December 3, 2023

Most organizations understand the importance of having a comprehensive risk management program for their operations, processes and systems. They obviously need to manage costs to prevent financial loss, but there is more, such as protecting assets (including in the event of business disruption) while complying with legal and regulatory requirements. If they don’t, they risk damaging their brand image, customer trust, or stakeholder confidence. When organizations proactively identify, assess and mitigate risk, they can enhance their resilience, sustainability and long-term success.

Most organizations cannot do all the work themselves and hire external parties (such as suppliers, suppliers or service providers) to support them in using a particular product/service. Any external party that plays a significant role in the organization’s environment is considered a third-party supplier. Each of these third-party suppliers presents risks. Since they should have their own risk management procedures, you’re not responsible for any of their associated risks, right? Incorrect! According to the Fed, “the use of a service provider does not relieve a company of its responsibility to ensure that outsourced activities are conducted in a safe and secure manner and in compliance with applicable laws and regulations.”

Types of Third Party Risk

Third Party Provider/Service Concept

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Each of these third-party vendors carries a risk that could adversely affect your organization’s operations, reputation, and security. So why aren’t more organizations paying as much attention to third-party risk as they should? For some, it’s because they don’t know or fully understand the potential risks, while others “trust” their third-party vendors. If something bad happens and affects your organization, neither reason will be accepted.

Third-party risks specifically refer to potential risks and loopholes arising from engaging third-party suppliers. Some of the main risks you should be aware of are:

  1. Cybersecurity risks – information security incidents and data breaches, including ransomware
  2. Compliance and regulatory risk – non-compliance with various legal or regulatory requirements
  3. Operational risk – if third party suppliers are unable to deliver their products/services (for example, if they have material shortages), business disruption could lead to operational inefficiencies
  4. Reputational risk – unethical behavior, abuse of authority, etc. by third-party suppliers that could damage their reputation
  5. Financial risk – financial loss, including fines, legal costs or loss of customers

Mitigating Third Party Risk

Risk Mitigation Concept


If something goes wrong with your third-party provider, you need to be as prepared as possible. Since every third-party vendor is different, how can you best mitigate these risks? Proactively implement a strong third-party risk management (TPRM) framework. A comprehensive TPRM minimizes potential risk to your organization from third-party vendors wishing to work with you. Some caveats are:

1. Do your due diligence and complete a thorough analysis before signing any contract. Review third-party experience, licensing, pending legal issues, etc. The depth and form of due diligence will depend on the product/service the third party will provide. Some of the contractual items are cost, performance metrics, audit rights, data ownership and termination rights.

NOTE: For your existing 3rd party vendors (with signed contracts), please continue with additional considerations. Consider the first item when a current contract is up for renewal.

2. Risks may be related to compliance, operations and reputation. Review contractual agreements, risk assessments, compliance/regulatory requirements, business continuity/disaster recovery, etc. Risks are assessed, analyzing their likely impact and likelihood.

3. Consider developing an exit strategy detailing exit criteria and procedures to ensure the safe transfer or disposal of data and assets (just in case).

4. Perform ongoing monitoring, including assessing their financial health and reviewing their internal and information security controls (eg, obtaining their SOC reports).

5. Continuously evaluate and update TPRM based on changes in business operations, regulatory changes and emerging risks.

An organization’s (internal) risk management program is critical. Since third-party vendors play an important role in an organization’s environment, (external) TPRM is also important. Organizations need to address both sets of risks to effectively manage their overall risk profile.

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