Starting from source code to compiling software, while resourcing needs keep growing, businesses can only face some of these stages independently. That is why the need to have third-party vendors has increased exponentially over these last five years. But as the role of third-party vendors grows, the need to properly monitor and identify risks from these vendors becomes crucial.

Why is third-party risk management important?

Without a doubt, third-party vendors can help accelerate your business even further, but at the same time, you can become exposed to new cyber threats. Since vendors have access to critical systems and customer data, your company must continuously monitor security risks to avoid potential business threats. Or on the contrary, you may unintentionally harm your business’s reputational, legal, or operational standing. By identifying and understanding these risks, you can create a successful risk management and remediation plan that can help minimize upcoming threats.

Five third-party vendor risks we should know about

Cyber Security and data protection risk. The vulnerability to cyberattacks, data breaches, or other security incidents can result in information exposure or data loss. Poor or ineffective cybersecurity controls can also contribute to these risks. It is essential to safeguard sensitive business information and customers’ identifiable information by limiting vendor access and controls.

Compliance and regulatory risks. These risks arise from a violation of regulations, processes or compliances that your business must follow to conduct its operations. Regulations and protocols may vary in different industries, but the overall consequences of violating the compliances can result in huge fines. This is why you should check if your third-party vendor compliance aligns with your business’s regulations.

Operational risk. Usually, vendors offer services that play a specific functional role in the whole business process. If a third-party vendor stops offering the intended service, the business will not be able to perform daily activities, which can result in harming business continuity.

Financial risk. These types of risks are connected with the ability of third parties to provide proper financial services that are aligned with your business’s needs and requirements. It is crucial to regularly audit vendors to ensure they are spending according to the terms of your contract to keep excessive costs in check.

Reputational risk. Third-party suppliers can damage your company’s reputation in several ways, including Inconsistent interactions with company standards, negligence or data breaches resulting in the loss or disclosure of customer information, violations of laws and regulations, and so on. Some of the most damaging has been caused by third-party data breaches resulting from poor security controls.

The proactive approach to managing third-party vendors risks

Managing third-party risks is an ongoing process which should be focused on prevention rather than reaction. Therefore, more organizations will likely follow proactive approaches soon and establish standards and audit programs for their suppliers and vendors. These assessments, unfortunately, will require a great deal of effort. Still, they can provide better security and reduce risk more effectively than just general information gathering that we can do on the vendors.