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What is Inherent Risk and How It Should Guide You in  Evaluating Your Third Parties
Glossary

What is Inherent Risk and How It Should Guide You in Evaluating Your Third Parties

By Editorial Team Nov 18, 20206 min read

When it comes to business, a certain degree of risk will always exist. Working with third parties also carries its own set of potential risks. But the more you can do to identify, understand and reduce all of these risks, the greater opportunity for success. 

Understanding Information Security Risk

Information security risk can be described as the risk of an undesired event occurring which results in lost, copied, stolen or otherwise compromised sensitive data, such as PII, PHI, and other personal or proprietary information. The effects can include adverse legal, financial, regulatory and reputational consequences for the company, including lawsuits and fines.

Internal factors such as a data leak or disgruntled employee and external factors such as a misconfigured firewall or a software vulnerability can lead to information security breaches regardless of whether they are deliberate or unintentional. Unfortunately, the damage can range from minor, such as temporarily being unable to access systems, to major, possibly putting a company out of business.

Incurred damage will vary, based on the severity of the breach, and may result in:

  • Contractual liability issues such as a breach of contract by an employee, client or other business partner
  • Legal expenses related to defending against legal action and/or restoring lost data
  • Loss of future revenue such as trade secrets, competitive advantages and/or reputational hits
  • Regulatory consequences such as fines from regulatory bodies and other groups designed to protect the industry from unauthorized exchange of confidential information

While these five consequences are enough to plummet a business, the reputational damage is the icing on the cake. Between disgruntled clients and negative media coverage, a breach can have far-reaching, adverse effects on a  company.

What is Inherent Risk?

Risk can often be organized into one of two buckets. There’s residual risk —which is the risk that exists after certain security measures have been implemented. Then there’s inherent risk. 

By definition, “[Inherent risk is] an assessed level of raw or untreated risk; that is, the natural level of risk inherent in a process or activity without doing anything to reduce the likelihood or mitigate the severity of a mishap, or the amount of risk before the application of the risk reduction effects of controls.”

Inherent risk could also be defined as the current risk level within the context of a limited set of controls. In other words, it’s the risk level your business faces when nothing is done. While reliance on third-party vendors is necessary for doing business, your inherent risk can also be greatly affected by those vendors, because essentially, their risks are also your risks. 

The correct approach to handling inherent risk is to: 

  1. Assess the various risk levels
  2. Take proactive steps to reduce risk
  3. Monitor risks on an ongoing basis

Assessing Inherent Risks

The first step is to understand exactly how much risk you and your third parties face. This requires creating a risk profile for your company and considering the likelihood of certain adverse events occurring if nothing more is done. You will need to evaluate a variety of factors such as:

  • What is the nature of your business? Certain industries and niches face much greater inherent risk than others.
  • How sensitive is the information you hold? In other words, what would the consequences be if your data was compromised?
  • How educated are your employees regarding basic security principles and the need for confidentiality?
  • What is the integrity and competence level of your internal personnel in terms of information security best practices?

Proactive Steps to Reduce Risk

Once you’ve evaluated the inherent risk faced by your business, the next step is to proactively mitigate risk. This decreases the likelihood of experiencing any possible adverse effects from the risk. 

Below are suggested ways to reduce risk in your organization. The exact steps will vary based on your organization’s inherent risks and available resources.

Assign clear responsibilities. 

Delegate clear ownership over every aspect of your security policy. Each element should be assigned to an individual or team, leaving no confusion about who handles what.

Use a consensus-driven approach. 

While clear responsibilities are essential, applying a consensus-driven approach ensures everyone’s voice is heard. Representation from each department within the organization creates a balanced strategy where everyone’s needs are considered.

Limit what you keep. 

Want to reduce stress and make things exponentially simpler in your business? Limit the amount of data you keep and store. It sounds simple, but it is much harder than it seems, especially in today’s digital age. 

Document everything. 

One method of limiting the information you keep is by creating an effective document retention and removal program. In fact, this speaks to a much larger point regarding strengthening security—document everything you possibly can. This eliminates friction, reduces confusion and provides something firm to stand on should you experience a breach.

Assess your third parties.

Start by mapping out your third parties and prioritizing their impact on your business. This enables you to weigh third parties accordingly, and is an important step in reducing risk to your organization. You also need to test the digital perimeter of your third parties to determine how resilient they are in the event of a breach. And lastly, reviewing security questionnaires will help you understand the internal security policies of your third-party vendors.

The more conscientious and proactive you are, the better off your organization will be!

Monitoring Inherent Risks (Indefinitely)

Monitoring inherent risks should be ongoing. Even after identifying inherent risks and taking proactive steps to avoid issues, you’ll still need to keep tabs on what’s happening. Keeping security risks at a minimum is an ongoing process, requiring continuous monitoring as well as knowledge of the latest security systems and protocols.

Compliance is not something you can take for granted. Just because you have rules or processes in place to prevent situations from occurring doesn’t mean that they are being followed. Your strategy must include continuous monitoring for compliance and consistency enforced over weeks, months and years.

A commitment to monitoring and enforcement shows everyone—including employees, clients and business partners—that you take information security seriously. Furthermore, it demonstrates your commitment to regulators and other external parties that you are aligned with the proper standards.

Automate Security With Panorays

In order to evaluate a third party’s inherent risk, you need to understand its business impact on your organization. Panorays enables you to create a custom, standardized inherent risk level to efficiently facilitate this process. Next, our automated platform helps you assess and mitigate risk as well as continuously monitor any changes in the third party’s security posture.

Panorays helps expedite your third-party security management program through its automated platform. It is the only platform providing a rapid supplier Cyber Risk Rating that combines automated security questionnaire results with attack surface evaluations while also considering business context. 

For more information or to see how it works, please request a demo today!

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Editorial Team

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