Do you have an exact count of how many third-party vendors you use? Each vendor is an access point into your business, and with each of your vendors using their own third-party tools, the ripple effect of bad third-party risk management can be disastrous for small business owners.
Whether it’s a supplier, distributor, or service provider, managing third-party risk in your supply chain is crucial for keeping your business data safe.
What Are Third-Party Risks?
Third-party risks are potential threats to your business that arise from external vendors, contractors, suppliers, and service providers. Essentially, any entity outside of your immediate organization that plays a part in your operations can introduce risks. Prevalent, a risk management provider, found that 61% of businesses have been breached by a third-party. Here’s how it could happen:
Common Types of Third-Party Risks
- Operational Risks: Vendors may fail to meet delivery deadlines, leading to supply chain disruptions. Critical delays can impact production timelines, customer satisfaction, and revenue.
- Financial Risks: What happens if your key supplier files for bankruptcy? Their financial stability can significantly impact your own operations.
- Regulatory and Compliance Risks: Third parties failing to comply with regulations could result in hefty fines for your business. For instance, vendor non-compliance with data privacy regulations like HIPAA can harm more than your reputation—it can cost millions.
- Reputational Risks: Third-party actions, like unethical labor practices or mishandling customer data, can tarnish your brand’s image and erode customer trust.
- Cybersecurity Risks: Vendors with insufficient cybersecurity protocols are a growing threat. A cyberattack targeting one of your partners can create a backdoor into your systems.
Steps to Identify and Assess Third-Party Risks
Those risks are big, but with third-party risk management, you can identify and mitigate them. Here’s how to get started:
1. Research Potential Suppliers and Vendors
Before entering into any partnership, perform due diligence. Review a supplier’s industry reputation, past performance, and history of compliance with regulations.
Ask for references or case studies from other companies they’ve worked with to gauge their reliability. Assess their cybersecurity measures, data protection policies, and how they manage risk within their own supply chain. This initial research will help you understand their potential impact on your organization’s security and operational continuity.
2. Use Risk Assessment Tools
Tools like risk questionnaires, on-site audits, and supplier scorecards can help you evaluate the security and compliance standards of your partners.
Ensure that these tools are tailored to your industry and the specific risks associated with your supply chain. For instance, questionnaires should address topics such as data encryption practices, employee training on cybersecurity, and incident response protocols.
3. Prioritize High-Impact Suppliers
Not all third parties carry the same level of risk. Focus your risk management efforts on high-impact vendors who are critical to your operations.
These suppliers often have access to sensitive data or play a key role in delivering essential services to your organization. Conduct thorough assessments of their security policies and practices to ensure they meet your standards.
Additionally, establish regular monitoring and communication channels to address potential vulnerabilities proactively.
4. Evaluate Financial Health
Examine financial statements and credit ratings of your third parties. Ensuring they are financially stable reduces the risk of disruptions caused by bankruptcies or financial mismanagement.
If you can, this evaluation should include a review of their cash flow, balance sheets, and long-term debt obligations to identify any potential financial risks. Regular financial assessments can provide early warnings of trouble, allowing your organization to make informed decisions or adjustments to mitigate impact.
Establishing Clear Third-Party Risk Management Processes
After due diligence, you can create your own standard operating processes for handling third-party risks. Should anything happen, your executives and employees will know exactly how to act to mitigate risk.
1. Build a Third-Party Risk Management Framework
Develop a standardized framework to assess, monitor, and mitigate risks. This could include establishing workflows for onboarding new vendors and periodic reassessment processes.
2. Draft Risk-Sharing Agreements
Work with your legal team to draft strong contracts. Include clauses that define compliance requirements, performance benchmarks, and penalties for breaches.
3. Set Clear Performance and Security Expectations
Outline what you expect from your partners in terms of delivery timelines, security protocols, and adherence to industry standards.
4. Leverage Third-Party Risk Management Software
Third-party risk management software automates tasks such as policy reviews, ongoing vendor evaluations, and tracking compliance. You could also partner with a managed service provider who will take all of these third-party risk management strategies and take care of them for you.
5. Continuously Monitor and Audit
Rather than assessing risks once and forgetting about them, establish a schedule for reevaluating your third parties. This helps you stay ahead of emerging issues.
Responding to Third-Party Risk Events
If the worst happens and you experience a third-party risk event, use these steps to contain the incident and get back on track quickly.
1. Have a Plan in Place
When disruptions occur, time is critical. Develop a response plan to tackle potential third-party failures, such as missed deliveries or cybersecurity breaches.
2. Establish a Contingency Plan
Work proactively to identify alternative suppliers or backup vendors to mitigate supply chain disruptions. Contingency measures should include temporary workarounds until normal operations resume.
3. Minimize Supply Chain Disruption
Work closely with internal teams and third-party vendors to resolve issues quickly. Keep communication transparent with customers to maintain trust.
4. Learn from Incidents
After resolving an incident, hold a post-breach analysis. What went wrong? What could be done differently next time? Use these insights to strengthen your third-party risk management strategies moving forward.
How ANC Group Can Help Protect Your Supply Chain
Third-party risk management can feel like a lot—you’re already worried about your data security, and now you have to worry about everyone else’s too? ANC Group can help take these things off your plate and improve your third-party risk management processes.
Here’s how we help businesses like yours:
- Compliance as a Service (CaaS): Simplify compliance by taking advantage of our regular assessments, employee training, 24/7 monitoring, and more.
- Stronger Security: We deliver layered cybersecurity solutions to prevent vulnerabilities in your supply chain.
- Data Backup and Recovery: Protect against data loss with secure storage solutions tailored to your needs.
- Custom IT Solutions: Our team works with you to build systems that enhance operational efficiency and risk mitigation.
Feel confident about your supply chain future. Schedule a call with our team to get started.
