The Importance of Third-party Risk Management

Whether you’re a small, four-person company or a Fortune 500 company, third-party risk management is a security matter that should not be overlooked.

What is third-party risk? Third-party risk occurs when a company begins to work with a third-party company that has access to private information, such as financial information. This creates a potential risk of information being exposed through the third party.

What Are Third-party Vendors and How Are They Shaping Risk Management?

Modern business and enterprise operations are increasingly complex, stretching out over different technology infrastructures, cloud environments, personnel, services, and industries. Most data-driven businesses find that delegating specific business functions to partners helps them streamline their own operations, improve their logistical capacities, and focus on core products and services.

The expanding contractor and third-party vendor market provides businesses with additional scale and resources. Managed service providers, in industries like cybersecurity, cloud computing, and payment processing, enable enterprises to expand their offerings without managing every aspect of their operations in-house.

The Challenge of Third-party Management

However, working with third-party vendors introduces a certain level of risk. This calls for a certain level of due diligence, trust, and risk management.

Therein lies the problem. Managing dozens of vendors with increasingly esoteric and niche capabilities is critically challenging, and enterprises must incorporate these vendors into their risk profile. The interactions of several vendor functions and internal business capabilities can introduce risks and vulnerabilities that could destabilize a business across several areas of focus.

Many enterprises, therefore, are turning to the practice of third-party risk management (TPRM ) to help them work better and more securely with their vendors.

Vendor Risk Management Maturity Levels

Vendor Risk Management Maturity Levels are a way to measure an organization’s capabilities in terms of their ability to manage risks associated with outsourcing services and vendors. The purpose is to assess an organization’s maturity in vendor risk management processes and procedures in order to identify areas for improvement and greater efficiency.

This includes processes from onboarding and monitoring vendors, to handling any issues that arise, including security and privacy. It is an important step for organizations to ensure they can appropriately and efficiently manage their vendor relationships and protect the organization from any potential risks associated with these relationships.

What Risks Do Third Parties Introduce to a Business?

Vendor risk management is challenging because the potential for vulnerabilities or negative business impact is constant across multiple areas of impact.

These impact areas include:

• Cybersecurity Risk: The most common form of risk from third-party vendors involves information security. Third-party vendors are susceptible to supply chain attacks and vulnerabilities, which can then affect the organizations with which they work. Depending on the level of integration between the vendor and client, hacks can plant advanced persistent threats into vendor software that easily make their way into client systems.

• Compliance Risk: Compliance is difficult on its own. Adding the complexity of vendor technology can make compliance harder. For example, HIPAA compliance requires that any vendors handling patient data must adhere to regulations. Failure to do so will have major consequences for that vendor and any enterprise they work with.

• Operational Risk: Hiring and working with a vendor is a decision made with the trust that the vendor can and will provide the services they claim to provide. If, at any point, a vendor is unable to perform their tasks, it can significantly impact a client enterprise. A payment processor that fails to handle a high volume of credit card transactions can limit how much an enterprise can grow. Likewise, problems in cloud applications can render an entire office unable to work for hours.

• Reputational Risk: An enterprise cannot control the actions of its vendors. Major breaches, technical problems, poor business practices, or bad messaging can shed a negative light on a vendor, which also conveys negatively on all of the vendor’s workers. Furthermore, a breach of a third-party vendor can impact an enterprise’s reputation and encourage its customers to see a business as unsafe or unreliable.

In response, third-party risk management addresses risk across all these potential areas.

Understanding and Mitigating Third-party Risk in the Healthcare Sector

The primary way to understand and mitigate third-party risk in the healthcare sector in relation to HIPAA is to ensure that all vendors providing services to any covered entity, such as a hospital, clinic, or physician office, must abide by the HIPAA Security Rule. This requires organizations to conduct careful due diligence when working with third-party vendors and to conduct a thorough security risk analysis prior to engaging with them.

Organizations must also ensure that all third-party vendors comply with HIPAA Security Rule requirements by signing a Business Associate Agreement (BAA) that details their responsibilities and provides clear privacy and security standards that must be followed. The BAA should also note the organization’s security measures and document any changes to these measures. The BAA should be updated regularly to keep up with changes in regulations and technologies.

Organizations must also conduct regular security reviews of their third-party vendors to verify that they remain compliant with HIPAA Security Rule requirements. This includes periodic reviews of their data security and privacy policies and procedures, system access, and other security safeguards.

What Is a Third-party Risk Management Framework?

With so many potential areas of risk, any organization working with third-party vendors will be best served to address issues across these different areas. To promote a holistic approach to management, it is important to develop what is known as a TPRM framework.

A TPRM framework helps enterprise organizations develop comprehensive management efforts around their third-party vendor relationships. This is done through what is known as the third-party management life cycle.

