How many types of Third-Party Risks are there?

The possibility that your company will suffer an adverse event (such as a data breach, operational interruption, or reputational damage) when you outsource specific services or utilize software created by third parties to complete particular tasks is known as third-party risk. Any independent company or person that offers software, tangible commodities, supplies, or services is considered a third party. Software suppliers, employment firms, consultants, and contractors are examples of third parties. It's dangerous to depend on outside people to run your firm successfully. After all, you must have faith in a different organization whose operations you have no influence over.

Third-party risk should be top of mind because the majority of businesses outsource at least a portion of their daily activities. This is true in view of rising in security incidents brought on by dealings with outside parties. The senior officials of your company are ultimately in charge of overseeing third-party connections. The same standards that apply to internal organization-managed operations should also be used to identify and manage associated risks.

Many organizations still do not manage third-party risks as meticulously as internal ones despite the multiple hazards that occur from third-party interactions over the vendor life cycle.

Organizations that fail to manage these risks are subject to regulatory action, financial action, legal action, reputational damage, and the inability to attract new consumers or provide excellent customer service.

Types of Third-Party Risks

Third-party risks can be of different types and categories. Here are some examples −

Cybersecurity Risks

You need to keep an eye on your vendor's cybersecurity posture more than ever because of the intricacy and speed of cyber threats. To quantify vendor cybersecurity risk, you must first determine your organization's risk tolerance. Once acceptable risk levels have been established, you can start evaluating third-party security performance and making any necessary improvements. You should concentrate on compromised systems within vendor network environments when assessing performance. While compromised systems do not also cause data losses, they do reveal how vendors spot and stop assaults.

Compliance Risk

The compliance risk associated with non-compliance with the internal procedures, laws, and regulations your organization must follow to operate is known as the compliance risk. Sectorspecific legislation will apply differently to each firm, although some general rules apply to many industries, such as PCI DSS and GDPR. You must ensure that your vendor's cybersecurity compliance activities align with legal requirements because non-compliance with these regulations frequently carries steep fines.

Reputational Risk

Concerned with reputational risk is how the general public views your business. Some of the ways that third-party sellers might damage your reputation include −

• Interactions that are inconsistent with the standards of the firm.

• Consumer data loss or disclosure brought on by carelessness or a data breach.

• Laws and regulations have been broken.

Financial Risk

When vendors fail to achieve the organizationally established standards for fiscal performance, third-party financial risk develops. The two primary types of financial trouble for suppliers are high costs and missed income. If high costs are not reduced, they may impede business expansion and result in excessive debt. You must carry out routine audits to ensure that vendor spending complies with the conditions stated in your contract if you want to keep costs from becoming exorbitant.

The first step in managing lost revenue is determining which vendors directly impact the activities that generate money for your company. A third-party system that monitors and logs sales activity for your company is an illustration of this. It is crucial to have a plan in place to assess their risk because any issues with these vendors and systems could result in delayed or lost revenue.

Operational Risk

When vendor procedures are stopped, operational risk develops. Organizational operations and third-party operations are linked, so when vendors cannot deliver the services they promised, businesses frequently find themselves unable to carry out routine tasks. Your company should have a business continuity strategy so that you can continue operating in the event of a vendor shut down to reduce operational risk.

Strategic Risk

Vendor business decisions that conflict with your firm's strategic goals creates strategic risks. Strategic risk frequently affects a company's entire value and can impact compliance and reputational risk. Organizations can efficiently monitor strategic risk by establishing key performance indicators (KRIs), which offer insightful information on vendor operations and procedures.

How to Minimize the Risks?

Depending on the state of your organization's third-party risk management (TPRM) program, you will need to take quick action to reduce third-party risks. First, you should evaluate your present TPRM program to see whether or not you currently have any security measures. Simply said, the following should be included in the vendor risk management process' earliest stages −

• Vendor inventory − Who are your suppliers? To start, you must correctly identify your vendors. Any individual or business that provides a good or service to your business but does not work there is referred to as a third-party vendor. Examples of third-party vendors include external staff, service providers, manufacturers and suppliers, and service companies. The inventory should consist of third parties (your third-party vendor's vendors) and be updated.

• Vendor assessment process − You must design a procedure for evaluating vendors after compiling a thorough inventory of all your suppliers. Organizations utilize this procedure to assess and approve potential third-party suppliers and vendors to ensure they can adhere to all contractual requirements and agreements. To speed up the evaluation of current suppliers and the onboarding of new vendors, you should now provide a template for a vendor questionnaire.

While these actions help lay a solid foundation for TPRM, they are insufficient on their own. A third-party risk management strategy should take into account the following −

• Most large businesses oversee hundreds or thousands of vendors, each of which poses a different risk. Each vendor has its own due diligence and risk assessment processes, as well as other tier-specific criteria, so your information security team will need to categorize each one independently in line with each risk tier. Additionally, they will need to interact with vendors to encourage the completion of risk profile questionnaires and to emphasize the significance of TPRM inside the firm.

• Prioritizing high-risk and lower-risk vendors is another requirement of managing such a vast number of vendors. To ensure nothing slips through the gaps, it is still imperative to frequently evaluate all vendors using the same standardized checks.

• Third-party risk management is not a "set-and-forget" task. Vendor questionnaires should be filled out during the onboarding process and at least once a year. To guarantee that vendors' security posture is sound, monitoring them and conducting frequent evaluations and reviews continuously is necessary.

It is clear from these considerations that an important time and financial commitment are required for successful TPRM. Information security teams may not have the requisite skills to effectively manage third-party risk since they must attend to all other aspects of your organization's security program.