move onto step 2.
Step 2: Engagement
If the vendor’s security rating is sufficient, the next step is to have the vendor provide (or complete) a security questionnaire that provides insights into their security controls that aren’t visible to outsiders.
To automate your security questionnaire workflows with our in-built questionnaire library. And if you want more information on a specific questionnaire, see our posts on HECVAT, CAIQ, SIG, CIS Top 20, NIST SP 800-171, and VSA questionnaires.
Step 3: Remediation
If the vendor has unacceptable risks, you may decide that you don’t want to work with them until they fix the security issues you have found. This is where a tool that can help with remediation is important as without one, you can lose important issues in Excel spreadsheets and email inboxes easily.
Step 4: Approval
After remediation (or lack thereof), your organization can decide whether to onboard the vendor or choose to look for a different vendor based on your risk tolerance, the criticality of the vendor, and any compliance requirements you may have.
Step 5: Monitoring
It’s important to not stop monitoring the security of a vendor once they have been onboarded. If anything, it’s more important to monitor them as they now have access to your internal systems, sensitive data, and are used in your business processes.
This is where continuous security monitoring (CSM) comes in. Continuous security monitoring (CSM) is a threat intelligence approach that automates the monitoring of information security controls, vulnerabilities, and other cyber threats to support organizational risk management decisions.
What is a Vendor Management Policy?
A vendor management policy identifies vendors who pose the risk most and then defines controls to minimize third-party and fourth-party risk.
This could include ensuring all vendor contracts meet a minimum security rating, implementing an annual inspection or replacement of existing vendors with new vendors who can meet security standards, or the requirement of SOC 2 assurance for critical vendors.
It may also provide a short overview of your organization’s third-party risk management framework and processes.
Many organizations enter vendor relationships not fully understanding how the vendor is managing and processing theirs and their customers’ data despite investing heavily in their own internal security controls.
How to Evaluate Third-Parties
There are various solutions and methods that exist for evaluating third-parties. Generally, senior management and the board will decide on the ways that are most relevant to them, which depends on their industry, number of vendors employed, and information security policies.
Common solutions and methods include security ratings, security questionnaires, penetration testing, and virtual and onsite evaluations.
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