Here’s Your 5-Step Plan for Third-Party Risk Management

Whenever your business embarks on a relationship with a third-party vendor, you’re assuming some risk. You can’t supervise your vendor’s processes, employees, and operations as closely as you would your own, especially if the vendor is overseas.

But that doesn’t mean you should just take it on faith that your vendor is doing everything they can to minimize the risk of supply chain disruptions, data breaches, regulatory snafus, and more. You should thoroughly investigate every vendor at the time of onboarding, especially if they’re going to have a business-critical impact. Hold your vendors accountable for maintaining strict security, and don’t stop monitoring them for changes in their risk level.

1. Do Your Due Diligence Before Onboarding a New Vendor

Third-party risks tend to be unpredictable, and they can be complex: reputational damage, data breaches, business disruption, theft, fraud, and compliance violations, to name a few. That’s why it’s so important to do your due diligence before you onboard a new vendor. In the financial services industry, for example, there are “Know Your Customer” laws that require providers to identify all of the third parties they’re working with.

You should investigate the risk profiles of any third parties you intend to work with. Know which individuals in your organization are responsible for each third-party relationship. The more thoroughly you vet a third party before they have access to your systems, the safer your systems will be.

2. Understand the Vendor’s Potential Impact on Your Organization

Some vendors are more business-critical than others and may need varying levels of access to your company’s data and systems as a result. Understanding the impact a particular vendor will have on your organization can help you understand what degree of third-party risk management you need to apply to each vendor. A vendor whose services aren’t business critical presents a lower risk profile than one whose services are, simply because your business operations won’t be disrupted if something goes wrong with the vendor.

Of course, the situation could be more complex than that. There are regulatory guidelines to think about, cyber security, and so on. You can use analysis of a vendor’s business impact to decide what level of system access to give them, how much governance they need, and how often to repeat security assessments.

3. Check References

Every third-party vendor is going to insist that their services are top-notch. To get a more accurate picture of how good those services really are, you need to check with other enterprises that have also worked with the same vendor. Just ask any prospective vendor for references from former, longstanding, and new customers to get a rounded picture of what people like and dislike about working with this company.

4. Hold Your Vendors to the Same Security Standards to which You Hold Yourself

It’s sad to say, but you can’t always trust vendors to maintain the same security standards within their own operations that your company does internally. And the best way to manage vendor risk is to make sure that your security standards are, well, standardized across all of your third-party relationships. Hold third parties accountable to maintain the same security protocols and procedures that you do in your organization. Then you’ll know exactly what’s going on, and won’t have to worry that your data isn’t safe.

5. Keep Monitoring the Vendor’s Risk Levels

Vendor risk can evolve rapidly, and risk levels can skyrocket or plummet overnight. That’s why it’s crucial to keep monitoring third-party risk levels on an ongoing basis. Monitor third parties constantly for changes that could affect their risk profiles, and routinely audit their security procedures, at least every six to 12 months.

Third-party risk is probably an unavoidable consequence of doing business these days — you just can’t get by without maintaining some third-party vendor relationship, but it’s not just a matter of getting by. Participating in the great interconnected web of global commerce requires negotiating a range of vendor relationships, and usually, that’s to everyone’s benefit. With the right strategies and tools for managing third-party vendor relationships, you can minimize the risks and keep operations ticking along smoothly, no matter what happens with your vendors or your supply chain.