Third Party Risk is the potential risk that arises from institutions relying on outside parties to perform business services or activities on their behalf.
Third-party risk is currently greater than it’s ever been this means that managing third party risk effectively will now require a re-strategised version of the traditional and conventional security models. Organisations and institutions are faced with vigilance regarding the risk and compliance challenges no longer stop at traditional organizational boundaries. Developing business relationships with the wrong business or allowing existing relationships to fail due to poor management may cause an organization to confront reputational and existential threats.
In our current society, almost everything is connected to the internet or living within the cloud, despite this making numerous business processes easier and more efficient, the possibility for mishandling or abuse also arises.
Almost any business activity that exists has a company or organisation that will take on that responsibility for another company. These can include staffing agencies, consultants, and service vendors. An industry example, hospitals and healthcare systems rely on hundreds (even thousands) of vendors every day to perform routine functions. These services can include hospitality, transportation, security, IT, transcription, laundry, patient care, and waste removal—to name but a few. In a highly regulated market such as healthcare, these relationships can pose big risks.
Even for many that have resisted outsourcing, the present-day organisation represents a wide web of third-party relationships and interactions that flow beyond traditional business boundaries. Complexity grows exponentially as these interconnected relationships, processes, and systems proliferate and embed themselves in the organization’s processes over time.
Several risks may arise from organisations or institutions using third parties. Some of the risks are related to the underlying activity itself, like the risks faced by an institution directly conducting the activity. Many potential risks are heightened by the collaboration with a third party. Failure to manage these risks can expose an institution to regulatory action, financial loss, litigation, and reputational damage, and may even impair its ability to establish new, or service existing, customer relationships.
Cybercriminals and threat actors regularly scope and target suppliers alongside partners to exploit connections to larger, more valuable targets. With expanding partner networks this means that the target attack surface is rapidly expanding as well as principle systems to connected devices, supply chains, and more. In fact, third parties have become preferred vectors for cyberattacks.
The risk landscape is frequently changing and new threats are ever on the rise, risks typically fall into one of five categories based on impact to the principle business:
- Financial Risk: The third party risk that could damage or be detrimental to financial performance. For instance, the company could fall short of revenue goals after a supplier provides a faulty component, impairing sales.
- Reputational Risk: This is the risk that can arise from a negative public opinion created by a third party. This can be dissatisfied customers, inappropriate interactions, poor recommendations, security breaches, and legal violations are all examples that could harm a company’s reputation and standing.
- Compliance Risk: Risk that a third party will impact compliance with laws, rules, or regulations, or from noncompliance with internal policies or procedures.
- Operational Risk: Risk that a third party could cause loss from disrupted business operations. This includes software vendors being hacked, leaving a company with a downed system, or a supplier being impacted by a natural disaster.
- Strategic Risk: This is the risk arising from unfavourable business decisions, or an inability to implement appropriate business decisions in a manner that is consistent with the institution’s strategic goals.
The biggest challenge for organisations is to provide the appropriate oversight and keep these risks in check. If your business employs third parties, it is your responsibility to ensure that you can manage the risk they may cause. It is vital to implement a third-party risk management program for maximum effectiveness and protection.