Whenever you transact with a vendor or supplier, there is always the possibility of encountering third-party risk. The potential is higher if the vendor or an outside party has access to your privileged systems and other private information. Why are they a threat? You need to keep in mind that third parties might not have the same protection and security standards that you have. Third-party risk management thus becomes a critical component in protecting your data. It must be a continuous real-time process, which includes reviewing, monitoring, and managing suppliers.
What Is a Third-Party Risk?
Once you outsource services or production, you are dealing with third parties. Although third-party risk does not occur every time you conduct business with contractors, agencies, and other providers, the possibility is always there. Thus, you need a third-party risk management solution to manage the threats.
You may know the third party on the business level, but often, you do not know everything about the company. For example, the main headquarters of the vendor may be in a different location or even outside the country. Some events, crises, force majeure, cyberattacks, and other incidents might affect their operations. Any of the incidents can expose your business information.
What Risks Could Third Parties Bring?
Several potential risks third parties can introduce to your organizations, such as:
The most common risk in managing vendors is failing to deliver services on time and within budget or missing service-level agreements. Managing risks in a third-party risk management program requires collecting data about controls and results. Trends you find in the data can show lagging or leading indicators of the performance of each vendor.
The third-party may not stick to the contracted or expected level of service. The client’s requirements may need more stringent controls than the vendor’s business operations. It is vital to put measures for the reliability of a specific service or product level. There should be realistic expectations for your vendors.
Poor service, fines, fraud, delays, and errors from vendors can damage your reputation. How consumers perceive your business practices or corporate behaviors is critical for any organization. Start your third-party risk management program by reviewing the third-party’s policies on corporate governance and compliance and ethics and their process for handling disputes or complaints.
There is a risk when third-party technology changes or becomes obsolete, impacting your business operations.
Importance of Third-Party Risk Management
Third-party risk management is vital to ensure that the companies you associate with will uphold industry standards, regulations, and applicable laws. The solution addresses data protection, IT security, and financial health risks, but it should also include reputational risk and compliance.
Governments introduced more regulations because of the expansion of third-party relationships. The third-party risk management process should include more advanced supply chain risk management features, including risk identification, impact assessment, and risk mitigation. The process will provide you with increased risk awareness and greater resilience. In addition, it can help you comply with various industry regulations and find current and accurate regulatory web data about your business.
Third-Party Risk Assessment
When you engage with new partners, suppliers, or vendors, you should perform a third-party risk assessment. Assessing third-party vendors and suppliers before you commit will uncover vulnerabilities or weaknesses. You should also understand third-party compliance and ensure that the third parties you want onboard comply with the regulations at the same level as you do.
Companies need to perform third-party risk assessments because data leaks and breaches can affect your information security, management, business strategies, and reputation. The extent of a third-party risk assessment program depends on how involved the third party will be with your business. Generally, you can use the following steps:
- Identify the hazards your company and employees might face
- Determine who will be harmed the most and how they will be harmed
- Evaluate each risk and choose the suitable precautions
- Record your findings and use them
- Review your assessment process and update it when needed
Most companies deal with vendors and suppliers. Thus, it is vital to know how third-party risks can affect them and how third-party risk management can help with data security and regulatory compliance.