Modern business is synonymous with third-party relationships. Organizations now rely on external providers for critical services and outsource essential responsibilities to improve operational efficiency and cut costs.
The benefits of third-party vendors are clear, but so are the risks. The average organization has expanded and digitized its supply chain over the last few years while simultaneously increasing its risk profile and subjecting itself to new levels of risk.
Amid these looming threats, third-party risk management (TPRM) has emerged as a necessity. Organizations that maintain large vendor ecosystems must develop comprehensive third-party risk management programs involving all aspects of their operation, including their board of directors.
TPRM is not solely about mitigating risks; it’s a broad process that safeguards an organization’s reputation and resilience holistically. Keep reading to learn how your board can oversee third-party risks and what improvements this entails for your organization’s cybersecurity practices.
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The Board’s Role in Third-Party Risk Management
Corporate boards that play a pivotal role in their organization’s third-party risk management process can help management develop a strong cybersecurity culture. While all members should be aware of an organization’s TPRM program, it’s commonplace for a board of directors to create a risk committee and delegate third-party risk oversight to these specific members. This board committee can set TPRM parameters and communicate expectations to senior management.
After your organization’s board forms a risk committee, here are the steps it should follow to develop risk oversight:
- Establish Risk Appetite
- Setting TPRM Expectations
- Identify Severe Risks
- Install Risk Tiering Priorities
- Develop Risk Assessment Cadence
- Install Monitoring Controls
- Encourage a Risk-Aware Culture
- Engage in Scenario Planning
- Develop Review and Improvement Cadence
- Set ESG Goals
Step 1: Establishing Risk Appetite
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Establishing risk appetite is foundational in developing effective risk oversight within an organization. An organization’s risk appetite sets the tone and direction for its risk management practices, guiding decision-making and shaping its overall approach toward risk.
Your organization's board can establish risk appetite by working with senior personnel to draft a risk appetite statement, create a risk appetite matrix, and develop a risk appetite framework.
- Risk Appetite Statement: A formal statement that declares an organization’s risk tolerance and appetite for specific risks
- Risk Appetite Matrix: A tool used to visualize risk tolerance, preferences, and risk boundaries across various risk categories and opportunities
- Risk Appetite Framework: A set of policies, processes, and parameters that help guide risk-based decision-making across an organization
Creating these three risk appetite tools allows your organization to easily align its risk preferences with critical business goals and aspirations. Your board should collaborate with key stakeholders throughout the establishment process to ensure the organization’s formal risk appetite documents and operation match the risk appetite of relevant departments on a localized level.
Step 2: Setting TPRM Expectations
While TPRM is a collaborative pursuit involving all organizational personnel, setting expectations and standards from the top down is critical to ensuring company-wide buy-in and effective practices.
Board members should collaborate with senior executives to develop a TPRM program, appoint leadership, promote interagency guidance, and prioritize procedures that mitigate severe risks the organization will inevitably encounter based on its risk appetite and aspirational goals.
The critical phases of a third-party risk management lifecycle include:
- Risk Identification: Using security ratings and security questionnaires to determine a vendor’s security posture and conducting additional due diligence procedures to determine what risks your organization will inherit by working with a specific third party
- Risk Analysis: Deployment of vendor risk assessments during and after procurement and onboarding to evaluate inherited risks and vulnerabilities, prioritizing risk in terms of severity and real-time impact
- Risk Mitigation: Strategies to prepare for and limit the impact of identified risks. Mitigation involves ongoing monitoring practices, incident response programs, and business continuity planning
- Risk Remediation: Eradicating third-party risks and vulnerabilities to avoid disruption. Remediation may involve selecting new third-party vendors, collaborating with service providers to implement solutions and continuous monitoring after personnel remediate threats
Recommended Reading: What is Third-Party Risk Management (TPRM)? 2023 Guide and 8 Third-Party Risk Management Challenges + Solutions and Tips
Step 3: Identifying Severe Risks
While your board of directors will likely identify severe risks throughout steps 1 and 2, it’s essential to communicate the presence of these risks to senior executives and personnel. Your board must also develop specific mitigation strategies to limit the effects of these risks and put personnel at ease when your organization is willing to inherit these risks based on the operational tradeoff it gains.
Your organization and board can organize these risks into one of six risk categories:
- Cybersecurity Risk
- Operational Risk
- Compliance Risk
- Reputational Risk
- Financial Risk
- Strategic Risk
Step 4: Installing Risk Tiering Priorities
Vendor tiering is the process of categorizing vendors based on the threats they present to an organization. To further expand its risk oversight, an organization’s risk committee should define risk tiers and install risk tiering priorities.
The board should create at least three risk tiers, ranging from low-risk, high-risk, and critical risk. Your board should also define the due diligence and ongoing TPRM procedures risk personnel should complete for each risk tier.
