What does it mean to be a third party?
A third party is an outside group that becomes involved in a situation between two groups. Businesses use third-party vendors for several reasons. A third-party vendor can be a source of higher-quality tools and resources, allowing you to grow your business and provide better products. Outsourcing tasks to a third party also allows your employees more time to focus on their other tasks without being overworked. Bringing in a third party also reduces cost, as the third-party vendor will have employees and resources already covered.
A third party can come with unnecessary risks to your business. Risk management is a part of running any business, and party risk management is no different. It’s important for you to understand exactly what they do and how they could affect your business, both positively and negatively. Before consulting or hiring a third-party vendor, look into their background and how other companies have reacted to working with them.
What is third-party risk?
Third-party risk can involve anything from reputational damage to stolen data. You could lose money, time, data, or reputation. If a third party engages in illegal actions, you can still face legal repercussions for their actions attached to your business.
Third-party risk management, or vendor risk management, is crucial to keeping your business running well when outsourcing to third parties. Addressing third-party risk beforehand will help you choose the right third-party vendor to go with. Even with a reputable vendor, you still need to keep up third-party risk management to minimize unavoidable risks and prevent avoidable ones.
Many third-party vendors are small upstarts. While their creativity and innovation can be indispensable, their novelty to the business world can be a potential risk, especially if they don't know the best practices for performing due diligence. It's important to perform risk assessments before working with any third-party vendor.
How can third-party risk harm me? How can I avoid it?
Third-party vendor risk can harm your business in several ways. You could lose money through them, data could be lost, stolen, or leaked, you could lose your reputation, and you could even face legal accusations for their actions.
The best way to avoid third-party risk is to have a good risk management strategy and to perform risk assessments on all organizations that you consider working with. Accept that third-party vendors come with both great benefits and some risks. The key is finding a third-party organization that provides the best benefits to your business with the least risk.
What are the best ways to manage and mitigate third-party risk?
There are some actions you can take to minimize third-party vendor risk. The best way to avoid it is to be prepared and know what to look out for.
The best way to manage supply chain risk is to educate yourself as much as you can on your third-party vendor and what they do. Once you understand what it is supposed to be like, you can better call out instances where the vendor is acting irresponsibly.
Cybersecurity risk management is growing as more and more companies conduct business online. Third-party risk management involves covering digital ground from potential vendor risk as well.
4 strategies for party risk management
There are 4 main party risk management strategies to use when dealing with risk: avoid, reduce, transfer, or accept.
Obviously, the easiest way to deal with risk is to avoid it altogether. Some risks are unavoidable, but many can be cleared by simply following rules and being careful who you outsource to. The best risk management is learning to adhere to regulations. Regulators provide clear guidelines and boundaries that will help you avoid risk entirely.
Reducing risk is crucial since, as mentioned before, some risks are unavoidable. Being prepared to deal with these risks can help you catch issues early and deal with them before they significantly affect your business. A strong risk management system will be indispensable to reducing third-party vendor risk.
If you can’t avoid third-party risk, and you can’t reduce it enough, you can try to transfer it. A shared vendor risk will hurt multiple companies but won’t necessarily destroy each one. Many companies share third-party risk in the form of insurance. Insurance companies essentially share the financial risk of those they cover.
Finally, if you can’t avoid, reduce, or transfer third-party risk, accept that it’s coming. Risks don’t always end badly. The trick is to keep monitoring your vendor risk and adjust your third-party risk plan to account for it. Do what you can to prepare and mitigate potential risks, and ride them out.
What should I keep in mind when designing a security system (or screening process) for potential vendors?
There are several cyber security strategies you can use to protect your business. A cybersecurity approach will protect your online transactions from third-party vendor risk. Cyber security solutions and vendor risk assessment systems will help you avoid unnecessary third-party risk.
Here are some things to keep in mind for the vendor screening process. You’ll want to perform general background checks on the organization and personal background checks on the managers and even employees that will be working with you. Look for a history of compliance (or non-compliance). Look at who is tied to the organization and who else they work with. And make sure they have a good reputation. Media can influence potential customers toward or away from you.
How can RiskRecon help me?
RiskRecon, a Mastercard Company is dedicated to securing your vendor ecosystem. They can help you find the weak spots in your risk management and cybersecurity to build a better business.
RiskRecon can help you organize and prioritize your risks, tackling them one at a time to mitigate third-party vendor risk, keep data assets up to par with regulatory requirements, and other related insights.
Schedule a RiskRecon demo today and start fortifying your risk assessments today!