Managing Third Parties: Identifying and Mitigating Privacy Risks
Third-party risk management.
It’s likely you’ve heard of it. Your organization may even understand its value and have measures in place to protect against it. But it’s more likely your organization isn’t doing it completely right. We aren’t here to single you out, though. In fact, 83% of organizations discover third-party risk after the onboarding process, forcing them to rely on point-in-time risk management. That same study found that even organizations with “exhaustive upfront due diligence” have a difficult time identifying certain critical risks presented by third-party vendors. But the fault doesn’t rest solely on your organization’s current third-party risk management plan.
The changing landscape of third-party operations, the COVID-19 crisis, and the increasing M&A state of vendors continuously increases your risk exposure. While this all might sound disheartening, we’re here to tell you that your organization doesn’t need to fall victim to the growing third-party risk challenges. The solution lies in having a process that allows your company to identify privacy risk faster, and set up an ongoing process that mitigates it moving forward.
Identifying Privacy Risk: The 7 Potential Third-Party Risks
Before we dive into how to mitigate risk, let’s cover what exactly your organization’s third-party risk management process protects. There are 7 key risk areas your organization needs to be on the lookout for when working with third parties.
- Strategic Risk
The risk from adverse business decisions or the failure to implement appropriate business decisions that are consistent with the company’s strategic goals.
- Reputational Risk
The risk that comes from negative public opinion. Keep in mind, the public doesn’t separate your organization from its vendors. So, if one of your third parties suffers a breach – and your customer’s data is exposed – your organization holds the fault in the eye of its consumers. As such, your reputation suffers the consequences.
- Operational Risk
The risk of loss from poor internal processes, people, and systems.
- Transaction Risk
Risk that develops from problems with service or product delivery. This takes place when a vendor fails to perform as expected by your organization or your customers due to inadequate capacity, technological failures, or human error.
- Credit Risk
Credit risk is the risk that a third party, or any other creditor necessary to the vendor relationship, is unable to meet the terms of the contractual arrangement with your organization or cannot financially perform as agreed.
- Compliance Risk
Risk arising from violations of laws, rules, privacy regulations, or from noncompliance with internal policies or procedures set by your organization’s business standards.
- Other Risk
While the six risks listed above are the most common, depending on the vendor and the arrangement put into place, the potential for unidentified risk is possible.
These risks are not to be taken lightly.
Third-party breaches cost companies an average of $7.5 million to remediate. And that numerical value doesn’t even include the reputational damage. Don’t believe us? Just ask General Electric, T-Mobile, Amazon and a handful of other major companies who experienced a major third-party breach within the last year. The concern at this point isn’t if your organization should take third-party risk seriously. Rather, it’s how your business should go about mitigating the existing risks to avoid such losses.
Mitigating Privacy Risk: The Risk Management Process
To protect your organization from third-party risk, you must appropriately assess, measure, monitor, and control the risk associated with each relationship. There are four main elements of an effective third-party risk management process: risk assessment, due diligence, contract structuring, and oversight.
- Risk Assessment
Risk assessment is the process of determining whether your organization should move forward with a third-party vendor relationship. To do this, your organization must:
- Ensure the vendor aligns with your organization’s business strategy.
- Identify the benefits, costs, legal aspects, and potential risks associated with the third party.
- Identify performance criteria, internal controls, reporting needs, and contractual requirements crucial to ongoing assessment and the identification of risks.
- Review your organization’s ability to provide oversight and management of the proposed third-party relationship on an ongoing basis.
- Determine the long-term financial effect of the proposed third-party relationship.
- Due Diligence
Due diligence is the process for onboarding a new third party to monitor potential risks that may not have been apparent at the time of the risk assessment. This process will help your company identify potential corruption exposure, cyber threats, and reputational risks that may come from the third-party relationship. There are three elements needed to conduct thorough third party due diligence:
- Data collection to assemble and document relevant information about the third parties’ commitment to integrity, and its sustainability for the particular business relationship your organization requires.
- Verification and validation of data to find any gaps or inconsistencies in the information collected through internal and external audits of the third party.
- Evaluation of results, including identification of red flags to ensure your organization has properly identified and mitigated risk through proper safeguards.
- Contract Structuring
Once your organization confidently collects all the information about the proposed third party, it should be in a position to decide whether to extend a contractual agreement with the vendor. The contractual agreement outlines the obligations of both your organization and the third party. While the level of detail will vary by vendor, there’s a basic structure that each contract should follow:
- Contractual term length
- Frequency, format, and specifications of the service or product being provided.
- Other services being provided by the third party such as software support and maintenance, training of employees, and customer service.
- Requirement that the third party comply with all application laws, regulations, and regulatory guidance.
- Authorization for your organization and the appropriate state regulatory agency to gain access to records of the third party in order to evaluate compliance with laws, rules, and regulations.
- Identification of which party will be responsible for delivering any required customer disclosures.
- Insurance coverage to be obtained by the third party.
- Terms relating to the premises, equipment, or employees.
- Permissibility/prohibition of the third party to subcontract or use another party to meet its obligations under the contract.
- Authorization for your organization to monitor and periodically review the third party for compliance with its agreement.
Once the third-party relationship is established, ongoing monitoring of the relationship is critical to protecting your business from potential financial loss, reputation damage, and supervisory action. This oversight program should include:
- Monitoring of the third parties quality of service.
- Implementing risk management practices.
- Evaluating financial conditions.
- Application of controls and reports.
Findings from ongoing oversight should be reviewed by upper management at a minimum on an annual basis. And any identification of weakness should be documented and promptly addressed.
Some businesses have hundreds – even thousands – of third-party vendors. Identifying and mitigating potential risk for each can be extremely difficult if done manually. That’s why OneTrust Vendorpedia exists.
Vendorpedia Third-Party Risk Exchange gives organizations third-party risk and vendor visibility at scale. With pre-completed assessments, due diligence data on 70,000 + vendors, gain service and product-level visibility and backed by OneTrust DataGuidance, it’s your one-stop-shop for identifying and mitigating third-party risk. Request a demo today!