This life cycle includes some of the following stages:

1. Profiling and Risk Tiering: At this stage, an enterprise identifies its third-party challenges, including creating a TPRM profile and a ranking of differing levels of risk based on criteria related to compliance, security, and business operations. At this stage, an organization devises and implements business requirements for the relationship, identifies relevant stakeholders, and determines who will own vendor risk management.

2. Selection: At this stage, the enterprise works with subject-matter experts across both organizations, assesses risk based on these interviews, develops controls and assessments, and makes final selections on appropriate vendors. At this stage, the organization aims to implement security controls and position internal experts to structure a vendor relationship. IT managers and chief information security officers play a major role in this stage and throughout the vendor management process.

3. Onboarding: At this stage, the enterprise negotiates contracts and conducts reviews for proper onboarding. At this stage, enterprise organizations conducting thorough TPRM frameworks will use information and insight gathered during the selection and onboarding phases to build risk management and mitigation requirements into vendor contracts. 

4. Ongoing Monitoring: At this ongoing stage, the enterprise will monitor the vendor, their performance, their technical infrastructure, and the relationship between the vendor and the client. During this stage, the contract can, and often does, undergo renegotiation based on factors and performance.

During this process, the client business will continually evaluate the vendor for their potential risks across security, reputation, operations, and compliance.

NIST Third-party Risk Management Framework (RMF) 800-37 Revision 2

NIST Risk Management Framework (RMF) 800-37 Revision 2 provides guidance for organizations to implement an effective risk management program. The framework establishes a standard for organizations to plan, implement, assess, and monitor security controls to protect information systems throughout the system’s life cycle. It outlines the six-step process for implementing security controls, including categorization, selection, implementation, assessment, authorization, and ongoing monitoring. Additionally, the framework outlines roles and responsibilities of each party involved in the security control process and emphasizes the importance of risk-based decision-making.

What Are Managed TPRM Service Platforms?

Since TPRM framework implementation is so challenging, many businesses leverage TPRM service providers and platforms to help them manage third-party risk.

A dedicated management vendor can focus exclusively on TPRM for a business. These providers and platforms should include a few key features:

• Support Contract Life Cycle Management: In TPRM, contracts are not a one-time event. Businesses must continually revisit and evaluate contracts in light of performance and security and build risk assessments and renegotiations into those contracts.

• Manage Risk Evaluation Workflows: These providers should be ready to streamline critical workflows around assessments, auditing, and any events related to responding to vendor activities.

• Manage Risk Profiles: A good TPRM provider or platform should give their customers the ability to build, create, and review profiles on a vendor-by-vendor basis.

• Continuous Monitoring and Assessments: Monitoring is a critical part of TPRM, and a provider or platform should provide key tools to monitor vendors for compliance, reputation, or operational issues. At this point, the provider should be able to collaborate with the client business to conduct assessments of their vendors. These assessments should include continuous reporting and meetings.

• Automation: While it does not seem very intuitive, many aspects of TPRM can be automated in a Software-as-a-Service (SaaS) system. Evaluations, event triggers, and contract evaluations—each can map to metrics within a cloud system to streamline TPRM.

Third-party or Vendor Risk Management Checklist

A third-party risk management checklist helps organizations identify and manage third-party risks. It provides a comprehensive list of risks that organizations should consider when engaging with or entering into contractual agreements with third-party providers.

1. Review vendor compliance policies and procedures: Examine all vendor compliance policies and procedures to ensure they meet your organization’s standards and understand the process for monitoring compliance.
2. Establish an audit program: Develop a formal audit program for assessing vendor risk and performance, including frequency of review and metrics for assessment.
3. Assess financial health: Evaluate the financial health of vendors and consider the financial impact of any termination of services.
4. Conduct due diligence: Understand the vendor’s background, capabilities, and track record of service to evaluate their suitability for your organization.
5. Consider alternative solutions: Analyze the cost-benefit of using alternative vendors.
6. Develop evaluation criteria: Establish criteria for selecting and evaluating vendor performance.
7. Assess security measures: Assess the security measures taken by the vendor to protect the confidentiality and integrity of your data.
8. Monitor performance regularly: Monitor vendor performance on an ongoing basis and ensure that the vendor is meeting agreed-upon service levels.
9. Review contracts: Thoroughly review all contracts and service-level agreements to ensure the terms are appropriate and enforceable.
10. Develop an emergency plan: Create a plan for responding to a vendor’s failure to meet its obligations.
11. Document risk management: Document all risk management processes and actions, including regular assessment of vendors.

Do Not Take Third-party Risk for Granted

With increasingly complex vendor relationships in many industries, risk management is critical. This kind of management is not a tertiary priority. However, it must become a top priority, especially where compliance, security, or reputation are involved. Third-party management and TPRM frameworks can help enterprises remain responsive, flexible, and scalable in the modern business economy.

How sensitive content is shared with third parties has critical governance, compliance, and security repercussions. Learn how Kiteworks unifies, tracks, controls, and secures sensitive content moving within, into, and out of an organization by scheduling a custom-tailored demo.

 

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