A Third-Party Risk Management program is a systematic approach to mitigating risks associated with third parties, such as vendors, suppliers, and contractors. It includes an assessment process that identifies, evaluates, and remediates any risks affecting your organization.
Implementing effective third-party risk management (TPRM) measures can safeguard organizations against potential threats and promote seamless and confident collaborations with external partners.
Understanding Third-Party Relationships
The main focus of a TPRM is on the third parties an organization interacts with. To develop an effective TPRM, an organization must first familiarize itself with third-party relationships and the risks they introduce.
What is a Third Party?
“Third Parties” refers to any external entities an organization deals with in a business context. This encompasses vendors, suppliers, service providers, consultants, affiliates, and partners that provide business functions. Third parties can be “upstream” or “downstream.”
Upstream third parties are part of the supply chain providing manufacturers with inputs or raw materials. For example, a smartphone manufacturing company relies on different suppliers for components, like chips, batteries, etc. A supplier that delivers the chips for these smartphones would be considered an upstream third party.
Downstream third parties are part of the distribution chain that takes the final product to the end consumer or market. Using the same example, once the smartphones are manufactured, the manufacturing company may rely on a network of retail partners to sell the phone. These retail partners are downstream third parties.
What Types of Risks Do Third Parties Introduce?
While third parties can offer vital services or products to an organization, working with outside entities always carries a potential risk.
- Cybersecurity Risk: A third party lacking strong cybersecurity measures can create vulnerabilities that may lead to data breaches or cyber attacks.
- Operational Risk: If a third party experiences any delay or disruption in their services, it can cause complications for the primary organization’s product or timeline.
- Compliance Risk: If a third party does not comply with regulatory requirements, it can result in legal repercussions, sanctions, or fines for the primary organization.
- Reputational Risk: If a third party has negative actions or failures, like being caught in a scandal or being found to have unethical practices, it can adversely affect the reputation of the primary organization.
- Financial Risk: If a third party experiences economic instability or even bankruptcy, it may result in unexpected costs or losses for the primary organization that relies on its services.
- Strategic Risk: If a third party doesn't share the same values and goals as the primary organization, it can result in conflicts that could hinder the primary organization from achieving its business objectives.
Why is Third-Party Risk Management Important?
A third-party risk management framework is paramount if an organization relies on third parties for services or products. No matter the scope of your relationship with a third party, security risks always come with outsourcing and working with third-party entities that can intertwine with your organization. Cybersecurity risks, supply chain attacks, and data breaches can devastate an organization.
Due to growing global regulations, inadequate third-party risk management programs have faced greater scrutiny. Data protection and data breach notification laws such as the GDPR, CCPA, and the SHIELD Act have significantly elevated the importance and regulatory consequences of inadequate third-party risk management programs. Your organization may face penalties and fines if a third party accessing your customer information experiences a data breach, even if your organization is not directly responsible.
An effective TPRM protects organizations against these risks while remaining compliant with existing regulations, allowing them to take advantage of the benefits of third-party relationships without compromising their organizational stability or integrity.
Learn about the top Third-Party Risk Management solutions on the market >
Key Components of a Third-Party Risk Management Program
A TPRM program has many components, but the main categories focus on identifying, evaluating, and remediating risks within third-party relationships. A TPRM should include the following components:
Security Posture Evaluation
Before onboarding a new vendor, organizations should identify the risks the third party poses and compare that risk level to other competitive vendors. Various tools measure this, including security questionnaires, risk tiering, vulnerability scanning, and more.
Metrics can help measure this risk level, and one of the most popular ways to evaluate a vendor is through security ratings. These ratings outline a vendor's external security posture and whether it meets the minimum score your organization requires.
Security ratings are built from externally viable information and calculated by a trusted independent organization. UpGuard Vendor Risk offers one of the most widely used and reliable security ratings platforms. Our risk ratings are generated using exclusive algorithms that analyze commercial and open-source data sets to collect information that can be used to evaluate cybersecurity risk quantitatively without intruding on privacy.
