Nixon Digital

What is third party risk management?

Businesses often rely on a variety of third parties to help them succeed. Organizations increasingly depend on third parties for their growth, innovation, and, most importantly, their digital transformation. However, third parties pose risks. Organizations must be aware of the risk posture, resilience, and reputation before engaging with a third party. In this blog, we will explore what third-party management is, why it is critical, what the risks are, and how to perform a third-party risk assessment. By the end, you will understand what a third-party risk assessment entails, what the risks are, and how to prevent legal action, regulatory action, financial losses, reputation damage, and revenue loss.

What is third party risk management?

Third-party risk management is recognizing, evaluating, and minimizing potential risks when collaborating with external vendors, suppliers, or service providers. It entails assessing the possible adverse effects of outside entities on an organization’s operations, data, systems, or reputation.

Third-party risk management aims to guarantee that organizations thoroughly comprehend the risks associated with their associations with third parties and establish suitable controls and measures to handle and reduce those risks efficiently.

Why is third party risk management critical?

Third parties are essential for the success and growth of an organization. Organizations rely increasingly on third parties for their growth, innovation, and, more importantly, their digital transformation. A recent study found that nearly a third of third-party vendors would be considered a significant risk in the event of a breach. Additionally, another study found that 80% of surveyed organizations experienced a third-party data breach in 2020. 

However, third parties are risky. Organizations must be aware of the risk posture, resilience, and reputation before they use a third party. Failure to manage third party risks can leave organisations exposed to legal action, regulatory action, financial action, reputation damage and revenue loss.

Challenges of risk management

Third-party risk management is a time-consuming, error-prone, and manual. These management processes need to be improved and cannot keep up with the growing number of third parties. Organizations are facing common challenges by not implementing a modern solution, including:

  • Manual Processes: Low monitoring efficiency and a longer time to identify and fix problems with third parties.
  • Lack of scalability: When teams choose a solution that won’t scale, they can’t keep up with third-party management, which might increase risk.
  • Siloes: The organization may have trouble accessing risk information with too many silos.
  • Disconnect: No enterprise context makes it difficult to prioritize third-party risks through the vendor lifecycle or when requirements change.

How to perform a third party risk assessment

To keep these third parties in check, performing a risk assessment for all the third parties you use is essential. Once you have identified the risks, you decide whether the benefits of a third party outweigh the parties.

A risk assessment can be time-consuming, but having an excellent third-party risk assessment can be beneficial. So, follow the steps to perform a risk assessment below.

Step 1: understand the risks.

Understanding all the potential risks, third-party connections are a great place to start. You can evaluate providers thoroughly if you know all the risks that may impact your business.

Step 2: Determine risk criteria.

When you have listed all the potential risks areas, you must develop risk guidelines for outside assessments. The risk areas change based on the type of business vendor. Create a framework for assessing vendor risk (one with a predetermined structure and grading criteria) and use it for each assessment.

Step 3: evaluate the service.

A third-party risk assessment should provide two solutions. It’s essential to inquire about the potential effects of doing business with this party on your company’s reputation. You should also assess whether the parties conduct business morally and lawfully. Additionally, consider how responsive and trustworthy their customer service is and the company’s financial position.

You can conduct a product-level investigation to assess the danger associated with a specific product. For example, if you’re interested in purchasing case management software, ask the following questions in addition to evaluating the business:

  • Is the software secure?
  • How long will it take our staff to get proficient with it?
  • How much does it cost?
  • Is the product compliant with all relevant data protection laws, reporting, and related matters?

By analysing the company and the product, you will understand the potential hazards comprehensively. This information will help you decide whether to initiate or continue business contact with them.

Step 4: Organize risks by level.

By categorizing third parties based on their risk level and evaluating their importance to your business, you can speed up the risk management planning process and make quicker vendor decisions. Assess the risk level of the third party using your criteria (high, medium, or low). Then, determine the vendor’s “business effect rating” to measure their significance to your company. Then decide on the level of vendor due diligence needed for each risk. This simplified process removes bias, promotes consistency, and improves efficiency.

Step 5: Create a risk management plan.

After choosing a vendor and evaluating their level of risk:

  1. Develop a strategy to manage that risk.
  2. Determine how your company will address and minimize potential hazards from the vendor. When a threat arises, you can quickly respond to mitigate any harm.
  3. Ensure to include risk scenarios, specific response responsibilities, and the person in charge of each in your plan.

