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Every organization relies on vendors, suppliers, and other third-party relationships to deliver goods and services. Indeed, it’s not uncommon for many organizations to have hundreds (even thousands) of third parties offering all types of products and services, some critical to their operations. While these third-party relationships drive innovation and efficiency, they also expose organizations to potential risks like data breaches, compliance issues, and operational disruptions.
To address these risks, businesses must perform thorough third-party risk assessments. This proactive approach protects sensitive data, ensures compliance, and safeguards operations. In this blog post, we’ll explore how to effectively assess and manage risks within your third-party ecosystem while mitigating potential vulnerabilities.
Third-party risk management (TPRM) is generally conducted before engaging with a third party and is ongoing while we have a working relationship with the third party.
Third-party risk assessment is the process of identifying, analyzing, and addressing risks posed by external vendors, suppliers, and partners. These assessments evaluate a vendor’s ability to safeguard sensitive data, maintain regulatory compliance, and ensure business continuity.
For example, an organization might assess a vendor’s cybersecurity measures, operational practices, and compliance risks. By understanding a vendor’s risk profile, businesses can take steps to:
Your default thinking may be: ‘We only work with highly qualified and reputable partners.’ So, it’s worth pausing to consider the risks to which any third party can expose your organization.
No matter how established a vendor is, you’re taking on additional risk when you work with external vendors, suppliers, or contractors. Some of these are more apparent, such as data breaches, while others may be less obvious but equally significant. Let’s consider some common risks your organization should consider when evaluating third-party relationships:
When a third party has access to sensitive information, such as customer data or intellectual property, poor security practices can lead to third-party data breaches. These breaches may result in financial losses, legal liabilities, and reputational damage.
For example, if a vendor fails to secure their systems properly, attackers might exploit vulnerabilities to access your data, compromising your overall security posture.
Third parties that fail to meet industry regulations or legal requirements can put your organization at risk. If a vendor mishandles sensitive information in violation of privacy laws, your business could face penalties—even if the breach was not your direct fault.
Managing compliance risk involves ensuring that your partners adhere to relevant regulatory requirements and data protection standards.
Operational disruptions, such as system outages, financial instability, or production delays, can ripple through your organization when they originate from a critical third party.
This scenario highlights the importance of assessing operational risk, especially for vendors providing essential services or goods. Such disruptions can threaten business continuity and force costly adjustments.
Another potential vulnerability is a third-party vendor’s financial health. Vendors facing bankruptcy, cash flow issues, or other financial challenges may be unable to deliver contracted services, resulting in supply chain delays, unfinished projects, or direct financial losses for your organization.
Your vendors’ actions reflect on your business. If a vendor is involved in unethical practices, scandals, or poor conduct, your organization’s reputation may suffer by association. This risk underscores the importance of thoroughly vetting your business partners before engagement.
Overreliance on a single vendor for critical services can lead to vendor lock-in. This dependency reduces flexibility and may result in higher costs if the vendor raises prices, fails to innovate, or experiences their own challenges.
When third-party vendors fail to meet your quality standards, the consequences can extend to your products or services, causing customer dissatisfaction and revenue loss. Monitoring and managing vendor relationships is critical to maintaining consistent quality across the board.
Sharing proprietary information with external vendors exposes your business to intellectual property risks. Unauthorized use, theft, or mismanagement of your proprietary data by a third party can compromise your competitive edge and create legal challenges.
Your supply chain can be vulnerable to external disruptions, such as natural disasters, geopolitical tensions, or transportation delays. These issues can impact production schedules and your bottom line, emphasizing the importance of robust supply chain risk assessments.
Working with third-party vendors inherently limits the control you have over their processes and actions. This lack of control can make it difficult to enforce your desired security measures, risk management strategy, or quality standards, further amplifying the need for thorough vendor assessments and ongoing monitoring.
