Demystifying third party risk

In today’s interconnected world, organizations rely heavily on third party vendors, so understanding third party risk is essential. These can include vendors, suppliers, service providers, or software used to run your business. While these external partnerships are invaluable for maximizing profit and efficiency, they also introduce significant risks. So, how do you best assess your systems’ vulnerabilities when dealing with third party risk management?

Third-party risk refers to the threats and vulnerabilities that arise from the cybersecurity gaps in external vendors’ systems. These gaps can open doors for malicious actors, potentially disrupting your business operations.

The potential risks associated with third party vendors

Every external vendor storing your data adds cybersecurity risks. Without a robust cybersecurity program, sensitive information may be vulnerable to unauthorized access. Key risks include:

1. Data breaches: Unauthorized access to sensitive information due to weak security measures of the third-party vendor.
2. Regulatory non-compliance: Failure of the vendor to adhere to industry regulations and standards, potentially leading to compliance risks such as fines and legal action.
3. Operational disruptions: Interruptions in service or supply chain caused by vendor issues, impacting business continuity.
4. Financial instability: Vendor’s poor financial health or bankruptcy affecting their ability to fulfill contractual obligations.
5. Reputational damage: Negative publicity arising from the vendor’s actions or security incidents, tarnishing the organization’s reputation.
6. Cybersecurity threats: Introduction of malware, ransomware, or other cyber threats through the vendor’s systems.
7. Quality control issues: Poor quality of products or services provided by the vendor, affecting overall business performance.
8. Contractual risks: Inadequate or ambiguous contract terms leading to disputes or financial losses.
9. Data privacy violations: Vendor mishandling or improperly securing sensitive data, leading to privacy breaches.
10. Vendor dependency: Over-reliance on a single vendor, leading to increased risk if the vendor fails to deliver.
11. Customer data risks: Risks to customer data due to third-party breaches and vulnerabilities.
12. Financial risk: Financial instability caused by third-party actions, including substandard work, defective components, or legal fees.
13. Operational risk: Potential operational shutdowns due to third-party issues such as network hacks or natural disasters.
14. Reputational risk: Damage to the organization’s reputation due to third-party actions or security incidents.
15. Strategic risk: Misalignment between third-party and organizational business strategies, leading to widespread impacts.

Real-world examples of third-party risk

• SolarWinds hack (2020): This data breach involved the SolarWinds software, widely used by numerous organizations. Attackers exploited vulnerabilities, gaining unauthorized access to thousands of networks. Approximately 18,000 SolarWinds clients downloaded malware disguised as a routine software update, leading to widespread system infiltration.
• Toyota’s Supply Chain Cyber Attack: A data breach at a supplier caused Toyota Motors to halt production at 14 key Japanese plants, showcasing how a minor vendor issue can significantly impact operations.
• Managed Care of North America, (MCNA): In 2023, MCNA experienced a significant data breach where an unauthorized entity accessed and extracted patient information, compromising the data of 8.9 million individuals. This highlights the critical need for robust third party risk management.

Where does third party risk come from?

Third party risks can pop up from a variety of places, affecting organizations in a multitude of ways. Knowing where these risks come from is key to creating solid mitigation plans. Here are a few common sources of third-party risks:

1. Cybersecurity vulnerabilities
   • Weak security measures: Inadequate cybersecurity defenses can become entry points for cyberattacks such as malware, ransomware, and data breaches.
   • Outdated systems: Outdated or unpatched software and hardware can create entry points for cybercriminals.
   • Lack of encryption: Failure to encrypt sensitive data during transmission or storage can expose information to unauthorized access.
2. Operational failures
   • Service disruptions: Vendors may experience technical issues, natural disasters, or other disruptions that halt their operations, impacting your supply chain or service continuity.
   • Inadequate business continuity plans: Without proper business continuity and disaster recovery plans, vendors may struggle to resume operations quickly after an incident.
3. Compliance and regulatory issues:
   • Non-compliance with regulations: Vendors failing to comply with industry regulations and standards can lead to legal penalties, fines, and reputational damage for your organization.
   • Insufficient data protection policies: Vendors may not adhere to data protection laws, risking unauthorized data access or breaches.
4. Financial instability
   • Bankruptcy: Financially unstable vendors may face bankruptcy, affecting their ability to fulfill contractual obligations and causing supply chain disruptions.
   • Credit risks: Vendors with poor credit histories or financial management practices may struggle to maintain consistent service levels.
5. Reputational risks
   • Negative publicity: Vendors involved in unethical practices, legal disputes, or security incidents can damage your organization’s reputation by association.
   • Customer dissatisfaction: Poor vendor performance can lead to customer complaints and dissatisfaction, impacting your brand image.
6. Quality control issues
   • Substandard products or services: Vendors delivering low-quality products or services can negatively affect your business operations and customer satisfaction.
   • Inconsistent performance: Vendors failing to meet agreed-upon standards or deadlines can disrupt your workflows and projects.
7. Contractual risks
   • Ambiguous contract terms: Poorly defined contracts can lead to misunderstandings, disputes, and financial losses.
   • Inadequate service level agreements (SLAs): Weak SLAs may not clearly outline the vendor’s responsibilities and performance expectations, leading to unmet obligations.
8. Supply chain risks
   • Geopolitical factors: Political instability, trade restrictions, and tariffs in vendor locations can disrupt supply chains and increase costs.
   • Natural disasters: Events such as earthquakes, floods, and pandemics can impact vendors’ ability to deliver goods and services.
9. Data privacy concerns
   • Mishandling personal data: Vendors mishandling or improperly securing personal data can lead to privacy breaches and legal repercussions.
   • Insider threats: Vendor employees with access to sensitive information may pose insider threats if they misuse or steal data.
10. Technological dependencies
    • Integration challenges: Difficulties in integrating vendor systems with your own can lead to operational inefficiencies and security vulnerabilities.
    • Vendor lock-in: Over-reliance on a single vendor for critical services can create challenges if you need to switch providers or if the vendor fails to meet your needs.