Step 6: Keep up with regulation changes.

Your business needs to stay informed to keep up with changing rules and regulations. These rules cover privacy, environmental restrictions, labor and employment, and tax laws. As you update your policies and procedures, assess all your vendors to ensure they can comply with the regulations.

Step 7: Complete annual evaluations.

Vendors evolve and change, just like your business. This means that their practices may no longer match your needs or expectations. For example, a supplier could be bought by another company that doesn’t operate in the same way as yours. Or the vendor might modify a product or start using a new one that doesn’t meet your business’s requirements.

To ensure the security and profitability of your business relationships, you must assess vendors regularly. The frequency of evaluation can depend on the level of risk involved. You can ensure your connections with vendors benefit everyone involved by consistently monitoring and conducting thorough assessments.

Social media platforms as third party

The websites have coding that allows users to share user data with social media platforms. This so-called “pixel” instantly notifies a corporation of each visit and communicates distinctive information or an “IP address” that may be used to identify a user’s internet connection.

According to a list created by the American business NerdyData at the request of BNR, at least 1,000 websites in the Netherlands have had such a TikTok pixel sometime in 2023. These include prestigious organizations and businesses like the Rijksmuseum, Refugee Work, and Wehkamp.

Major platforms, including Meta and Google, employ this strategy to target individuals with adverts better and give advertisers more information on their efficacy. Users can be dragged into the data dragnet without having a social media account.

Major platforms, including Meta and Google, employ this strategy to better target individuals with adverts and give advertisers more information on their efficacy. Users can be dragged into the data dragnet without having a social media account. In most cases, these pixels are being fired before users can consent.

Explicit consent is required from users before any personal data can be collected and processed. This means that before the TikTok Pixel is launched, users should be given clear and comprehensive information about what data will be collected and how it will be used, and they should actively agree to this.

Increased espionage risk

TikTok, a platform hugely popular among young people, has been at the centre of political debate for a while now. In March, the national government discontinued allowing its civil officials to use the app, partially in response to the AIVD’s warning of an “increased espionage risk.”

Late last year, TikTok was discovered snooping on Financial Times reporters writing negative articles about the firm. Whistleblower claims TikTok sent the Chinese Communist Party information about Hong Kong protests earlier this month.

Beijing is the home of ByteDance, the parent company of TikTok. According to Daan Keuper, Head of Security Research at Computest, it becomes riskier to disclose personal data with the organisation. We are still determining the precise information saved, who has access to it, and its intended use. According to Keuper, the Chinese government may also access those records.

According to TikTok, its Chinese roots are a thing of the past and that it now primarily does business “internationally.” The business also claims to be developing a method in which users’ data from Europe may only be viewed within Europe.

But who are responsible for third party risk management?

There are several parties involved in third party risk management. Therefore, we speak of three lines of defence.

First line

This is where businesses handle and oversee third party risks. People in this role interact directly with third parties and customers during transactions; they are the first to know about issues. Third party owners usually occupy the most senior positions.

Second line

The primary responsibilities of the second line include overseeing the third-party risk management program and ensuring that related tasks are performed effectively. This includes prioritising third party risk management activities and ensuring that concerns are addressed by the responsible parties.

Third line

The third line of defence oversees the roles and duties of the first and second lines of defence. They also conduct internal audits to ensure compliance with compliance policies and programs. The audit department reports to the third line and is responsible for the compliance and risk assessment of the company.

Your next step

If your organization still needs to formalize its third-party risk management. No one-size-fits-all solution exists, as each organization has a different risk profile. Your compliance platform must reflect actual risks instead of assumptions. The initial step is to gather the appropriate stakeholders from your organization, including the compliance team, legal team, procurement, audit, privacy team, and others, to understand the objectives and potential risks that may arise for your company.

At Nixon Digital, we highly value transparency, integrity, and responsibility. We strive to assist clients in meeting their compliance requirements efficiently and effectively while contributing to broader societal goals. Our platform specializes in detecting third parties on your website portfolio, allowing you to see and categorize third parties, such as unwanted pixels on your website portfolio, automatically. With our automatic scanning tool, you can scan, organize, and review third-party on your website portfolio in just a few simple steps. Take the first step towards managing third-party websites with our free website portfolio scan today!