What is Third-Party Cyber Risk Management and Why Is It Important?

The practice of identifying and reducing risks related to outsourcing to third-party vendors or
service providers is known as third-party risk management. The topic of third-party risk includes a wide
variety of digital threats. These could include dangers to finances, the environment, reputation, and
security. Due to vendors' access to intellectual property, sensitive data, personally identifiable
information, and protected health information, there are dangers involved. Third-Party Risk
Management is a crucial feature of any Cybersecurity programs since third-party interactions are
fundamental to corporate operations.

Any organization that your company collaborates with is a third party. Suppliers, producers,
service providers, business associates, affiliates, distributors, resellers, and agents are included in this.
They can include non-contractual entities and can be upstream (suppliers and vendors) or downstream
(distributors and resellers). They may, for instance, offer a SaaS solution that keeps your staff engaged,
manage the logistics and transportation for your actual supply chain, or act as your banking institution.

It is critical to construct a comprehensive third-party risk management process that covers the
following phases in order to develop an effective third-party risk management framework that can feed
into your entire enterprise risk management. Before bringing on a third party, it's critical to understand
the dangers you'll be adding to your business and the amount of due diligence necessary. One
increasingly prevalent method is to utilize security ratings to verify whether the vendor's external
security posture achieves a minimum recognized score.

If the company's security rating is adequate, the next step is to have the vendor present (or
complete) a security questionnaire that provides insights into their security procedures that are not
accessible to outsiders. when the vendor poses unacceptable risks, you may elect not to cooperate with
them until they address the security vulnerabilities you discovered. This is where a remediation tool
comes in handy, since without one, you may quickly forget significant issues in Excel spreadsheets and
email inboxes.

Based on your risk tolerance, the criticality of the vendor, and any compliance needs you may
have, your business can determine whether to onboard the vendor or search for an alternative vendor
after remediation (or lack thereof). It is critical to continue monitoring a vendor's security after they
have been onboarded. Monitoring them is much more crucial now since they have access to your
internal systems, sensitive data, and are used in your business operations.

When engaging with suppliers, firms may run into a variety of hazards. Examples of typical third-
party risks are: (A) Operational Danger, the chance that a third party may interfere with corporate
activities. Business continuity and incident response strategies, as well as contractually obligated service
level agreements (SLAs), are frequently used to manage this. You may want to have a backup vendor in
place, which is customary in the financial services sector, depending on how crucial the vendor is. (B)
Cybersecurity Risk, the possibility of being exposed to or suffering loss as a result of a cyberattack,
security lapse, or other security disaster. Due diligence procedures before onboarding a vendor and
ongoing monitoring throughout the vendor lifecycle are frequently used to reduce cybersecurity risk. (C)
Compliance, Regulatory, and Legal Risk, the chance that a third party might affect your adherence to
local laws, rules, or agreements. For businesses that provide healthcare, financial services, and
government, this is especially crucial. (D) Financial Risk, the possibility that a third party will have a
negative influence on your organization's financial success. For example, your company may be unable
to sell a new product owing to ineffective supply chain management. (E) Reputational Risk, the danger
of bad public perception as a result of a third party. Customers who are dissatisfied, improper contacts,
and poor recommendations are merely the top of the iceberg. The most severe incidents are third-party
data breaches caused by inadequate data security, such as bank security data breaches. Finally, Strategic
Risk, the possibility that your company may fail to accomplish its commercial objectives as a result of a
third-party provider.

Third-party risk management is critical since the usage of third parties has an influence on your
cybersecurity, both directly and indirectly. Third-party involvement complicates your information
security for various reasons. Third-party security measures are often not under your control, nor do you
have total insight into their security controls. Some vendors have strong security standards and risk
management policies in place, while others fall short. Every third party is a possible attack vector in the
event of a data breach or cyber assault. If a vendor's attack surface is susceptible, it might be exploited
to get access to your business. The more suppliers you utilize, the greater your attack surface and
possible weaknesses. Every business relies on third parties since it is frequently preferable to outsource
to a subject matter expert.

In addition to the discussed importance, there are practical reasons why a company should
consider third-party cyber risk management. Cost-cutting measures, third-party risk management should
be seen as an investment. It costs money (and time) up front but saves money in the long run. A strong
third-party risk management approach may significantly lower the likelihood of a data breach.
Compliance with regulations, many regulatory obligations, including Federal Information Security
Management Act of 2002, Sarbanes-Oxley Act of 2002, Health Information Technology for Economic and
Clinical Health Act, Prudential Standard CPS 234 Information Security, Gramm-Leach-Bliley Act, and the
NIST Cybersecurity Framework, need third-party management. Depending on your business and the
type of data you manage, you may be required by law to examine your third-party ecosystem in order to
prevent being held liable for third-party security events. Third-party risk management is now part of
most industry norms, and noncompliance is not an option. Risk mitigation, due diligence simplifies the
vendor onboarding process while lowering the risk of third-party security breaches and data leakage. In
addition to initial due diligence, suppliers must be examined on an ongoing basis throughout their
lifespan, since new security threats might emerge over time. Understanding and assurance, third-party
risk management enhances decision-making across all stages, from initial assessment to offboarding, by
increasing your knowledge and insight into the third-party providers you engage with.