Reducing your exposure to potential third-party risks and pitfalls is essential in modern-day business. While partnerships with suppliers, contractors, vendors, and more are integral to many operations, precautions must be taken to ensure that your business stays protected in the case of third-party claims.
Implementing a third-party risk management program is crucial for mitigating third-party risks. Such a program involves updating data maps, conducting thorough risk assessments, and collaborating with auditors to address the growing threats associated with third-party relationships, especially in light of recent significant data breaches.
Third-party risk management (TPRM) is the practice of crafting dedicated strategies toward [taking precautions against] various risks that could come up related to your business relationships. In this article, we’ll cover key aspects of TPRM and provide practical steps and strategies you can take to safeguard your business.
How to Mitigate the Risk When Using a Third-Party Component?
As they say, the first step to solving a problem is admitting that you have one. Identify various potential third-party risks that could come your way as a result of a business relationship, such as:
- Compliance risks or failure to meet regulatory standards
- Operational risks like delays or other disruptions to service
- Cybersecurity risks such as data leaks
- Reputational risks like bad PR from connections to unethical business practices
- Financial risk due to the financial instability of third parties
Once you’ve identified some of the possible risks coming your way, you can begin to put risk mitigation efforts into play. However, before jumping into creating strategies to minimize each and every risk, it’s important to consider the likelihood of them actually occurring.
Implement a thorough vetting process to assess your various vendors and partners. Use tools like a third-party risk assessment framework or other analysis to evaluate and prioritize potential threats.
After vetting vendors and assessing risk, it’s time to implement strategies to stop them from happening – or reduce their impact if they do.
Finally, regular performance and risk evaluation is key. Periodically assess third-party performance to ensure that they continue to meet your standards and that new risks don’t emerge. Continuous monitoring is essential for tracking an organization’s third-party risk posture, enabling timely identification and assessment of potential risks.
What Are the Steps in Third-Party Risk Management?
There are a handful of steps in the third-party COI risk management process. Let’s take a look.
A solid third-party risk management strategy is crucial in mitigating potential risks that can arise from both direct third parties and their fourth-party vendors.
Establish a third-party risk management framework
A TPRM framework helps you plan ahead to structure and organize the risk management process. Common areas generally covered here include defining risk categories, setting policies, and assigning internal roles to manage third-party risk using structured processes and tools. The framework should be scalable for various kinds of vendors, or businesses can make different kinds of frameworks for different use cases, such as critical vs. low-risk suppliers.
Conduct third-party risk assessments
In order to prioritize and plan for risks, businesses should perform risk assessments that are tailored to each of their vendors. This process will help determine the likelihood and potential impact of each identified risk. More in-depth analysis may be needed for higher-risk vendors. Additionally, vendor risk management is crucial for establishing structured frameworks for vendor risk assessment, ensuring compliance with regulations like the GDPR, and protecting customer data.
Monitor and review third-party performance
Risk factors can change over time and can be influenced by things like shifts in regulations, market dynamics, or internal vendor changes. It’s essential to keep up with evolving risks through regular audits, performance reviews, and/or updates to risk management policies. Additionally, continuously monitoring the security posture of third-party vendors is crucial to detect any changes and proactively address potential risks.
What Are the 3 General Risk Mitigation Strategies?
There are three general strategies that businesses use to minimize the potential likelihood and impact of risks: risk avoidance, transfer, and reduction.
Additionally, businesses should focus on strategies and frameworks to mitigate third-party risk, highlighting the importance of managing this risk in various business contexts.
Risk avoidance
This strategy involves eliminating involvement with vendor activities that carry high levels of risk. Many times it is not possible to completely avoid risk but the first step should always be to avoid risk if possible. For example, if a vendor’s compliance standards don’t meet your organization’s requirements, you could (and perhaps should) choose to avoid the partnership altogether.
Risk transfer
Risk transfer shifts the responsibility for potential damages and losses from one party to another. For example, your company may require a vendor to hold specific types of insurance to cover and take on risks that your organization would otherwise be held responsible for in the case of a claim.
Risk acceptance and reduction
There are times when accepting a manageable level of risk is appropriate, especially if the likelihood is low or the cost of mitigating it is too high. However, you should still take measures to reduce the impact, such as setting up controls or contingency plans.
How to Manage Third-Party Cyber Risk?
One increasingly common kind of third-party risk that businesses expose themselves to these days is cybersecurity risk. This refers to any threats that could cause harm resulting from digital attacks, data breaches, third-party breaches, or third-party data breaches.
Here are a few tips for managing your third-party cyber risk:
- Implement cybersecurity policies. Create and enforce cybersecurity guidelines for all third parties you work with. These might include things like password policies, data encryption requirements, or data access restrictions. Protecting sensitive data in the context of third-party risk management is crucial to prevent vulnerabilities due to third-party access.
- Regular auditing and compliance checks. Routine audits help verify that third-party vendors are doing what they say they would when it comes to maintaining strong cybersecurity measures. Depending on your industry, you can also tailor compliance checks to certain regulations such as HIPAA or GDPR. Addressing vendor risk is essential to ensure that all potential threats from third-party vendors are mitigated effectively.
- Incident response planning. Finally, create an incident response plan so that in the case of a cyber incident, you have a swift and coordinated response to limit damage.
Need More Guidance on TPRM? myCOI Has You Covered
Third-party risk management is essential for protecting your business in an interconnected business landscape. Ready to elevate your TPRM efforts? Book a demo with us to explore how our solutions can streamline risk management and secure your business’s future.