What Is Third-Party Risk Management?
Third-party risk management can be a challenge for small- to mid-sized businesses (SMBs) to understand the role that cybersecurity threats can create with it. Third-party vendors and suppliers have become crucially important for countless businesses. It’s provided an avenue for even small businesses to scale operations and continue to sustain in today’s competitive market.
The reality for SMBs is that when you offload support to third parties you are also bringing in more risk for your business. Along with those risks are also the associated risks of that third-party vendor or supplier. Additionally, this includes the cybersecurity risks that the third parties you work with may have. This has been demonstrated given that supply chain attacks against businesses have continued to increase in the volume and complexity of cyberattacks.
Gartner released a report in 2023 showing that 45% of organizations experienced a third-party security breach that impacted business operations. Protecting your SMB against supply chain attacks and integrating third-party cyber risk management is key to maintaining business resiliency. Let’s explore what third-party risk management is, key concepts, challenges, best practices and more to help you safeguard your small business from growing cyber risks.
Defining Third-Party Risk Management (TPRM)
Third-party risk management (TPRM) is the process of identifying, evaluating, and mitigating risks affiliated with third-party vendors, contractors, suppliers, and other external-facing entities to your business. The practice of TRPM is essential for businesses to ensure that the risks of working with third parties minimize business operational disruptions. Many third-party relationships often have access to your organization’s digital assets, including sensitive information, systems, and networks.
By providing this access to third parties that work with your business, can introduce significant cybersecurity risks if not properly managed and monitored. Without a proper TPRM process in place for your external partnerships this can lead to supply chain attacks resulting in financial losses, destruction of confidential information, security breaches, operational disruptions, legal consequences, and reputational damage.
It has become a necessity for SMBs to safeguard their information by utilizing third-party risk management when working with third-party entities. SMBs have become increasingly reliant on their supply chains for various processes to support their technological, operational, and other business needs. These business partnerships have many benefits for SMBs, but they can also introduce additional risks, including cybersecurity.
Key Concepts in TPRM
Third-party risk management is a key component that can help businesses minimize their risks successfully. It can help them ensure greater cybersecurity and business continuity for them and their partnerships as well. Understanding the fundamental elements involved in TPRM can help organizations safeguard their operations and maintain compliance with regulatory requirements relevant to their industry. The following are several key concepts that are involved with TPRM for small businesses.
Risk Identification
Identifying all the risks that could arise from third-party partnerships is a crucial first step in TPRM. These risks can include financial, operational, and reputational risks that could damage your business if a TPRM process is not in place. Additionally, many businesses also need to identify additional risks with third parties surrounding their cybersecurity and compliance risks. Cybersecurity risks that your small business could face with their partnerships can result in other business risks as well. Identifying all the risks your small business may face digitally, and more is crucial to ensure that those risks are minimized effectively.
Risk Assessment
Beyond identifying risks, assessing them and their possible impact is another key concept of TPRM. The goal of assessing your identified risks involves evaluating the severity of them and prioritizing measures depending on their probable impact on your organization. Risk assessments in TPRM include conducting quantitative and qualitative analyses of them. This can include considering multiple factors such as the financial stability, past results, and internal security practices of your third-party business relationships.
Risk Mitigation
Risk mitigation is crucial once a business has identified and assessed its third-party partnerships. Organizations need to address the risks they have discovered and implement proactive measures to minimize them. Risk mitigation involves implementing security controls and processes that reduce identified risks to more acceptable levels. It can also include developing contract agreements, insurance requirements, cybersecurity measures, and ongoing internal risk audits. By doing this, it enables businesses to stay better protected from third-party risks and cyberattacks that could affect their business as well.
Due Diligence
Facilitating due diligence on all your potential third-party partnerships is a critical aspect of third-party risk management. The goal of performing due diligence involves conducting an in-depth review of a third-party before entering new business relationships. This can include reviewing their financial profile and stability, security policies, and checking their references and backgrounds. Due diligence allows you to make informed decisions about vendors, suppliers, contractors, and more. It can also help avoid working with riskier third parties or other business entities.
Monitoring
In order to remain one step ahead of supply chain risks, ongoing monitoring is essential to ensure that your business stays one step ahead. Ongoing monitoring helps ensure that third-party partnerships are reviewed for emerging risks and that compliance standards agreed upon are upheld by both parties. The process of continuous monitoring can include periodic reviews, security audits, and other performance evaluations of your third-party partnership. Businesses that conduct ongoing monitoring of TPRM are better equipped to detect and address issues efficiently with the goal of ensuring risks are managed through the lifecycle of the partnership with that third party.
