Third-party service providers are key contributors in every business ecosystem. Particularly, IT service vendors that keep your systems and network running, secure, and compliant. Recent data by the Information Services Group (ISG) found that IT services constitute 75 percent of global outsourcing contracts.
Over the years, businesses have come to rely on third-party providers for many reasons. Above the fold, these providers are able to pool resources and collaborate with several companies simultaneously to bring down their service costs. But while third-party providers offer optimal costs and quality, this framework faces significant risks.
In this article, we address the potential risks of handing over critical operations and data to third parties and how to mitigate the risks.
Third-Party Risk Origins: How Do Third Parties Expose Your Organization?
Exposure begins from the moment third-party vendors are granted access to company systems, network and data. The scope of third-party vendors spreads far and wide to include SaaS vendors, marketing services providers, external accounting firms, healthcare providers, and everything in between.
When multiple vendors are granted access to business networks and data, it can be difficult to trace who has access to what.
Areas of Third-Party Risks
When third parties associated with your business are compromised, your company also stands in the way of serious operational, regulatory, financial, and strategic consequences.
Threat actors often target third-party provider vulnerabilities for the large amounts of data they hold and process on behalf of their clients. Managing third-party risk can be difficult owing to the obscurity of their internal security practices.
That said, here are some potentially devastating risk areas businesses should watch out for:
Financial exposure: The average cost of a data breach stands at $4.88 million. Yet the majority (58 percent) of organizations are unable to detect breach through their own security teams. The mounting costs of reputational damage, operational disruption, repairs, and reparations for affected parties add financial strain on the affected company.
Reputational damage: Often, data breaches attract bad media attention. Companies that fall victim to a data breach often find themselves on the front page headlines. Negative media attention leads to serious (and sometimes irreversible) reputational harm, whether you’re directly at fault or partly involved in the breach.
Service disruptions: Potential downtime and service interruptions are inherently frustrating for employees and customers that rely on your network. However, the biggest casualty in any downtime is your mission-critical operations.
Breach of law and regulations: Third-party breaches carry serious non-compliance consequences. These include fines, legal fees, and reparation for aggrieved parties. A recent study by the US Chamber of Commerce published in December affirmed that small businesses are facing more commercial lawsuits than ever.
Despite this, there are several reasons why organizations demonstrate laxity with third-party vendor management.
For starters, there’s a general expectation that selected vendors have put up adequate measures to comply with data protection laws and have set up reasonable measures against attempted breach. On the other hand, organizations hand over sensitive systems, networks, and data to potentially hundreds of third parties, which can make scrutiny incredibly difficult.
Setting Up a Third-Party Risk Management Program
At its most basic level, a third-party risk management program should provide a holistic view of the many IT risks facing your business.
Vet Your Vendor and Your Vendor’s Vendors
How often do your third party vendors conduct their IT audit? What password policies do they have in place? How do they respond to critical emergencies? These are just some of the most important questions to ask your vendors.
Third party risk management is all about vetting vendors, contractors, and suppliers, and ensuring that they meet certain information security and compliance conditions.
Still, vetting doesn’t stop at third parties. Your vendor’s vendors could be unknowingly putting your company at risk. This is referred to as fourth party risk. Such risks are more difficult to manage since fourth party vendors do not have a contractual obligation to protect your data or provide information about their practices.
One way to alleviate fourth party risk is by conducting deeper audits on your vendors to unveil potentially risky suppliers.
Break Down the Critical Areas of Third-Party Risk
Third-party risks, while broad in nature, can fall into several categories. Strategic risks affect the business’s long-term vision. For example, subtle changes in regulation may pose significant operations risk for organizations that fail to comply.
Technological risks on the other hand pose danger to data security. Any breaches in your network pose a threat to your data security. Often, these risks carry a financial element and serious reputational harm for companies that fall victim.
While evaluating risk, it’s important to keep in mind other concerns such as volatile geopolitical elements. Regional laws, conflicts, and global players have the potential to reshape your definition of risk. However, this may not have an immediate impact on your business.
Seek Greater Visibility into Vendor’s Risk Management Policies and Standards
One issue echoed by several businesses is the inherent lack of visibility into vendor data management and handling practices. What’s more, organizations also lack visibility into vendor response measures when things fall out of place.
Still, not all blame falls on poor visibility. Complex, time-consuming organizational processes also obscure third-party risk management practices. For instance, prolonged risk evaluation processes as a result of limited resources and disparate procedures could hinder critical risk management activities.
Stay Vigilant. Prepare for the Worst
Despite all the policies and procedures organizations use to alleviate risk, things can still go wrong and without warning. IT threats are constantly evolving in both scale and severity.
Rigid vendor practices means that your vendor is ill-prepared for new threats. Conduct regular security assessments on your vendors. Where incident response plans are non-existent, develop a detailed incident response plan that lays out procedures for dealing with security breaches involving third-party vendors.
Third-Party Risk Management Doesn’t Have to Be Difficult
Where most companies fall short in labor and resources for third-party risk management, consider the services of a managed IT provider. Third-party risk management falls well within the scope of services that we provide here at BoomTech. With proficient teams and a security-first approach, third party managed IT services are better positioned to help your company map and respond to risk with surgical precision.
Final Thoughts
All in all, third-party risks are an inevitable part of modern-day business. The greater the dependence on third-parties, the greater the risk.
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Hear from Philipp Baumann, owner and founder of BoomTech:
