Businesses rely on external vendors and partners to provide goods, services, or expertise. Being interconnected with one vendor, or a variety of vendors, has become a normal business operations process these days. These external entities, known as third parties, can be vendors, suppliers, contractors, or service providers also carry their own risks to businesses they provide services to.
While partnerships with third parties are vital for business growth and efficiency, they also bring unique challenges. For example, 70% of data breaches have caused significant disruptions to operations, emphasizing the importance of proactive third-party risk management tools. One of the most critical challenges is third-party risk management, which has been the source of some major data breaches in 2024. But what exactly is a third-party risk, and what is an example of such a risk?
Let’s explore this topic in detail.
Third-Party Risk Management Framework
Third-party risk refers to the potential threats and vulnerabilities a business faces when working with external entities. Many organizations align to a third-party risk management framework and most often use a third-party risk management tool to develop, manage and minimize the risks posed by their third parties in accordance with the framework.
These risks can impact operations, finances, compliance, and a company’s reputation. Identifying third-party risks is a critical component to the service relationship because businesses often have limited control over their partners’ internal processes, yet they remain responsible for any issues caused by those partners.
Some common categories of third-party risks that a third-party risk management framework helps to address include:
- Operational Risks: Problems that disrupt daily business operations.
- Financial Risks: Risks tied to a partner’s financial instability.
- Compliance Risks: Issues related to failing regulatory or legal requirements.
- Reputational Risks: Damage to a company’s image due to a third party’s actions.
- Cybersecurity Risks: Data breaches or cyberattacks involving a third party.
Example of Third-Party Risk
Examples of third-party cyber risks can vary from cloud misconfigurations, unpatched IT hardware or software, a vulnerability in software code that the third-party may use but not manage, lack of security training at the vendor or lack of role-based access controls. These are the types of risks to evaluate in your due diligence processes so it doesn’t lead to a cyber incident with a negative outcome for your organization.
These examples of cyber risks and vulnerabilities are some of the reasons to evaluate the third-party, its cybersecurity program and their posture. These risks can lead to cyber incidents in different ways, such as:
- Data breaches: Vendors with access to sensitive data may have weak security systems. Hackers can exploit these vulnerabilities.
- Malware infections: If a partner’s system is infected with malware, it can spread to your company.
- Unauthorized access: Third parties with excessive permissions might misuse them, intentionally or accidentally.
One notable example of third-party sourced data breach occurred with Toyota in February 2022. The company experienced significant disruptions after a data breach at a third-party supplier, Kojima. This breach led Toyota to temporarily halt operations in Japan. The shutdown resulted in a production deficit of approximately 13,000 cars, about 5% of their monthly production target. Although Toyota did not suffer direct cyber consequences from the breach itself, the operational impact was substantial.
Another example involves Mercedes-Benz USA, which faced a data leak in June 2021 due to negligence by a vendor managing their cloud storage. Sensitive customer information was inadvertently made accessible, potentially leading to legal disputes and reputational damage for Mercedes-Benz. This incident highlights how lapses in third-party security can have far-reaching consequences for an organization.
How to Mitigate Third-Party Risks
While third-party risks are inevitable, businesses can take proactive steps to minimize them. Here are some key strategies:
1. Conduct Thorough Due Diligence
Before partnering with any third party, evaluate their reputation, financial stability, and compliance record. Check their cybersecurity policies and data protection measures. Evaluate what, if any, identified risks are accepted, managed or transferred. More on transferring the risk to insurance below.
2. Set Clear Contracts and Expectations
Draft contracts that outline responsibilities, compliance requirements, and security standards. Include clauses for regular audits and penalties for non-compliance.
3. Monitor Third Parties Continuously
Regularly assess your third parties to ensure they meet agreed-upon standards. Use tools like automated risk management platforms to simplify this process.
4. Invest in Technology
Use a third-party risk management tool to track and assess risks in real-time. These tools can help identify vulnerabilities and ensure compliance.
5. Train Your Team
Educate employees about example of third-party risk and vigilance when interacting with external partners.
What is Third-Party Risk Insurance?
Third-party cyber liability insurance specifically focuses on the financial consequences your business faces if a cyber incident at your company impacts other organizations or individuals. Employing cyber insurance is a common tactic when transferring risk.
Consider this: a cybercriminal breaches your third-party’s network and steals sensitive customer data that also happens to be your data. These customers could then hold your company liable and sue for damages. Third-party cyber liability insurance is designed to protect your business from the financial consequences of such lawsuits. It covers a range of potential costs, including:
- The cost of legal representation in court (legal defense costs)
- Out-of-court settlements to resolve legal claims (settlement costs)
- Monetary damages awarded by a court if you are found liable (court-ordered damages)
- Fines and penalties imposed by regulatory bodies for non-compliance (e.g., GDPR, HIPAA)
- The expenses associated with notifying affected individuals about the breach (notification costs)
Third-Party Risk Assessment
Technology is playing a much-needed role with many third-party risk management tools available to help organizations. Advanced tools, like third-party risk compliance tool and technologies can make managing third-party risks easier. For instance:
- Third-party risk management software helps businesses track and monitor vendor performance.
- Cybersecurity solutions can detect vulnerabilities in third-party systems before they become a problem.
- Compliance monitoring tools ensure that vendors follow relevant regulations.
By using these tools, businesses can reduce risks and improve partnerships.
Take Control of Third-Party Risks with FortifyData!
Protect your business from costly disruptions and compliance headaches. FortifyData provides a comprehensive third-party risk management module as part of it’s automated cyber risk management and cyber GRC platform that helps organizations identify, assess, and mitigate risks in real time.
- Threat Exposure Management: FortifyData identifies and manages threat exposures across the entire attack surface. This includes internal networks, cloud environments, and third-party vendors. Organizations can prioritize their response efforts effectively by providing real-time insights into vulnerabilities.
- Cyber Risk Scoring: The platform offers an industry-leading cyber risk scoring system that tracks performance against key risk indicators.
- Compliance Monitoring: The Questionnaire Management with technical control auto-validation feature allows organizations to monitor their compliance with various industry standards such as PCI, HIPAA, SOC 2, ISO 27001, and NIST.
- Holistic Risk Analysis: FortifyData evaluates three critical pillars of cybersecurity—people, processes, and technology—for a better view of risk exposure. This approach makes sure a company can identify weaknesses across all areas of its operations.
Are you ready to fortify your company’s cybersecurity? Book your demo to discover how FortifyData can transform your approach to risk management.