Incident Response
Security incidents can still occur despite your best efforts at third-party risk management. Implementing incident response and reporting into your risk management processes can be important for addressing and minimizing the impact in the event one arises. This process can include communication protocols, clearly defined responsibilities, escalation measures, and remediation practices for third parties. The goal of having an incident response plan integrated with your TPRM is to support the containment, reduction, and recovery from potential incidents.
Best Practices in Third-Party Risk Management
When developing an effective third-party risk management for your small business, there are several best practices to follow. Implementing some of these practices in your TPRM processes can be crucial to safeguarding your business and your third-party partnerships from cyber risks. Below are some best practices to follow when implementing TPRM for your business and the risks it may face in third-party relationships.
- Establish proactive risk management frameworks for your business.
Creating frameworks within your business can be key to proactive risk management. The goal of establishing a TPRM framework is to ensure that clear policies and procedures are defined for your business and third-party entities. This can include comprehensive vendor selection, risk assessments, ongoing monitoring, and procedures for termination of partnerships with third parties.
Frameworks can also help you to assign roles and responsibilities for your third-party partnerships with your business. Implementing proactive risk management frameworks allows you to ensure accountability and effective execution of the support your third-party partnerships provide to your organization.
- Make your third-party due diligence a priority.
Due diligence as a priority in the selection, onboarding, and offboarding of your third-party business relationships is also important. Your due diligence processes can include conducting multiple business assessments to analyze and determine probable risks for that partnership. Due diligence with TPRM should also be an ongoing monitoring process to ensure that the partnership is not opening the business to increased cyber risks.
It allows you to establish critical risk between each third-party relationship to your business and specify which vendors could have higher risk relationships than others. For example, a small retail provider will likely need to assess their third-party relationships for shipping and production needs as well as cyber risks when outsourcing security or IT needs. If a vendor is a higher risk, it will be important to continuously monitor their activity in your systems and conduct regular due diligence on the risk profile of that third party considering how it may impact your business.
- Strengthen contractual obligations and management with third-party entities.
Contracts are what establish the relationship between your business and a third party. Your contracts with your third-party partnerships should have clearly defined expectations, indemnification for liabilities, scope, and more. This can be done by providing third-party partners with service level agreements (SLAs), key performance indicators (KPIs), and other related contracts relevant to your business and industry. You can also include risk management-related clauses in your third-party contracts to specify requirements, data protection measures, and incident response protocols.
- Prioritize data security and privacy with a risk-based approach.
The security and privacy of your business information are crucial to protect in any third-party partnership. When you prioritize data security with a risk-based approach, this ensures that third-party relationships understand the confidentiality of the information they may access. Ideally, most small businesses can benefit from adopting a least privilege framework that defines the classification of your data and the level of access to it from third parties. You can implement this by categorizing vendors based on their risk tier, such as high, medium, or low. This can support you then being able to allocate necessary resources to your third-party relationships based on their risk level to your business.
- Continuously work to enhance your risk management program with third parties.
A quality and effective TPRM is often one that is continuously reviewed and improved based on its efficacy. This can be done in multiple ways that include regular feedback and assessment. When you establish continuous feedback channels, you improve your TPRM based on industry best practices and lessons learned. Many industries are held to regulatory standards where TPRM is important and necessary to periodically revise to remain in compliance.
Challenges and Future Trends in TPRM
For small businesses, there are several challenges and future trends to watch in regard to TPRM. Small businesses in today’s market can face obstacles with TPRM in terms of accessibility and affordability. SMBs may not have the affordability to access tools, solutions, and other resources that can enhance their third-party risks effectively. The reality is that TPRM is a necessity to businesses of all sizes and small businesses can still implement affordable measures that can better safeguard their risk. Additionally, there are also the factors of the growth of reliance on supply chains and the sophistication of attacks against them. In a recent article reported by Security Magazine, showed that 91% of organizations suffered a software supply chain attack in 2023. Diversification of supply chains has increased the risk for businesses and exposed them to potential cyberattacks. Regulations are continually updated to keep up with the evolving threat landscape.
Businesses have been required to adhere to new regulation standards and practices to enhance TPRM and data security concerns. These changes have also prompted further trends to emerge focusing on the need for continuous monitoring of third-party partnerships, more emphasis on cyber resiliency, and integrating TPRM into your overall risk management processes. As the adoption of automation and artificial intelligence (AI) capabilities also continues to grow for businesses, reducing existing risks is going to be key for the future of TPRM.
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