Learn how UpGuard evaluates security postures with instant security ratings >
Risk Assessment
Once the minimum security rating is met, organizations should engage with the vendor to learn more about their internal security measures, which are not typically accessible to outsiders. A vendor risk assessment can include security questionnaires, a great way to learn about a vendor’s security controls. These questionnaires have inquiries about a broad spectrum of security topics, including:
- Information Security and Privacy
- Physical and Datacenter Security
- Web Application Security
- Infrastructure Security
- Information Security Policy
- Business Continuity Management
- Operational Resilience
- Incident Response Planning
- Governance, Risk Management, and Compliance
- Threat and Vulnerability Management
- Supply Chain Management
- Access Control
- Data Privacy
UpGuard Vendor Risk automates your security questionnaire workflow with our built-in questionnaire library. Select industry-standard security questionnaires and automatically send them to vendors to complete, tracking completion over time.
Learn more about UpGuard’s Vendor Risk Assessments workflow here >
Risk Remediation
Evaluation and engagement may uncover unacceptable risks within a third party, and you may not want to work with a third party until those security issues are fixed. This component of a TPRM focuses on communicating the risk to the third party and offering an opportunity for them to address or remediate that risk. If a vendor agrees to this, using a remediation tool can help track and review any security updates a vendor completes.
The UpGuard Vendor Risk platform automatically categorizes risks within a third party, prioritizing the most critical that should be addressed immediately. Our remediation workflows allow your organization to resolve risks and provide an audit history quickly.
Selection
After reviewing a vendor’s risk profile and ability to remediate security issues (if remediation is required), your organization can approve or reject the vendor. This procurement decision should also consider your organization’s risk tolerance, compliance requirements, and how critical the vendor is to your organization.
Continuous Monitoring
TPRM doesn’t end once vendors are approved to work with your organization. One of the most crucial components of a TPRM is ongoing monitoring of vendor security throughout their entire lifecycle, especially if they now have access to an organization’s internal systems and sensitive data.
Continuous security monitoring (CSM) is a practice that automates monitoring of information security controls, vulnerabilities, and other cyber threats. Organizations should practice CSM for their business and watch their vendors’ security postures. TheUpGuard Vendor Risk platform updates your vendor security posture daily, including any new risks that may affect your organization.
What Makes a Third-Party Risk Management Program Effective?
While every TPRM should have the essential components outlined above, a genuinely effective TPRM will focus on specific practices within those components that enhance each step.
Comprehensive Due Diligence
During the evaluation phase, organizations should use a comprehensive due diligence process in reviewing a vendor’s security posture. Along with cybersecurity practices, thorough due diligence includes an exhaustive evaluation of the third party’s financial stability, compliance history, reputation, and other factors relevant to the business partnership.
Not all third parties pose the same level of risk—but don’t overlook small or indirect third-party relationships. Even if it seems like a vendor only has a small level of risk, it is still a risk that can potentially adversely affect your organization.
Standardized Risk Assessment
Organizations should utilize a consistent methodology to assess and categorize the risks associated with each third party. Evaluating vendor risks uniformly makes it easier to prioritize and manage them effectively. If using security questionnaires, send the same questionnaire to all vendors. Consider utilizing an industry-standard questionnaire, including the widely-used methodologies below:
- Health Insurance Portability and Accountability Act (HIPAA) Questionnaire: Determines if vendors with access to protected health information (PHI) align with the United States HIPAA standard.
- ISO/IEC 27001 (ISO 27001): Leading international standard for regulating data security, covering aspects like information security management systems, IT, information security techniques, and information security requirements.
- CIS Critical Security Controls (CIS First 5 / CIS Top 20): A set of prioritized best practices to enhance cyber defense by identifying and mitigating the most prevalent cybersecurity vulnerabilities.
- Consensus Assessments Initiative Questionnaire (CAIQ): Educates and promotes secure cloud computing best practices and documents security controls across IaaS, PaaS, and SaaS products.
- NIST 800-171: Outlines cybersecurity and privacy best practices and standards in the U.S.