Effectively managing third-party risk requires a proactive and structured approach. Let’s explore the best practices your organizations can adopt to minimize vulnerabilities and foster resilience in their third-party relationships:
Start by implementing a comprehensive risk management strategy tailored to your organization’s needs. This involves:
Building solid and transparent relationships with your business partners can help address concerns before they escalate. Here’s how:
Using technology can significantly streamline the vendor risk assessment process and improve accuracy. Consider:
Your supply chain may include indirect vendors whose risks could impact your organization. Best practices for addressing supply chain risks include:
Developing a standardized approach for vendor risk assessments ensures consistency and thoroughness. This might include:
“When it comes to working with third party vendors, organizations can minimize exposure to risks and data breaches by conducting a thorough vendor due diligence review. As part of an organization’s vendor management process, a review of vendors is essential to minimize risks. The review should include aspects related to security, privacy, and AI since most vendors are now incorporating AI into their product/service offerings. Having contractual obligations in place with indemnity clauses can also assist in minimizing the financial impact of a data breach.” – Jay Trinckes, Data Protection Officer, Thoropass
Organizations should educate internal teams about the importance of managing third-party risks. Key steps include:
At Thoropass, our Third-Party Risk Management (TPRM) Program is built on a hybrid framework that combines the strengths of globally recognized standards and frameworks, including:
By integrating these frameworks, we ensure our approach to managing third-party risk is both comprehensive and adaptable. This methodology allows us to maintain the highest possible TPRM standards, addressing a wide range of compliance risks, security risks, and operational challenges.
Additionally, this hybrid framework enables us to guide our clients toward achieving similar standards of excellence. By aligning with proven best practices and global compliance requirements, we help organizations mitigate their third-party risks, strengthen their risk management strategy, bolster business continuity, and foster resilient vendor relationships.
Let’s look at Thoropass’s third-party risk management process to see how this all works in action. Our vendor process begins with the need for a product (or service) a third-party service provider can provide. We have the requestor complete a vendor assessment and business justification form. This form consists of four parts:
Third-party management begins with collecting the basics:
This information includes terms and cost information and an overview/benefit of the product/service. The requestor must explain the issues we are trying to solve and how working with the third party will solve these problems. The requestor will detail the value proposition of working with the third party and describe other third parties they evaluated in making this vendor recommendation.
The requestor must abide by our Procurement and Expense Policy, which includes:
This section includes criteria defining the need for a security and privacy review. Almost any software application, program, or third party that is utilized, integrated, accessed, collected, or has a financial impact will require a review.
The requestor will assign a ‘criticality rating’ and a ‘vendor risk rating’ based on defined criteria and their rating rationale.
If they are unsure, the ratings will default to medium for further evaluation by our Chief Information Security Officer, Data Protection Officer, Operations Lead, and Finance Lead.
For instance, we define vendor criticality as:
We define vendor risk as:
In addition, we ask about the third party’s reputation and any attestations/certifications they’ve obtained.
We ask 13 questions as part of our supplier risk assessment. After determining the type of data collected or stored by the application (to include processing of either employees, customers, or both), the following questions must be answered:
If the answer is ‘yes’ to any of these questions, we will conduct an enhanced evaluation, which could include performing a data protection impact assessment (DPIA).
Compliance software can help mitigate third-party risks by streamlining the processes of assessing, monitoring, and mitigating risks associated with vendors, suppliers, and partners. Here’s how it may help:
Compliance software simplifies the vendor risk assessment process by automating the creation, distribution, and analysis of questionnaires. These tools help organizations efficiently evaluate a vendor’s security posture, compliance, and operational risks, reducing manual effort and ensuring consistency.
With compliance software, organizations can maintain a centralized repository of vendor information, including third-party relationships, contracts, and risk profiles. This enables businesses to monitor the entire third-party ecosystem in one place, ensuring no vendors, including those in the supply chain, are overlooked.
The software facilitates ongoing monitoring of vendor compliance and performance. Alerts and dashboards can notify organizations of changes in a vendor’s risk profile, such as financial instability or data breaches, ensuring timely action to mitigate risks.
