Why Is Third-Party Risk Management Important?
Many modern organizations rely on third-party vendors and outsourced service providers for their infrastructure, software supply chain, and various operations. However, while these partnerships achieve operational efficiencies, they also introduce potential data protection risks.
Involving third parties can make it difficult for organizations to understand their information privacy and security risk levels, continually monitor those risks, and prevent incidents like data breaches. If jeopardized data from a breach contains personal or sensitive personal information, it can threaten individuals’ rights and livelihoods and involve legal or noncompliance penalties.
Third-party risk mitigation processes are vital for your company to better protect itself and its customers.
The Evolving Ecosystem of Third-Party Relationships
Third-party vendors play a massive role in today’s business environment. Companies can’t always take care of every business operation in-house, and third parties are often cost-effective solutions.
However, a supply chain built with many third-party links can increase potential risks. Cybersecurity Dive cites a report stating, “A total of 98% of organizations worldwide have integrations with at least one third-party vendor that has been breached in the last two years.”
That’s without the additional layer of fourth parties. The same report notes that “Half of organizations have indirect links to at least 200 fourth-party vendors that have suffered prior breaches.”
These numbers are devastating and provide a clear warning: Managing third-party risk is a serious task.
Consequences of Neglecting Third-Party Risk
Poor third-party risk management (TPRM) can result in a host of negative consequences. Beyond legal issues and financial risks relating to non-compliant vendor relationships, poorly managed third parties can result in:
- Increased cyberattack threats due to weak information security practices,
- Reputational damage and loss of customer trust
- Large-scale operational risks and business continuity concerns
Building a Robust Third-Party Risk Management Program
The Lifecycle of Third-Party Risk Management
We’ve written about third-party risk management before and exactly what it is. In previous pieces, we focused on applying the National Institute of Standards and Technology’s (NIST) Risk Management Framework (RMF) as a way to mitigate and manage third-party risk.
The seven steps outlined in RMF are widely applicable to risk management as a whole, but this piece will focus on more things to keep in mind for mitigating third-party risk. Scroll down for a recap of tips from this piece.
Third-party risk mitigation starts before vendor onboarding and should continue through a third-party partnership’s entire lifecycle. Conducting an initial risk assessment is a great starting point for beginning a trustworthy relationship with third-party vendors.
Ongoing monitoring and continued risk assessments are vital parts of keeping your data safe when it’s with third parties. Real-time risk monitoring helps organizations understand which third parties and even fourth parties may lack vital protections for the data they hold.
Even at a relationship’s end, risk management should be a consideration. When cycling off of a service contract or partnership, make sure to conduct a final risk assessment during offboarding.
TPRM, Privacy Compliance, and Data Security
Third-party risk management has an impact across multiple parts of your business and helps meet data privacy regulatory requirements while securing sensitive data from cybersecurity risks like data breaches.
Part of TPRM is ensuring that necessary contractual agreements are signed and all parties understand their role and responsibilities. To ensure regulatory compliance with GDPR, PIPEDA, CCPA, and other comprehensive privacy laws, organizations must establish contracts with their third-party service providers detailing:
- The personal information disclosed by the business to the third party for limited and specified purposes
- Responsibilities and accountability for mishandling (or misprocessing) personal information according to the same standards the business is held to
- The business’s right to evaluate the third party’s technical and organizational safeguards (such as through annual audits)
- The third party’s obligation to notify the business if it can no longer meet its statutory or contractual obligations
- The business’s right to stop and remediate a third party’s noncompliant activities or privacy and security standards
Solid TPRM processes will also ensure sensitive data shared with third parties is kept secure. Implementing strong security controls and maintaining a security posture helps protect the confidentiality, integrity, and availability of systems and information. It can be extremely helpful to ensure that third-party vendors have similar security controls on their end.
Streamlining and Automating Third-Party Risk Management Processes
The Power of Automation in Risk Mitigation
Risk mitigation workflows and decision-making related to third-party risk can be improved and streamlined with the right automation.
Things like continuous and real-time risk monitoring, due diligence processes, third-party risk assessments, third-party SaaS system discovery, and more can become much lighter lifts when powerful automation is applied.
These automations can simplify the data discovery and data mapping processes and improve risk mitigation program accuracy when working with third-party vendors.
