Third-party relationships touch every part of an organization, reaching into the most critical functions. These vendors offer specialized services that help companies remain competitive, reduce costs and scale quickly. But interconnected operations equal interconnected risks.
Gartner’s “Stay Ahead of Growing Third-Party Risk” report lays out three key aspects of relationships with third-party vendors:
Each of these factors adds to the complexity of managing risks associated with third parties. Less mature companies might lack strong risk-management frameworks, potentially exposing their business (and yours). Adding another level of vendor — a fourth party — introduces additional challenges in risk identification and assessment. The growing need for third parties to access organizational data also increases the possibility of a breach. Vendors’ risk and compliance issues can bleed into your operations, exposing your company and customers. You need an effective third-party risk management strategy.
Customers need to trust that organizations, and their network of third-party vendors, are protecting their data. However, consumers and the organizations owning their data have both expressed a lack of trust about data management:
Those concerns aren’t misplaced. A recent report found that nearly half of organizations experienced a data breach during the past year. A vast majority (74%) of the affected companies attributed the breach to third parties having too much privileged access. Considering two-thirds of consumers have experienced a data breach, it’s no surprise most consumers want to give their business to organizations committed to protecting their privacy.
In addition to the immediate business exposures resulting from a breach, the potential loss of customer trust could have a more immediate, quantitative business impact than regulatory fines or reputational risk. According to IBM, lost business contributes to 38% of the cost of a data breach, adding up to an average $1.52 million per breach.
Efforts to cement customer trust must include a proactive approach to managing third-party risks. Effective third-party risk management entails three main elements: consistently reviewing processes, prioritizing vendors meaningfully, and continuously monitoring for risk.
Consistent Review Processes
If third parties interact with every part of your organization, everyone in it should play a role in managing third-party risks. Start by determining which departments to involve in review processes, and who should own the relationship for each function.
Establish third-party assessment criteria and frameworks for each kind of vendor relationship. Depending on the nature of the vendor, you’ll need regulatory frameworks like GDPR, security frameworks like NIST or ISO, or healthcare frameworks like HIPAA. Then decide on key performance measures, including internal controls and reporting. Consider revisiting third-party contracts as part of your review process to identify vendors failing to meet their obligations, then enforce those service-level agreements. Finally, consider your organization’s strategic direction and each vendor’s ability to scale effectively to meet your future needs.
Establishing a shared language and consistent vendor-review process ensures that different teams approach risk management similarly. Holistic governance, risk and compliance (GRC) software facilitates transparency and visibility to support cross-functional work, while giving team members access to the necessary information to evaluate risk within their functional groups.
Most organizations work with dozens if not hundreds of vendors. Not every vendor requires the same level of review. The extent and frequency of your review will be determined by a vendor’s significance to your operations, and the risks it poses.
Rank your third-party relationships. Those most critical to your operations will require the highest level of scrutiny and the most time and attention. For each vendor, identify:
Use this information to determine the specifics needed to assess each vendor’s vulnerabilities.
Effective third-party risk management offers insights to help your organization mitigate ongoing risks and develop contingency plans to anticipate potential vendor incidents. Whether you’re facing a security threat or must align with updated privacy regulations, a risk management strategy that monitors vendor interactions with your systems makes it easier to address and mitigate evolving risks.
It’s a much more effective strategy than what many companies do — opting to approach third-party risk management as a discrete event rather than an ongoing process. Gartner found that nearly 75% of resources allocated to risk identification go toward point-in-time due-diligence and recertification efforts, with merely 27% dedicated to risk management throughout a third-party relationship. By limiting your monitoring to the beginning of the relationship and an annual checklist, you’ve put yourself at a disadvantage. Vendor contacts change, information becomes outdated, and vendors could slip out of compliance without your knowledge, exposing your organization to significant risk.
To maximize your third-party risk management, treat it as a constant element of your vendor management. Continuous monitoring ensures you spot risks as they evolve and elevates you above the competition. To enable a continuous monitoring approach:
Third-party relationships are more important than ever, as is how you manage the risk involved in those relationships. A holistic strategy for identifying and managing your organization’s risks offers customers improved protections, building trust, confidence and a stronger customer relationship. When everyone in your organization aligns on third-party risk management — from business leaders and internal audit teams to legal, compliance, and IT departments — you’ll take control of vendor risks, save time and money, and safeguard your most important assets.
Heath Anderson is vice president of information security and IT at LogicGate.
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