Compliance software provides robust reporting and analytics capabilities, helping organizations track and manage risks over time. This reporting makes it easier to identify trends, assess the effectiveness of a vendor risk management program, and demonstrate compliance with regulatory requirements.
By aligning with industry standards like NIST, ISO, or GDPR, compliance software ensures that third-party risk assessments adhere to regulatory requirements and best practices. This reduces the risk of non-compliance and associated penalties.
Conducting a thorough third-party risk assessment is essential for protecting your business from vulnerabilities introduced by external vendors. Whether it’s safeguarding sensitive data, maintaining regulatory compliance, or ensuring operational continuity, these assessments are integral to effective risk management.
Leveraging compliance software can transform how you manage third-party risks. From automating the assessment process to enabling ongoing monitoring, these tools streamline workflows, improve accuracy, and centralize vendor data for a more proactive approach. By integrating compliance software into your risk management strategy, you can mitigate risks, strengthen vendor partnerships, and ensure resilience across your third-party ecosystem.
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A third-party assessment evaluates the risks of engaging external vendors, suppliers, or service providers. This process involves examining a third party’s practices, policies, and operations to ensure they meet an organization’s security, compliance, and operational standards. Organizations can make informed decisions about whether to engage or continue working with a vendor by identifying vulnerabilities, such as weak security measures or compliance gaps.
The scope of a third-party risk assessment often includes areas like data security, financial stability, regulatory compliance, and operational reliability. It ensures that third parties do not introduce risks that could harm the organization’s reputation, operations, or sensitive data.
An example of a third-party risk is a data breach caused by a vendor’s inadequate cybersecurity practices. For instance, if a payroll service provider fails to secure employee information correctly, it could result in a breach that exposes sensitive personal and financial data.
Another example is operational risk: Imagine a logistics company relying on a single supplier for critical components. If the supplier experiences a disruption, such as a factory fire or a shipping delay, the logistics company’s ability to fulfill orders could be severely impacted, leading to financial and reputational losses.
A third-party risk assessment is vital because it helps organizations identify and mitigate risks that external vendors and partners can introduce. These risks may include data breaches, regulatory non-compliance, operational disruptions, or financial instability. By proactively assessing these risks, organizations can protect their sensitive data, maintain regulatory compliance, and ensure business continuity.
Failing to conduct regular risk assessments can leave organizations vulnerable to legal penalties, financial losses, and reputational damage. As businesses increasingly rely on third parties for critical services, a robust third-party risk management program becomes essential for safeguarding operations and maintaining stakeholder trust.
Creating a third-party risk assessment involves several steps:
By following these steps, organizations can establish a consistent and thorough risk assessment process that protects against potential risks in their third-party ecosystem.
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Picture this: You’re running a successful business and rely on various vendors and third parties to provide essential services. But have you ever considered the potential third-party vendor risk associated with these vendors? This is where Vendor Risk Management (VRM) comes into play.
VRM is all about identifying and mitigating risks that come with working with vendors, making it absolutely critical for your business’s success. It involves a comprehensive approach to managing vendor relationships throughout the entire lifecycle, from onboarding to offboarding.
Understanding the key components of a VRM program is vital for effective vendor risk management. These components include identifying and implementing a comprehensive VRM strategy, assessing vendor risks, and continuously monitoring vendor performance.
While vendor risk management (VRM) and third-party risk management (TPRM) are often used interchangeably, they have subtle differences. Both VRM and TPRM involve identifying, assessing, and mitigating risks associated with external entities. However, the scope of each can vary.
Vendor risk management can be seen as a subset of third-party risk management. VRM specifically focuses on managing the risks associated with vendors that provide goods and services to an organization. These risks can include compliance, financial, reputational, and cybersecurity risks.
