What is Third party risk management?

Third-party risk management (TPRM) is a critical aspect of an organization’s overall risk management strategy. It involves identifying, assessing, and controlling risks that occur due to interactions with third parties. Third party here refers to vendors, suppliers, service providers, and other external entities with whom an organization interacts. The engagement with third parties brings about an array of risks that, if left unaddressed, can significantly impact an organization.

1. Cybersecurity Risk: Third parties often have access to an organization’s systems or data, which can expose the organization to cyber threats. For instance, a third-party vendor with inadequate cybersecurity controls can expose the organization to cyberattacks and data breaches. This risk is further magnified by the fact that the organization does not have direct control over the third party’s cybersecurity practices.
2. Operational Risk: Due to integration, If a third party fails to deliver a service or product on time, or if their systems fail, it can disrupt the organization’s operation third parties. For example, a third-party system error might prevent the organization from completing customer transactions.
3. Financial Risk: Substandard work or a defective component from a vendor can slow business and reduce revenue. Additionally, fraud at the suppliers end may result in financial losses for the organization.
4. Reputational damage: The actions of third parties can significantly impact an organization’s reputation. For example, a third-party data breach resulting from poor security controls can damage the organization’s reputation. Similarly, inappropriate interactions or poor recommendations by a third party can tarnish the organization’s image.
5. Regulatory and Compliance Risk: If a third party fails to comply with data protection laws while handling the organization’s data, it can result in regulatory penalties for the organization. This risk is particularly significant for sectors like financial services and healthcare, where regulations are stringent.

What are the essential frameworks for Third-Party Risk Control?

The goal of TPRM is to ensure that these third parties do not pose a significant risk to the organization, especially in terms of security, compliance, and overall business operations. The TPRM program allows organizations to document internal roles and responsibilities, develop regulatory practices, and appropriately communicate guidelines to navigate third-party risks throughout the vendor lifecycle.  The vendor lifecycle refers to the entire process of managing a vendor relationship, from the initial identification and selection of vendor candidates, through the onboarding process, to the ongoing management and eventual offboarding of the vendor.  Vendor risk management processes include the initial identification and categorization of third parties, through risk assessment and mitigation, to continuous monitoring and reassessment of third-party relationships and risk exposures. A thorough mitigation program ensures that the risk associated with third parties remains limited. TPRM policies allow organizations to document internal roles and responsibilities, develop regulatory practices, and appropriately communicate guidelines to navigate third-party risks throughout the vendor lifecycle.  

Why organizations are prioritizing Third-Party Risk Management?

As organizations increasingly rely on third-party services, the need to manage associated risks has become more apparent. Effective TPRM programs are designed to provide discipline, structure, and oversight to guide the plans, policies, and processes by which organizations identify and categorize the third parties, understand and prioritize the risks presented by them, establish and enforce key controls for mitigating those risks, perform monitoring that tracks and regularly reassesses third-party relationships and risk exposures. 

TPRM is a complex process for many big risk organizations, primarily due to the dynamic and unpredictable nature of risks. The risk landscape is in a state of constant evolution, with new threats emerging and existing ones varying in intensity and impact. This continuous change can make it challenging for organizations to keep their TPRM strategies current and effective.

Each third party that an organization engages with can be seen as a potential vector for a cyber-attack or data breach. If a vendor’s security measures are inadequate, it could serve as a vector for attackers to gain access to the organization’s systems or data. The more vendors an organization engages with, the more vectors it introduces, thereby expanding its attack surface and increasing the potential for vulnerabilities.

Other factors responsible for introducing complexity of implementing TPRM are resource limitations, a lack of visibility into new third-party relationships, the task of managing multiple vendors, and the need to handle an increasing number of requests for third-party risk assessments. Additionally, challenges include the absence of integration between upstream and downstream processes and systems, a complex operating model, and limited use of technology.

Furthermore, the growing interconnectivity in today’s digital world has broadened the risk landscape, introducing new types of risks and amplifying the potential impact of third-party relationships. For example, cyber threats have become more advanced and widespread, posing significant challenges to organizations’ cybersecurity measures. Given these risks and gaps, organizations are prioritizing the development of robust TPRM strategies to ensure consistency in managing third-party risks.

What are components of third-party risk management (TPRM)?

Given the complexities and challenges associated with the exposed landscape, it’s clear that Important third-party risk management combined with a structured approach is needed to manage them effectively. The concept of Third-Party Risk Management (TPRM) programs are specifically designed to address these challenges and provide a comprehensive framework for managing third-party risks. Here are some common components of a TPRM program:

Risk Identification

It involves identifying the third parties to engage with and understanding the potential risks they present. In this process some organizations may employ a benchmark or a baseline for vendor selection. This criteria may include cybersecurity certifications like ISO 27001 or SOC 2, adherence to industry standards such as a defined risk management process, or the implementation of GDPR-compliant privacy controls. Once risks are identified, they need to be assessed.

Onboarding process

The second phase is a critical phase in the TPRM lifecycle, where the selected vendor is integrated into the organization’s operations, marking the beginning of the business relationship. A vendor risk assessment is conducted to evaluate the potential risks posed by the new vendor, considering factors like financial and strategic risks, and even the risks posed by fourth-parties.

The assessment’s findings are documented, outlining the inherent risks and the mitigation strategies in place to address them. For example, if the primary goal is to meet regulations, it is advised to prioritize risks that could lead to legal penalties. If the business is oriented towards customer satisfaction, then disruptive data loss or service disruptions are more likely to be prioritized than other risks factors. Given the time-consuming and resource-intensive nature of vendor risk assessments, many organizations are turning to third-party risk exchanges. These platforms provide access to already completed assessments, streamlining the process and conserving resources.

Active mitigation through risk Monitoring

This is a continuous process that uses specialized tools to track, assess, and analyze risk factors over time against internal controls. Monitoring strategies help organizations identify and track high-risk parties, determine the volume and risk profile of the entire third-party portfolio, and analyze major operational loss events.

Third-Party Offboarding 

Comprehensive offboarding is critical to prevent digital backdoors in to the business environment. Failing to disable third-party users, accounts, or services can leave openings for attackers to exploit. The process involves revoking access privileges, disabling user accounts, retrieving all intellectual property, IT devices, and other company assets provided and removing any third-party issued software or applications.

Conclusion

In the dynamic digital landscape, navigating third-party risks requires a strategic and structured approach. Embedding Third-Party Risk Management (TPRM) programs within a culture of accountability equips organizations with essential tools and frameworks. As the risk landscape evolves, prioritizing robust TPRM strategies becomes integral, ensuring the consistency and resilience of organizations in the face of third-party challenges. MitKat’s program plays a crucial role in this process by facilitating risk identification and evaluating potential threats tied to vendors, suppliers, and service providers. Thus, MitKat offers the solutions needed for effective risk management in today’s complex environment, providing a reliable framework for organizations to thrive.