What Every Organization Needs to Know About Third-Party Risk Management

Risks exist throughout your organization, ranging from the threat of ransomware to natural disasters disrupting your warehouses. Risk management is a broad practice that aims to understand and mitigate the impact of risks before, during, and after they occur. 

On top of the inherent risks in your organization, every third party you work with introduces additional risks to your business. Third-party risk management (TPRM) is a practice under the risk management umbrella that thoroughly assesses every vendor, service provider, or SaaS platform before onboarding and throughout the relationship. 

Yet, roughly 80% of risks associated with third parties are identified after vendor onboarding. That means only 20% of third-party risks are understood before these parties gain access to your networks, sensitive data, and customer information. 

It’s clear that organizations of all sizes need to improve their third-party risk management practices. But how can businesses better understand risks before it’s too late?

Today, we’ll go over some common mistakes organizations make with TPRM and then dive into what every business needs to know about the modern TPRM landscape. Read on to bolster your understanding of how to assess and manage risks that vendors pose.

What is Third-Party Risk Management?

Third-party vendor risk management is a series of processes and procedures that evaluate potential and current vendors for the risks associated with doing business with them. 

In the past, TPRM was done before onboarding a vendor and then was rarely revisited. However, the business world has changed. There’s the increased threat of cybersecurity attacks and dependence on third-party relationships (and even fourth or fifth-party ones) to conduct business day-to-day, companies need to perpetually evaluate vendors to understand the risks they pose. Changes that your third parties make, such as adopting new software or merging with another company, introduce new risks to your organization that must be understood. 

That means it’s time to leave the spreadsheets behind and embrace modern platforms that allow you to quantify and visualize risks accompanying your third-party relationships. Risk management platforms like Risk Cloud help you avoid many common mistakes that organizations make regarding TPRM.

Common Mistakes of Third-Party Risk Management

Most businesses understand the need for third-party risk management, but too many make the same mistakes that leave risks unknown and unmitigated. Some widespread mistakes are:

• No Common Standards: TPRM varies between industries and companies, so you must create internal standards for evaluating risks. Some frameworks or regulations may have specific needs and guidance, but your organization needs to craft comprehensive policies for vetting vendors. Failing to create an internal standard leads to inconsistent vendor assessments.
• No Centralization: Without a comprehensive and centralized framework for your organization, vendor assessments are handled on a case-by-case basis. This leads to things falling through the cracks and inefficiencies, allowing third-party risks to leave your organization vulnerable. 
• Failure to Include All Relevant Departments: Typically, the department that initiates a third-party risk assessment is not the same team that will manage the relationship going forward. Failing to include every relevant team in the process creates gaps in communication and oversight. Fix this mistake by including stakeholders from the beginning. 
• Irregular Ongoing Assessments: It’s entirely too common for businesses to conduct an onboarding assessment and then never or rarely revisit vendor assessments. It’s a mindset that embraces “no news is good news,” but that viewpoint will leave you vulnerable to risks that have developed or were missed during onboarding. 
• Thinking About Risk Management Too Late: Teams may create a great-looking business case, have it approved, identify vendors, onboard them, and then identify risks. This roadblock can derail projects or end them entirely. In order for organizations to be more strategic, vendor risks need to be thought through from the beginning. 

Now, let’s explore the current state of TPRM and what your organization needs to know to avoid introducing risks to your business. 

What You Should Know About Modern TPRM

TPRM is an ever-evolving field that changes with each new regulation or significant data breach that makes headlines. 

Staying on top of how TPRM is changing is essential. So let’s explore how this risk management practice is transforming.

You Must Understand the Technical Footprint

TPRM has become more technical than ever before. Risk assessments were previously primarily focused on governance and compliance, but the field is broadening and deepening. 

Vendors' software and how they secure their systems must be included in vendor assessments. Regulatory compliance and governance are certainly still substantial, but so is the cybersecurity posture of every third party you work with. A breach with your vendor can easily spill over to your company.

What does this mean? You need the right people involved with TPRM assessments that can effectively evaluate the technical footprint of third parties. Have cybersecurity analysts and other technical experts get involved in the TPRM process from the beginning to identify potential issues before they become vulnerabilities. 

Focus on What Matters Most to Your Organization

Creating or refining a TPRM process for your organization can be daunting. Rather than trying to do everything at once, focus on what matters most to your business. Then, examine how your third parties interact with what’s important. 

For example, customer information is likely necessary to your business, but who is storing it? A cloud storage service? They must be thoroughly evaluated, including their encryption standards, data transmission practices, and overall security posture. 

Once you’ve identified the most critical aspects of your organization, you can grow your TPRM program centered on what’s truly important. Don’t try to cover every angle from the beginning; start with what truly matters.

Set and Convey Your Standards to Tiered Vendors

Create documented standards and convey them to every vendor during and after the assessment process. A great way to create standards is to have three or four tiers of providers. Tier 1 providers are held to the highest standards as they impact your operations the most. At the same time, tier 4 suppliers have less demanding requirements since they have a minimal impact or access level to your organization. 

Additionally, your organization should understand its risk appetite and what you’re willing to accept from your vendors. Decision-makers should fully understand the risks they accept when onboarding a vendor, and accountability must be documented. 

It’s common for organizations with successful TPRM programs to hold their vendors to the same standards they have for themselves. Use your internal standards as a starting point to create the requirements for the different tiers of vendors. 

Understand Your Ecosystem

You need to understand your entire vendor ecosystem, which is typically straightforward for smaller organizations but becomes increasingly complex for enterprises. Begin by looking at accounts payable; who are you sending checks to? 

Identify every vendor you have, then determine if they’ve been recently evaluated. Next, create a set schedule for ongoing risk assessments so that you’re staying on top of any changes your vendors make that may impact you. 

Additionally, risk and compliance managers need to start considering fourth-party vendors. A fourth-party vendor is your vendor’s vendor. A fourth-party vendor is only one step away from impacting your business. Be aware of fourth-party vendors and require your third-party vendors to conduct thorough assessments that meet your standards.

Don’t Be Afraid of Simplicity

Smaller businesses often create questionnaires with hundreds of questions that they send to vendors, but this might not be necessary. Instead, don’t be afraid to embrace simplicity with shorter questionnaires focusing on what matters. Establish a baseline for your company and then grow as necessary. 

Additionally, there may not be a universal third-party risk management framework, but other frameworks often provide most of the information you need from a vendor. For example, asking for a SOC 2 report will provide much of the information you need to evaluate a potential vendor fully. 

Improve Your Third-Party Risk Management Program with Risk Cloud

Is your organization struggling to understand the risks presented by vendors and partners? Staying on top of regular vendor assessments can be time and resource-intensive. And at LogicGate, we believe there’s a better way to manage third-party relationships. Check out our eBook, Teaming Up to Solve Third-Party Risk for additional insights and steps to improve your TPRM program. 

With our Third-Party Risk Management solution in Risk Cloud, you gain a quantitative understanding of your organization's risks, including those presented by third parties. But don’t just take our word for it. See why we were recognized as a “Strong Performer” in The Forrester Wave™: Third-Party Risk Management Platforms, Q2 2022 report. 

Ready to revolutionize your risk management? Book a demo today to talk to a risk management expert about how you can transform your TPRM program.

SOC 1®, SOC 2® and SOC 3® are registered trademarks of the American Institute of Certified Public Accountants in the United States. The AICPA Trust Services Criteria for Security, Availability, Processing Integrity, Confidentiality, and Privacy is copyrighted by the Association of International Certified Professional Accountants. All rights reserved.