On the other hand, third-party risk management has a broader scope. It encompasses not only vendors but also all third parties that an organization interacts with. This can include partners, affiliates, contractors, and even customers. TPRM aims to manage the risks associated with all these external entities.
In essence, while all vendors are third parties, not all third parties are vendors. Therefore, while VRM is a crucial component of TPRM, it is not the entirety of it. An effective TPRM program will include a robust VRM component but also consider other third parties that pose potential risks to an organization.
As companies increasingly rely on third-party vendors to support their business operations, the importance of vendor risk management (VRM) has grown exponentially.
Examples of common vendor relationships that companies often engage with include:
While vendors augment your business, adding subject matter expertise and resources you might not otherwise have, this mutually beneficial partnership can also introduce various risks to your organization, such as:
A robust VRM program minimizes the consequences of unexpected vulnerabilities and reduces your organization’s overall risk exposure.
“When companies began extensively outsourcing and globalizing the supply chain in the 1980s and 1990s, they did so without understanding the risks suppliers posed. Lack of supplier attention to quality management could compromise the brand. Lack of physical or cybersecurity at supplier sites could result in a breach of corporate data systems or product corruption. Over time, companies have begun implementing vendor management systems– ranging from basic, paper-based approaches to highly sophisticated software solutions and physical audits – to assess and mitigate vendor risks to the supply chain.” NIST
“When companies began extensively outsourcing and globalizing the supply chain in the 1980s and 1990s, they did so without understanding the risks suppliers posed. Lack of supplier attention to quality management could compromise the brand. Lack of physical or cybersecurity at supplier sites could result in a breach of corporate data systems or product corruption. Over time, companies have begun implementing vendor management systems– ranging from basic, paper-based approaches to highly sophisticated software solutions and physical audits – to assess and mitigate vendor risks to the supply chain.”
The perfect vendor risk management strategy should kick in right from the vendor selection process through due diligence and contract negotiations. It should continue throughout the vendor relationship, including the delivery of the product or service and planning proactively for business continuity.
An ongoing vendor risk management model ensures seamless communication and proactive risk management throughout the vendor lifecycle, which is a crucial aspect of vendor lifecycle management.
Understanding the maturity level of your VRM program is critical to identifying areas for improvement and aligning your VRM efforts with your organization’s risk appetite and strategic goals. While there are a few different models for measuring maturity levels, this is a helpful place to start:
By assessing your VRM maturity level, you can identify gaps in your current approach, set realistic goals for improvement, and develop a roadmap for advancing your VRM plan.
Vendor risk is just one piece of the puzzle. See how you can build a cohesive compliance and risk strategy.
Establishing a solid VRM plan is crucial for successful vendor risk management. A successful plan has several backbone components that work together to identify, assess, and mitigate risks associated with third-party vendors. They include:
This involves identifying potential risks that a vendor might pose to your organization. These risks could be financial, operational, reputational, or related to compliance, cybersecurity, or privacy.
For instance, a software vendor might pose a cybersecurity risk if their systems aren’t secure, and your data could be compromised.
Once risks are identified, they need to be assessed based on their potential impact on the organization. This involves determining the likelihood of the risk occurring and its potential impact. The following section will delve into this topic in greater detail.
For example, if the software vendor’s system is breached, the assessment would determine the potential damage to your organization’s data and reputation.
Based on the risk assessment, appropriate strategies should be developed to manage and mitigate these risks. This could involve implementing controls, changing vendor processes, or terminating the vendor relationship if the risk is too high.
In the case of the software vendor, a mitigation strategy could be to require the vendor to improve their security measures or to requiring they meet specific, verifiable security standards like SOC 2 or ISO 27001.
Your company should regularly monitor the performance of vendors to ensure they are meeting their contractual obligations and not posing any additional risks to the organization.
For example, regular audits could be conducted on the software vendor to ensure they maintain the agreed-upon security measures.
A vendor risk management plan should not be static. It should be continuously reviewed and updated based on changes in the business environment, regulatory changes, or changes in the vendor’s business.