- Standardized Information Gathering Questionnaire (SIG / SIG-Lite): Assesses cybersecurity, IT, privacy, data security, and company resiliency. SIG-Lite is designed explicitly for low-risk vendors, utilizing select questions for high-risk vendors in SIG.
- VSA Questionnaire (VSAQ): Monitors the security practices of a supplier across six unique areas, including data protection, security policy, preventative and reactive security measures, supply chain management, and compliance.
Explore UpGuard’s entire library of security questionnaires here >
Clear Contractual Terms
After selecting a vendor, provide a clear contract outlining the partnership between the vendor and the primary organization. This contract should include roles and responsibilities, data protection requirements, compliance expectations, and penalties for breaches or other non-compliance actions.
A clear contract protects the primary organization should anything disrupt the partnership with the third party. Organizations can refer to this contract for the agreed-upon penalties and next steps in a data breach or cybersecurity incident. Don’t forget about providing clear procedures for ending the relationship with a third party and offboarding, also known as exit strategies.
Incident Response Planning
Organizations should also include a well-defined incident response plan in their TPRM. This plan details how to respond if a third party experiences a breach, outage, or other incident that affects the primary organization. An effective TPRM prioritizes being prepared in an emergency, and a solid Incident Response Plan is an excellent place to start.
According to the National Institute of Security and Technology, a process for responding to incidents should include:
- Preparation
- Detection and Analysis
- Containment, Eradication, and Recovery
- Post-Incident Activity
Consider also including internal communication protocols and a strategy for notifying affected parties in your Incident Response Plan.
Feedback and Evolution
TPRM programs should not be static. Just like organizations continuously monitor their vendors for changes in their security posture, your organization should evaluate the effectiveness of your TPRM program and implement changes to improve over time. Prioritize collecting feedback from internal teams, and assess the current business environment to identify any other room for improvement.
Benefits of an Effective Third-Party Risk Management Program
TPRM programs are proactive rather than reactive. It’s an invaluable tool that protects the primary organization and enhances the security posture of all involved parties. An effective TPRM program provides many benefits for organizations that utilize outside partners.
Minimized Operational and Financial Risks
A robust TPRM program will identify threats and vulnerabilities early, which allows organizations to take action before problems arise. Organizations can avoid operational disruptions, financial losses, and legal implications arising from third-party failures or breaches by recognizing and addressing the risks associated with third parties.
Enhanced Reputation and Trustworthiness
Any company can suffer a massive blow to its reputation today due to just one data breach or scandal. Even if that data breach occurs through a third party, the primary organization can still suffer repercussions.
One example is the 2013 Target data breach, where cybercriminals stole the personal information of 70 million customers and as many as 40 million payment card accounts. Hackers compromised one of Target’s third-party vendors, Fazio Mechanical Services, who had remote access to Target’s network for contract and billing purposes. Even though Target was not individually responsible, the breach tarnished its reputation.
To avoid this, organizations should manage the risks of working with third-party partners through an effective TPRM program, ensuring their partners maintain the same high standards of conduct and security. By doing so, not only do they protect their reputation, but they also build more vital trust with their stakeholders and customers.
Improved Regulatory Compliance
Across industry sectors, there are strict regulations that apply to third-party relationships. An effective TPRM program ensures that third parties comply with appropriate regulatory standards, which minimizes the risk of penalties for non-compliance. Companies that continuously monitor third-party activities demonstrate due diligence during regulatory audits, helping them avoid potential legal consequences and fines.
How UpGuard Can Help Your Third-Party Risk Management
With UpGuard Vendor Risk, your organization can reduce time spent on vendor risk management and streamline your TPRM process. We accomplish this by automating vendor questionnaires and offering templates that align with the NIST Cybersecurity Framework and other best practices. Our platform also enables continuous monitoring of your vendors' security posture, allowing for benchmarking against industry standards.
Each vendor undergoes a rating process based on over 50 criteria, including the presence of SSL and DNSSEC, which also includes risks of domain hijacking, man-in-the-middle attacks, and email spoofing for phishing. Vendors are monitored daily using UpGuard's Cyber Security Rating system, and any significant drops in their scores are immediately flagged and reported so you can respond in real-time.
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