Third-Party Risk Management Policy: Benefits, Best Practices & How to Create Your Own

Working with third-party partners and vendors has its perks: they can make the organization more efficient, bring a new set of skills or technologies and otherwise improve the work product. But without an effective third-party risk management policy, vendors can introduce new and unprecedented risks. 

Third parties often have access to valuable company systems and the sensitive data that come with them; they might also access the system from a different location or a different server. Third party risk management (TRPM) helps to ensure organizations are less susceptible to cyber-attacks and breaches, even when working with the most trusted third and fourth-party partners.

Developing a third-party risk management policy can pave the way to better security no matter how many third parties an organization works with. Here’s how to get started. 

What Is a Third-Party Risk Management Policy? 

A good TPRM policy uses the third-party risk management lifecycle to identify the risks that third parties introduce, then creates a framework for what systems and types of data a third party can access. Though this level of security has always been necessary, it’s even more critical in the digital age. 

Organizations rely on third parties for everything from cloud hosting to SaaS software solutions to business partners and providers. 82% of organizations also share all their cloud data with these third parties, which creates risk for both negligent and malicious breaches. While most organizations can’t just stop working with vendors, they can tighten up their vendor management policies to protect against security risks. 

Doing so means having a vendor risk management policy and ensuring they put controls in place that minimize all types of risk. This becomes the framework for how organizations collaborate with their third-party partners.

The Five Types of Third-Party Risks to Manage

Not all risks are alike, which is why vendor management policies need to be comprehensive. These are the six risks vendors can introduce, all of which should be covered within the risk management policy and controls: 

1. Cybersecurity Risks: These risks include compromised systems and attacks or breaches. 
2. Compliance Risks: These risks arise anytime a vendor is non-compliant with laws, regulations or internal procedures. 
3. Reputational Risks: Any time a vendor harms an organization’s public image, they create a reputation risk. This can include loss or theft of customer information or even public interactions that meet company standards. 
4. Financial Risks: These risks occur when vendors don’t meet financial expectations through high costs or low revenue. 
5. Operational Risk: Third parties can introduce risk when they don’t follow proper operations or procedures, including the proper protocols for accessing systems and data. 

The Benefits of a Third-Party Risk Management Policy

Third-party access is a crisis for many organizations. In a 2021 report, 44% of organizations faced a breach within the past 12 months. But what’s worse is that 74% of those organizations attributed the breach to their vendors and third parties, particularly that they had given their third parties too much access. 

Too much access isn’t the only challenge, either. 51% of organizations said they grant third parties access to their systems without verifying the vendor’s security practices. More than half of organizations also didn’t have an inventory of which third parties had access to either their systems or their most sensitive data. 

Since many organizations lack the infrastructure, they need to partner with third parties safely; the most significant benefit of adopting a third-party risk management policy is safeguarding against external risks. Without these policies, organizations are at serious risk of compromising their systems, data and revenue. 

According to IBM, the cost of data breaches will reach $4.4 million in 2022. Combining an effective third-party risk management policy with the right TPRM software solutions can help organizations keep that money in their own pockets rather than in the hands of cybercriminals. 

How to Create a Vendor Risk Management Policy

Getting started with third-party risk management and vendor risk management can be difficult. Effective risk management policies have layers. They tell the organization how to assess a third party’s security, then guide vendors on how they must handle sensitive data. 

Organizations can start building their security policies through the following steps: 

1. Audit All Third Parties: The first step is to audit which vendors have access to company systems or data. Create a comprehensive list of everyone the organization works with, including contractors, consultants and suppliers. This should include both what level of access those vendors already have and what level of access they need. 
2. Assign a Risk Score to Each Vendor: Scoring each vendor’s level of risk involves taking a closer look at each vendor’s system access. The more data they have access to — and the more the organization relies on them for critical business activities — the higher the risk. Create a database that categorizes vendors based on whether they’re high, medium or low risk. Be sure to update this anytime you part ways with or sign on a vendor.
3. Create Risk Management Procedures: Use the vendor list and associated risk scores to develop procedures for each risk level. These should include the following:
   • Due Diligence: What security questions should the organization ask of each vendor?
   • Security Service Level Agreements (SLAs): How does the organization verify that vendors meet SLAs, and what steps does the organization take if they don’t?
   • Controls: Which controls are mandatory and which are acceptable?
   • Compliance: How will the organization verify that the vendor meets regulatory and industry standards?
   • Liability: Who is responsible in the event of a breach, and what recourse does the organization have?
   • Review: How is the organization auditing and reviewing vendors on an ongoing basis to ensure they continue to meet security requirements?
   • Oversight: Which processes will the board and executive management oversee?
   • Mitigation of Risk: What procedures are in place should a breach occur?
4. Continuously Update Risk Management Policies: Cyber threats are almost always evolving, as are organizations’ reliance on third parties. To keep up, organizations should have an “always on” approach to monitoring and updating third-party risk management policies. 

Third-Party Vendor Risk Management Policy Template

As new risks arise, so will new controls. While it can be challenging to keep track of it all, templates for version history can make it easier to review changes and their effectiveness over time. Organizations can track everything from creating new documents to implementing new controls — like application controls — to changing access levels, all of which can impact the system’s security. 

Track data like version number, the data of the change, who approved the change and what the change was so that anyone on the risk management team can review and understand it later. This will not only help understand which changes were the most effective, but it can also make it easier to make revisions if new controls or procedures don’t meet expectations. 

Use this template to get started: 

Brush Up on Third-Party Risk Management Essentials

Third parties can lower costs and boost revenue, but they can also introduce risks that are both costly and reputationally damaging. Establishing an effective third-party risk management policy is a great way to protect the organization from external risks, but it’s essential that organizations choose the right framework for them.

Third-Party Risk Management Essentials from Diligent breaks down the differences between third-party risk management, vendor risk management and effective frameworks to help mitigate risks. Download now to continue the journey towards effective governance for third-party risk.