In the case of the software vendor, if they implement a new system or process, the VRM plan would need to be updated to reflect this change.
Vendor relationship management involves managing the relationship with the vendor to ensure it remains beneficial for both parties. This includes regular communication, performance reviews, and contract renewals.
For instance, regular meetings could be held with the software vendor to update and maintain key contacts, discuss performance, address any issues, and plan for the future.
To effectively assess and mitigate vendor risks, you can employ various vendor risk assessment techniques, such as:
These techniques can help you comprehensively understand your vendors’ risk profiles and ensure that they adhere to industry regulations and best practices.
Security questionnaires are useful for assessing a vendor’s security controls, values, objectives, policies, and practices against industry regulations and best practices. They usually consist of a series of questions designed to evaluate a vendor’s security posture and compliance with industry standards.
Utilizing security questionnaires provides the following benefits:
Vendor audits are another technique for assessing and mitigating vendor risks. They allow you to identify compliance gaps and monitor vendor compliance with established standards and regulations.
The vendor audit process involves gathering information from the vendor, ensuring that they are following the rules, and evaluating their performance. Regular vendor audits ensure adherence to industry regulations and best practices, thus minimizing potential risks and protecting the organization from vendor-related threats.
However, most organizations don’t have time to perform in-depth audits on vendors, so they will leverage the audits performed by independent assessors and auditors (such as the case of obtaining a SOC 2 Type 2 attestation, ISO certifications, HITRUST, and others).
External risk intelligence can provide you with a comprehensive view of vendor risks by incorporating data from various sources, such as cybersecurity ratings and geopolitical risk assessments. By leveraging external risk intelligence, you can gain a more holistic understanding of your vendors’ risk profiles and ensure that they meet your organization’s standards and requirements.
Incorporating external risk intelligence into your VRM program can help you proactively identify potential risks and take appropriate measures to minimize their impact on your organization. This will help you build a robust VRM program that effectively manages vendor-related risks and ensures the security and privacy of your data.
As we look ahead, there are several best practices that you can incorporate into your VRM program to ensure its success. These include embracing automation, fostering collaboration, and adapting to regulatory changes.
Implementing these best practices creates a proactive and efficient approach to managing vendor risks. This will help you minimize potential risks, ensure the security and privacy of your data, and maintain compliance with evolving regulations and industry standards.
Automation is key to streamlining your VRM process and reducing operational overhead. Automating key VRM processes and tasks, such as:
Taking advantage of automation when it comes to VRM results in time and cost savings while also enhancing the organization’s security by implementing the right product or service.
Embracing automation enables the organization to:
Utilizing VRM software and tools can significantly enhance your VRM efforts by automating processes, providing real-time risk intelligence, and improving overall program efficiency and effectiveness. VRM technology can simplify your vendor risk management program by automating key processes such as vendor onboarding, risk analysis, vendor due diligence, and assessments.
Collaboration is crucial for the success of any VRM program. Fostering collaboration between departments and stakeholders ensures alignment and collective work towards common goals.
A collaborative approach to VRM can help you identify potential risks early on and take appropriate action to mitigate them. This ensures that your organization remains protected from vendor-related threats and maintains compliance with industry regulations and best practices.
Staying up-to-date on regulatory changes and incorporating them into the VRM program enables proactive vendor risk management and ensures data security and privacy. This will help you maintain a robust VRM program that effectively manages vendor-related risks and protects your organization from potential threats.
Gauging the success of a VRM program requires the establishment of metrics that evaluate its effectiveness, such as compliance rates, risk reduction, and cost savings. Measuring the program’s success helps identify areas of improvement and refine VRM processes for better vendor risk management.
Regularly reassessing your VRM program’s performance will help ensure that your organization remains protected from vendor-related threats and maintains compliance with industry regulations and best practices. This will ultimately contribute to the overall success of your VRM program and safeguard your organization’s operations and reputation.
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