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Why is third-party
risk management

Author: Sue Poremba

Nearly every company relies on third-party partners to keep business operations flowing. But an organization only has so much control over its supply chain, especially when it comes to third-party risk management.

You are in charge of your cyber security and risk management tools, protocols and systems. Will you use a zero-trust approach or regular security awareness training? If a cyber incident occurs through a breakdown in your security system, it falls on the shoulders of your organization. But, thanks to the digital transformation and an increase in machine-to-machine contact, you also have to consider breakdowns outside your system. For example, if there is a cyber incident in a supply chain vendor whose network has access to yours, it could be your network that ends up breached. 

When you bring in a third party, security becomes a shared responsibility. You need a partner who will do all they can to provide the same high level of security.  

Why is third-party risk management important?

Some of the highest-profile data breaches over the past two decades were due to the supply chain and a failure of third-party risk management. These data breaches are a result of overlooked issues, such as not knowing the level of access a third-party vendor has or when a contractor has an orphaned identity with authorization into different areas of the network.

Why is third-party risk management important to your overall security posture? It's simple: Even if a vendor's vulnerability is the cause of your data breach or cyber incident, your organization is likely the one that pays the fines and takes the reputational hit.

How does a third-party risk impact an organization's bottom line?

To answer the question of why is third-party risk management important, you also have to consider how a third-party risk impacts an organization's bottom line. According to IBM and Ponemon Institute, a data breach costs a company $4.24 million in 2021. If a third party is involved in the breach, the cost increases by an average of $700,000. Not only could there be fines, but cyber incidents due to third-party risk could also result in violation of data privacy laws and other compliance regulations—not to mention breaking a customer's trust and damaging your organization's reputation.

Third-party risk management should defend against not only cyber security risks but also operations, legal, compliance, financial and reputational risks.

Preparing for third-party risk

Every organization is susceptible to third-party risk, but protecting against it can be a challenge. Even when you set up a security policy agreement with vendors, it is impossible to have full vision into their system. Working with a managed security service provider (MSSP) that specializes in third-party risk management can greatly enhance your visibility into potential vendor risk.

The MSSP can conduct regular risk assessments across the supply chain environment and set up monitoring services that alert you to any potential risk.

How should business leaders implement these strategies?

Now that it's clear why third-party risk management is important, there are a few steps leaders can take to implement third-party risk management strategies:

  1. Develop a risk assessment questionnaire for all vendors to sign and follow.
  2. Regularly audit third-party vendors.
  3. Bring in a managed service provider that specializes in third-party risk assessment.

It's also important to look beyond the supply chain and to involve technology and software providers, as cloud risk is on the rise. Software companies should provide regular vulnerability and other updates that help lower vulnerabilities.

Discover how Verizon's cyber risk management services can help your organization reduce the risk of breaches.