Organisations are delegating more of their business procedures to third parties, as a result, the risk of cyber-attacks and data breaches from third-party vendors must be pinpointed and mitigated.
Vendor risk management is focused on the management and monitoring of risks resulting from third-party vendors and suppliers. As businesses increase their use of outsourcing, it is vital third-party risk management and vendor risk management becomes an increasingly important part of any enterprise risk management framework.
The biggest risks that come from third-party vendors are reputational and financial risks (e.g.data breaches), but there are a wide variety of risks that vendors can further cause issues.
- The reputational risk applies to how customers view an organisation. A third party experiencing a data breach can, unfortunately, can cause a decreased customer trust or loyalty in the aftermath for organisations involved.
- Third-parties pose prospective operational risks if they provide a technology important to continued business functions. If a third party experiences a cyber attack or something similar, this puts organisations at risk of experiencing business interruptions.
- As more industry standards and regulations incorporate third-party vendor risk as a compliance requirement, organisations need to ensure that they are applying their organisation’s risk tolerance to that of their third-party business partners as well.
- Working with third-party vendors can cause financial risks such as excessive costs and lost revenue. This risk occurs when vendors are unable to meet the economic performance requirements that have been set by organisations. For this reason, vendors’ impact on sales or revenue should be identified as that are used to track sales activity pose an additional threat to security.
- Strategic risk occurs when a vendor and an organisation are not aligned on strategic business decisions. The continuous monitoring of third-party risk vendors is a pivotal point in ensuring that strategic risks don’t lead to compliance, financial, or repetitional risk.
Organisations need to understand how their vendor (or vendors) coincide with the overall context of their strategies and targets. Third-party relationships can range from a small one-off project with an independent contractor to an ongoing vendor relationship with a large multinational.
The focal point is for organisations to reduce and if possible, stop risks from coming into fruition. Vendors should be constantly measured and evaluated. It is not enough to have subject matter experts who own their vendors.
Informal regulations and constraints with long-term vendors can be a large risk, controls need to be as rigorous five years in as on the first day. One way to reduce risk is to only give vendors access to what data they need to get their job done and no more.
Organisations can put themselves in difficult situations and face an abundance of risks when they engage with third parties. Building rapport with vendors is vital, but also vendors who handle confidential, sensitive, proprietary, or classified information on your behalf are especially risky and if these third-party vendors have poor security practices, they can pose a huge risk to organisations regardless of how good internal security controls are and how strong the relationship is.
Contracts of any length can pose a risk to organisations. There are regulations about a and third-party relationships that go beyond specific time frames so even the length of a contract can pose risk.
Organisations should make it straightforward to their vendors how monitoring will occur when it will occur, how reviews and feedback are conducted and how risk exposures are identified and mitigated.
It is imperative to keep in mind that implementing best practices is pointless if these protocols are not followed through with. Many data breaches caused by vendors are usually always caused by a lack of enforcing pre-existing procedures and practices. Organisations must be completely clear with their vendors transparent about what they expect from them and what risks are posed.
Monitoring vendor performance regularly enables organisations to be continually aware of a vendor’s capability to comply with contractual obligations. These obligations and performance indicators should be in line with applicable laws, regulations, and standards.
Before a vendor contract is finalised, proper planning and due diligence are essential for vendor risk identification and mitigation. By understanding the complexity of a vendor relationship, organisations can better define controls.
Onboarding processes can be defined based on the type of vendor, and assessments can be organised based on the information captured. Organisations should prioritise their due diligence efforts by targeting the highest risk vendors first and then proceeding to the lowest risk ones. Vendors posing the highest risk require a thorough evaluation of their performance and abilities to comply with ongoing regulations.
An effective risk management framework assists in flagging vendor risk and enables organisations to react to risk and compliance issues on time. Organisations need to be able to develop a standardised risk management framework by clearly defining consistent risk assessment procedures, establishing controls, defining forward-looking risk metrics, and implementing risk mitigation strategies.
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