Outsourcing operations to a third party vendor is a popular business strategy because it allows an organization to save money, focus on their core competencies, and gain efficiencies. Your vendors may have access to critical back end systems and sensitive customer data, so it is essential to ensure that your company monitors the various types of risks to limit any potential threat they may pose.
Taking a risk-based approach to vendor management requires that an organization have a thorough understanding of the six different types of vendor risk. Knowing this helps an organization accurately and objectively assess their third party risk and classify vendors based on the threat level they pose. From there, your security team can build our remediation plans and strategies to ensure that these risks are minimized.
Here are the six types of vendor risks that we suggest you evaluate when assessing a third party vendor.
Cyber Security Risk
Cyber threats are increasing in scope and speed. As such, it is necessary to understand an monitor your vendor’s cybersecurity posture. Do they have security controls in place, encryption, TLS, employee training programs, and many other controls in place to protect the data? What is the probability or likelihood of exposure or loss resulting from a cyber attack or breach? At what
Next is reputation risk. Reputational risk is the threat or danger to your good name (or goodwill) and often occurs out of nowhere or without warning. It can occur directly, indirectly or tangentially. Basically, what would happen to your reputation if one of your vendors was breached and it impacted your data or systems? How would your employees, investors, and the general public view this?
Compliance risk is the risk that arises from failure to follow laws, regulations and/or internal process that your company must follow in order to conduct business. There are many types of compliance risks and non-compliance with these laws and regulations can often result in substantial fines or worse, contract cancellations and thereby a loss of revenue. Some of which are applicable could be GDPR, PCI-DSS, SOX, GLBA,CCPA, COPPA, HIPAA, and if you deal with federal government FISMA. Do you know which are applicable to you and why?
I think this is a basic one to understand. Financial risk is the risk that arises when a vendor is not able to meet their financial obligations and not pay your or continue the contracted services. This could be as simple as ensuring they are spending in accordance with the contract or as complicated as them facing bankruptcy or going out of business. Do you know what percentage of your business does this vendor constitute or vice-versa? Knowing this can help you from putting all our eggs in one basket.
Operational risk is when there is a shutdown of vendor processes and they are not able to process transactions. When you are relying on a third party, what is the risk that their process will impact your processes. Do you have a Service Level Agreement (SLA) in place to help? To limit operational risk, both parties should have written and tested business continuity plans so that both will know what happens and how to remain operational.
Strategic risk is when a vendor makes business decisions that do now align with your strategic objectives. Strategic risk often goes hand in hand with compliance and reputational risk. Establishing boundaries and Key Performance Indicators (KPIs) allow an organization to monitor strategic risk as they provide valuable insight into vendor operations and goals.
How to Manage Vendor Risks
Once you have identified the possible vendor risks posed, the next step is to create a process or systems that allow you to monitor and/or mitigate the risk(s). Here are three processes you can implement to manage this:
Risk assessment or vendor assessments help an organization understand the level of risk that a vendor poses. For a risk assessment to be effective, it must align the evaluation parameters with the their risk threshold.
Due diligence is the process of identifying and remediating third party cybersecurity risks. While most people think this is done for mergers and acquisitions, it can also be done during the onboarding of a new vendor. This in-depth review helps your company better understand the risks.
Continuous monitoring is necessary as the speed of business changes rapidly. Continuous monitoring keeps tabs on the various security metrics or key performance indicators so that you can see problems starting to happen and be proactive about resolving them. Not only will you be more aware but this will help streamline remediation efforts.
How Mathom Solutions Can Help
Monitoring third-party cybersecurity risk is a resource-intensive job that requires continual investigation. Mathom Solutions can help provide those valuable insights into your vendors security posture by doing a thorough investigation of the six vendor risk factors and then give a rating for that vendor, so you can easily monitor their risk level.