Understanding and tracking the full scope of third-party risk can be a difficult task, as data sprawl and shadow SaaS can evade manual discovery and mapping processes. Our research finds manual audits miss up to 50% of SaaS applications storing data across company systems, creating a huge knowledge gap and increasing the likelihood of compromised customer data.
DataGrail’s privacy platform employs automation for data discovery, risk management, and assessment purposes to make sure you have the full picture of your company’s third-party connections.
Vendor Risk Management and Service Level Agreements
Setting and enforcing service level agreements (SLAs) is a way to manage third-party vendor risk and ensure that vendors understand the risk mitigation strategies and procedures expected of them.
SLAs relating to TPRM can be useful to avoid high risk levels from third and fourth parties and set vendor risk assessment expectations during the procurement and negotiation process. It’s essential to develop and agree on third-party SLAs that ensure a fruitful relationship and meet your risk management goals.
Overcoming Challenges and Perfecting Your TPRM
The Role of Remediation in Risk Mitigation
For all the precautionary measures smart companies take when it comes to TPRM, risks have a way of breaking through. Sometimes, a third-party vendor will introduce a higher level of risk.
When this happens, it’s important to have a remediation plan and begin the process quickly to reduce the risk of vulnerabilities for your data. Navigating remediation workflows can be challenging, but efficient risk mitigation depends on the process.
Remediation can involve:
- Implementing additional technical security controls
- Reconfigurations or customizations
- Additional contractual controls
- Adjusting to data privacy law updates like opt-outs for the CCPA as amended by CPRA
Engaging Stakeholders in the Risk Management Process
Managing risk across an organization takes cross-functional collaboration, and third-party risk management is no different. It’s vital to ensure a solid understanding of the workflows and responsibilities shared between you and your vendors when working to implement or improve risk mitigation processes.
One of the best ways to ensure customer data is kept safe and potential risks are minimized is to train internal and, if needed, third-party stakeholders on why mitigation tactics are important and how the company uses them.
Monitoring for TPRM
Implementing comprehensive risk management processes isn’t enough to ensure risk levels are kept low — you have to keep your finger on the pulse.
Ongoing monitoring and continual risk assessments for your third-party vendors are the best ways to stay on top of your risk levels, ensure TPRM SLAs are being met, and maintain a healthy and safe vendor relationship.
Recapping 11 Tips for TPRM
- Identify Third-Party Vendors and Fourth Parties: Know who they are and their roles
- Assess Risk: Conduct and analyze risk assessments for each vendor relating to privacy, cybersecurity, operational, financial, reputational, and compliance risks
- Risk Categorization: Classify vendors based on risk levels
- Implement Security Controls: Set up data security and cybersecurity protocols based on risk assessment findings
- Enforce SLAs: Define TPRM expectations through Service Level Agreements
- Ongoing Monitoring: Continually monitor vendors’ compliance and risk profiles
- Automate Processes: Streamline risk management with automation for risk assessments, continuous monitoring, and more
- Implement Remediation Plans: Have a strategy ready for fixing vulnerabilities identified during monitoring
- Maintain Vendor Relationships: Foster strong relationships with vendors to ensure compliance and reduce risk
- Stay Informed and Adaptable: Adapt to changes in regulatory environments, industry standards, and potential risks
- Train Your Team: Ensure everyone understands the basics of third-party risk for identification and reporting of potential risks
Real-Life Example: TPRM in Healthcare
Managing Third-Party Risk in Healthcare
Organizations in the healthcare industry are continuing to expand their use of third-party vendors, which can lead to an issue where sensitive data is concerned. Even as more third-party vendors are introduced to the sector, healthcare organizations are struggling to track and assess them all.
In fact, according to a report readout from Healthcare Dive, “The healthcare industry was the most common victim of third-party breaches in 2022, accounting for almost 35% of all incidents.”
As a legacy industry, healthcare organizations often rely on outdated, manual processes that introduce high levels of human error and can negatively impact data security.
To combat the high risks associated with handling sensitive health information like electronic health records, patient billing, and patient communications, the healthcare industry should increasingly look toward strong TPRM practices that rely on automation and ongoing risk monitoring.
Wrapping Up
Implementing and managing robust TPRM principles and processes can be complex, but safeguarding your business and ensuring the safety of your customer data is an important investment that’s sure to pay off and help keep your organization away from the high-risk danger zone.
Whatever industry you’re in, if you’re dealing with customer and employee data, it’s time to study the long-term benefits of investing in a thorough, streamlined, and heavily automated third-party risk management solution.