Why is Third-Party Risk Management Important?
Third-party risk management — also known as TPRM — refers to the practice of identifying and mitigating the risks that arise in connection with vendors, contractors, and other third-parties whom a company leverages in the course of their business.
The extreme competitiveness of many industries and business sectors has made independent service providers a critical component of success. And make no mistake: these third-parties hold the potential to pose a serious risk to a company’s welfare, underscoring the importance of a comprehensive TPRM strategy.
Security breaches, stolen intellectual property, compromised trade secrets, damage to an organization’s reputation — these are just a few of the many risks that exist when pulling a third-party into the fold. Certainly not every individual is a “bad apple,” but it only takes one person — one incident — to inflict profound damage to a company’s profitability and future viability.
An experienced third-party risk management consultant works with a business to devise and implement a strategy to minimize third-party risks. Should you invest the time, effort, and money into third-party risk management?
Why is Third-Party Risk Management So Important?
The short answer: Third-party risk management is important because it takes just a single act by a lone individual to destroy a company. TPRM consultants and even third-party risk management software platforms can mitigate risk with great efficacy, helping organizations both large and small to identify, respond to and protect against losses stemming from third-parties.
Still not convinced that third-party risk management is critical to protecting your company’s future? Consider these scenarios.
- An important network upgrade is beyond the capabilities of the company’s in-house IT staff. The company contracts a network specialist to handle the one-time project and he is granted unlimited access to the organization’s networks, data, and servers. The shady contractor completes the upgrades, but he also implements measures that facilitate an attack. Critical company data is encrypted and a significant ransom is demanded to decrypt the mission-critical data.
- An installer is called in to help with an office remodeling project. This individual overhears confidential private discussions and uses the information to blackmail high-level executives at the company. The execs are left to pay the demand or face a public relations nightmare that could destroy their reputations and the company as a whole.
- A food manufacturing company hires a contractor to oversee employee training on its new enterprise software platform. While on-site, the contractor accidentally encounters the company’s secret recipe for its most well-known food item. She immediately realizes that this recipe would have tremendous value to the company’s competitors. She captures the recipe on her mobile device and sells the information to not one but three competitors. This devastates profitability and the company folds within months.
These are just three examples of how a rogue third-party can cause tremendous damage. That damage may be financial, strategic, or damage to an organization’s reputation. A comprehensive third-party risk management strategy is essential, as is a crisis response team. In order to be effective though, the aforementioned must be created before a problem occurs.
TPRM for Vendors With Access to Sensitive Information
Many vendors and third-party service providers require access to potentially-sensitive data, documents, discussions, and areas within a business. This poses a significant risk so it is probably no surprise that a large portion of TPRM strategies tend to focus on protecting sensitive information.
The universal best practice is to provide individuals with the minimum amount of access required to perform their duties. This is true whether you are dealing with a trusted employee who has been with the company for the past 20 years or an unfamiliar IT specialist who has been contracted to work on a three-day special project.
Even with a good strategy in place, a third-party could encounter sensitive information. This underscores the importance of third-party risk management. You need to have a solid TPRM strategy and protocols to mitigate risk. This can include the following measures.
A non-disclosure agreement – Non-disclosure agreements (NDAs), confidentiality agreements, and other similar legal documents can be very effective from a deterrent standpoint. A well-crafted agreement may also reduce risk by giving organizations the ability to recover financial losses that occur due to a third-party’s actions (or inactions, as the case may be.) A TPRM consultant can typically advise on what types of legal documents may be used to minimize risk when working with third-parties.
A background check – Today’s background checks are usually very comprehensive and accurate. Humans are creatures of habit and they tend to repeat behaviors — both good and bad — which makes background checks a good method for evaluating third-party risk level. Requesting personal information to run a background check can feel a bit uncomfortable, but a TPRM solutions expert can advise on the best way to approach this request.
A reference check – References can go a long way toward offering peace of mind or verifying that an individual poses a risk. Past clients can offer insights into a third-party’s reputation and the overall quality of their work. If a third-party is unable to provide multiple positive references, this is usually a warning sign that they could pose a risk.
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Using Third-Party Risk Management Consultants and TPRM Software to Minimize Risk
In addition to a TPRM consultant, third-party risk management software can go a long way toward minimizing risks by using technologies such as artificial intelligence/machine learning and analytics.
Some TRPM software platforms are questionnaire-based. They evaluate and compare a respondent’s answers to those that have been provided by past vendors to evaluate risk level. This type of software tends to get more accurate over time too since more data usually translates into greater accuracy and efficacy.
With virtually every company using third-party vendors, contractors, and service providers, third-party risk management is a vital component to long-term success and peace of mind. At iTech, we understand the diverse array of risks that today’s companies confront, from massive enterprises to smaller startups and everything in between. Contact iTech today to learn more about our multi-pronged approach to third-party risk management and how your business can benefit from our solutions.