Mitigating third party risk

Whether you’re working with a third-party vendor, are the vendor, or both, scrutinizing the cybersecurity team and processes is essential to avoid audit issues. Ongoing monitoring is crucial for continuously assessing and managing risks associated with third-party relationships. A comprehensive third-party risk assessment is the only way to protect your business and its assets from potential threats.

Importance of regular risk assessments

A third-party risk assessment provides an in-depth examination of external vendors, identifying possible security risks and how to avoid potential pitfalls. Regular assessments are crucial for managing third-party relationships, allowing organizations to make informed decisions about maintaining or terminating partnerships. Notable triggers for these assessments include:

• Sharing sensitive or confidential information with a vendor.
• Being assessed by customers who hold your sensitive data.
• Undergoing financial events such as mergers or acquisitions.

Proactive cybersecurity will save organizations more revenue and time than responding to breaches after they occur. For example, the SolarWinds incident’s “ounce of prevention” could have saved $26 million in losses.

Key triggers for assessments

Regular third-party risk assessments are always a good business practice, but there are times when they are non-negotiable. Important markers that should always trigger an organization’s assessment for third party risk management are as follows:

• You share sensitive or confidential information (e.g., personal identifiable information (PII) of your customers) with a vendor or outsourced service provider. In this circumstance, an assessment evaluates an outside entity’s capabilities, such as infrastructure, data security measures, and compliance practices. It ensures that an outside vendor’s continuity plans align with your company’s data protection and privacy requirements.
• Your customers may perform outside assessments on you as a third party because you hold their sensitive data. A proactive assessment by you will speed a path to revenue, since you’ll be prepared for any incoming third party risk assessments. When unprepared, this can hold up – or even lose – lucrative contracts.
• You are undergoing a financial event such as a merger or acquisition. Assessing a target company’s cyber capabilities is critical during the due diligence phase. A famous miss here was Yahoo’s $350M reduction in valuation after a cyber incident. You want to know about these issues before purchase.

Proactive cybersecurity will save any organization far more revenue and time than if forced to respond to a breach that has already occurred. If an ounce of prevention is worth a pound of cure, then in the case of SolarWinds, that “ounce” would have equaled $26 million dollars. This was a far more catastrophic loss to SolarWinds and its customers than any front end revenues put toward avoiding such a disaster.

Third-party risk management process

The time spent on a third party risk assessments depends on the number of third party vendors, the information shared, and the data protection measures in place. The process involves:

• Assessing risk for individual third party vendors based on their importance to your organization.
• Classifying partnerships according to their access to your systems, networks, and data.
• Reviewing service level agreements (SLAs) to ensure vendor performance and compliance with contractual obligations.
• Determining compliance requirements for your organization and external partners.
• Assessing selected third party vendors through questionnaires and independent reviews.
• Providing continuous monitoring for changes in the third party vendor environment and your own.

If you haven’t run a third party risk assessment in the last year – or ever – the time to act is now.

Preparing for third party risk management

Preparing for a third party risk assessment involves several critical steps to ensure a comprehensive evaluation and mitigation of potential risk factors. Here’s high-level approach:

• Review and classify your entire third party vendor list based on data sensitivity.
• Create a data map for all sensitive data flows, including third party vendors.
• Establish a risk register if you don’t have one already.
• Work with your businesses legal teams to review current contractual obligations.

Ways to improve your security program

Mitigating third party vendor risk is a continuous process, presenting a constantly shifting challenge. Regular third party cybersecurity risk assessments are essential for safeguarding your business. Consider engaging an outsourced firm for these assessments to enhance your cybersecurity risk management practices.

Looking for more guidance on managing third party risk with a comprehensive risk assessment? Cyber Defense Group can help.

Get in touch with our experts and see what results are possible for your organization.