What is Third-Party Risk?

LogicGate | May 26, 2022

Third-party risks are any risks companies introduce via external parties into your ecosystem, infrastructure, or supply chain. Third parties can include vendors, suppliers, partners, contractors, or service providers that have access to any internal data, whether systems, processes, Intellectual Property, customer information, or internal communications.

A critical point to remember about third-party vendors is that you may have solid measures and remediation plans in place, yet your third-party vendors may not uphold these same standards. Thus third-party relationships can increase vulnerabilities even in the most secure of companies.

Knowing who has access to your company's data is paramount. Hyperconnectivity and expanding services via third-party options have allowed companies to grow and make specific business processes more accessible and efficient. Still, it has also raised risk exposure and the potential for more significant losses. Failure to manage third-party (or vendor) risks could mean regulatory action, financial loss, litigation, and reputational damage. 

What Kind of Third-Party Risks Are Out There?

Third-party risks are numerous and diverse. Many companies invest in security and risk management, so cybercriminals have found that targeting suppliers and partners with connections to larger entities are easier and far more valuable targets. An attack on a smaller vendor can rapidly expand thru cloud-based connections and infect principle companies' systems (and all other partner networks) rapidly via connected devices and supply chains.

The risk landscape constantly evolves, and new threats arise daily. Typically third-party risks that impact principle businesses fall into the following five categories:

  1. Financial Risks damage financial performance and cause revenue goals to fall short or impair sales. An example is a supplier that provides a faulty component to a larger product.
  2. Reputational Risks from negative public opinion upsets customers through inappropriate interactions, poor recommendations, security breaches, and legal violations. A supplier that uses child labor is an example.
  3. Regulatory/Compliance Risks occur when third parties do not follow laws, rules, or regulations. An example is when a supplier violates labor or environmental laws. The principal organization is liable and could face fines.
  4. Operational Risks are any loss from disrupted business operations, such as the loss of a facility due to natural disasters or a cyber attack that brings down the principal company's operational systems.
  5. Strategic Risks come about having made adverse business decisions or the failure to implement appropriate business decisions consistent with its strategic goals. In other words, choosing the wrong third-party entity to perform critical functions.

Organizations need to provide the appropriate oversight and keep these risks in check. What are companies to do to help mitigate or eliminate these risks?

What is TPRM?

Third-party risk management (TPRM) is a process and framework that allows companies to analyze and control risks involved with vendors and service providers. TPRM frameworks provide organizations with a roadmap to build their TPRM programs based on industry-standard best practices. As a first step for any third-party relationship, you should conduct a vendor assessment. They help you understand the risks associated with different vendors and can be critical for creating risk mitigation plans.  

Third-party risk management's goal is the reduction of possible data breaches, operational failures, vendor financial malfeasance, and operating according to regulatory requirements.

How Having an Efficient TPRM Program Helps Companies

Third-party programs can be complex, dispersed, multi-layered, and information-heavy. If your company employs third parties, you need to give your employees the ability to manage Third-party risks effectively. When companies place a TPRM framework and tools, managing risk becomes easier to identify, track, and enforce.

If Suzan, in marketing, needs to find new vendors yesterday for a mission-critical campaign, she must vet possible vendors. To do so effectively, she needs to check their experience and performance and ensure that due diligence has been done to make sure new contracts are in alignment for privacy, security, and compliance.

You may find yourself asking, who should care about TPRM in my organization? One answer is that everyone from the CISO to the Board and risk managers to legal team members — the list could go on and on. But the reality is that everyone in the organization should care about TPRM because each department within an organization is using different vendors and contractors to get their work done. Encouraging everyone to think like a risk manager in your organization leads to a better understanding of potential risks and ultimately to better vendor relationships.

LogicGate Helps Mitigate Relationship Risk

LogicGate's Risk Cloud platform helps companies identify red flags and steer clear of risky relationships. Our TRPM solution offers companies the support needed to help control their third-party relationships. With Risk Cloud you can:

  • Streamline vendor assessment process with the help of automated questionnaires and assessments.
  • Protect your data with the help of external user multifactor authentication.
  • Encourage better collaboration between multiple stakeholders and external vendors.

Our proactive Applications are designed to meet your business's needs with easy-to-build and track processes that assure you that your third-party relationships have solid foundations.

Don't just take our word for it. See why LogicGate was named a “Strong Performer” in The Forrester Wave™: Third-Party Risk Management Platforms, Q2 2022.

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