What is Third Party Risk Management?
Third-party risk management (TPRM) is a process designed to minimize risks such as financial, environmental, reputational and security for businesses that utilize third-party services to operate effectively. And since most businesses in the modern world lean heavily on third-party services, it’s more important than ever before.
But how exactly does third-party risk management work, and why is it so important?
Third-Party Risk Management: The Basics
Let’s start with the basics. A “third party” is any vendor, service provider or partner that works with your business. They could provide software that you use to keep your employees productive, they could provide logistics and transportation for your organization or they could handle all your financial transactions.
In any case, each third party will directly or indirectly affect your organization’s security in some way. For example, if the third party handles some of your company data, a breach of that third party could result in the loss of your company data—even though you weren’t the one responsible for the breach initially.
Third-party security risk management is a process designed to review third parties for their current security practices, their role in your organization, and their overall sustainability.
Why Third Parties Present Security Risks
Third parties increase the complexity of your security considerations for several reasons.
First, almost every business must rely on third parties. It’s nearly impossible to handle every phase of your business’s operations internally. Accordingly, every business is presented with some level of third-party risk.
Second, third parties aren’t typically under your control, nor are they typically fully transparent. You may have high security standards and good risk management practices in place in your own organization, but if a third party drops the ball, it could still leave you vulnerable.
Third, each third party in your network of operations is another potential entry point for a would-be hacker. For example, if there’s a security flaw in a third-party tech component, every business that has ever used that component could be rendered vulnerable to an attack or breach.
The more third parties you use, the more potential vulnerabilities you could face.
Types of Risks From Third Parties
There are many types of risks a business could face because of the third parties they work with, as well. These are some of the most important:
- Financial and operational risks. If a third-party vendor succumbs to a cyberattack, it could disrupt the reliability or functionality of your supply chain, ultimately impacting your bottom-line finances.
- Reputational risks. If one of your third-party vendors is the target of a cyberattack, or if their security standards fail to meet expectations, it could affect your reputation; your customers may lose faith in your ability to keep their data secure.
- Regulatory risks. Businesses in certain industries must comply with complex rules and regulations, which often include maintaining secure relationships with third parties. If a third party introduces a vulnerability to your operations, you could be held responsible for the legal consequences.
Why Dedicate Resources to Third-Party Risk Management?
You can conduct third-party security risk management using an internal team, or by working with a third-party security risk management specialist. Either way, you’ll need to spend time and money on the process. So why should you invest in third-party security risk management?
- Cost reduction. First, it’s appropriate to think of third-party risk management as an investment. Even though it will cost you some time and money up front, it stands to save you money in the long run. A data breach could cost your company thousands, if not millions of dollars—but an effective third-party security risk management strategy could prevent you from ever facing this scenario.
- Regulatory compliance. Second, third-party risk management is a component of many regulatory requirements. Depending on your industry and what kinds of data you’re handling, you may be legally required to conduct at least some forms of third-party risk management. If you don’t, you could be fined or held responsible for the damages.
- Knowledge and confidence. Third-party risk management also increases your knowledge and visibility of the third-party vendors with whom you’re working. The more confident you are in your network of vendors and partners, the more seamlessly you’ll be able to work.
What Does Third-Party Risk Management Entail?
Third-party security risk management is an ongoing cycle of activity meant to keep your business secure, and these are the steps to follow:
Step 1: Analysis
The company identifies the inherent risk of the relationship and the level of due diligence to be performed. Accordingly, the company evaluates the third party’s security posture and performs a gap analysis.
Step 2: Engagement
The company and third party collaborate on how to remediate gaps.
Step 3: Remediation
The third party fixes the cyber gaps.
Step 4: Approval
The company approves the third party or rejects it based on risk tolerance.
Step 5: Monitoring
The company continues to monitor the third party to detect any cyber gaps.
Are you looking for third-party security risk management, or are you interested in learning more on the topic? Request a free demo of Panorays’ third-party security risk management software, or contact us to learn more today.