Organizations can create vendor tiers using manual or questionnaire-based tiering strategies. However, the best way to streamline the vendor tiering process is by utilizing a comprehensive Vendor Risk Management tool like UpGuard.
Using UpGuard, organizations can quickly gather vendor risk information, create risk tiers, and categorize vendors accordingly. UpGuard Vendor Risk also elevates the effectiveness of TPRM programs by intuitively organizing vendors, providing real-time risk updates, and remediation and mitigation workflows to handle related risks.
Step 5: Developing a Risk Assessment Cadence
Developing a risk assessment cadence goes hand-in-hand with installing risk tiering priorities. An organization’s board should set specific cadence expectations for each tier of vendors and general cadence expectations regarding onboarding, procurement, and offboarding.
At a minimum, organizations should deploy vendor risk assessments once every year. However, senior leadership can help your board set cadences based on third-party data, your organization’s risk appetite policies and documents, and overall objectives.
Step 6: Installing Monitoring Controls
One of the best ways your board can develop risk oversight is by installing monitoring controls that continuously evaluate the security posture of vendors, reveal the status of mitigation and remediation workflows, and identify new risks and vulnerabilities that could affect the organization.
UpGuard offers organizations 24/7 visibility into their external attack surface and vendor’s security posture. Using UpGuard, your organization can easily:
- Automate 24/7 risk notifications that communicate changes in a vendor’s security posture and notify personnel of new risks and vulnerabilities
- Develop comprehensive risk reports at the board, senior executive, and risk personnel level
- Set, track, and follow mitigation and remediation workflows and see the results of solutions
Discover how UpGuard keeps organizations informed 24/7>
Step 7: Encouraging a Risk-Aware Culture
An organization’s board of directors is vital in fostering a culture of healthy cybersecurity. Your risk committee should encourage personnel at all levels to develop an understanding of the risks third-party vendors present, the regulatory requirements the organization must comply with, and the everyday exercises employees can practice to protect data privacy and information security.
Your board can also set expectations for employee training and collaborate with senior management to develop ongoing programs that encourage a risk-aware culture.
Step 8: Engaging in Scenario Planning
Another step a board can complete to develop comprehensive risk oversight is to engage in scenario planning. Executive leaders will likely already have contingency plans in place to defend your organization against severe threats and potential disruptions. However, your board should know these plans and ensure all incident response procedures align with the organization’s risk appetite and overall risk goals.
The leading incident response framework is the NIST Incident Response Process. The NIST process follows these steps:
- Preparation
- Detection and Analysis
- Containment, Eradication and Recovery
- Post-Incident Activity
Recommended Reading: What is an Incident Response Plan? and How to Create an Incident Response Plan (Detailed Guide)
Step 9: Developing a Review and Improvement Cadence
The best risk committees have clearly defined schedules for reviewing TPRM procedures and introducing improvements. By developing a consistent review and improvement cadence, your board of directors can signal to personnel that third-party risk management is a critical endeavor.
During this step, your board should also define processes for communicating improvements to personnel throughout the organization and for personnel to raise concerns to senior leadership and the risk committee themselves.
Step 10: Setting ESG Goals
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Environment, social, and governance (ESG) is a risk-based framework primarily concerned with an organization’s operational sustainability. Organizations set ESG goals to ensure their operation and third-party ecosystem (including subcontractors and fourth parties) are not exposed to legal, labor, or reputational risks.
Your board should decide to what extent your organization will incorporate ESG goals into its TPRM program and define what ESG factors could cause the most severe disruption to the business.
The three categories of ESG factors include:
- Environmental Factors: Climate change, natural disasters, and other environmental events that can directly impact operations
- Social Factors: Human rights, labor practices, and other social causes that could harm a business’s reputation
- Governance Factors: Fraud, corruption, and other legal risks that could negatively affect an organization’s financial stability
Recommended Reading: Integrating ESG Into a TPRM Program: Mitigating Operational Risk
UpGuard: Helping Organizations Communicate Third-Party Risk
As previously mentioned, effective TPRM is a holistic process that involves all facets of an organization, including on-the-ground personnel and the board of directors. Your board can follow the steps listed above to develop effective risk oversight. However, communicating expectations and sourcing up-to-date risk information can still present significant challenges for any organization.
UpGuard helps organizations develop robust TPRM and Vendor Risk Management programs, and this development starts with effective communication. UpGuard Vendor Risk offers organizations the tools to facilitate communication between risk personnel, senior executives, and the board of directors.
All Vendor Risk customers get access to these powerful tools:
- Vendor Security Ratings: Instantly understand your vendor’s security posture
- Vendor Risk Assessments: Reduce the time it takes to assess new and existing vendors
- Vendor Tiering: Classify vendors based on their level of inherent cyber risk and your organization’s unique risk tolerance
- Compliance Reporting: Map vendor details against common compliance frameworks (NIST, ISO 27001, PCI, etc.) and initiatives
- Vendor Data Leak Detection: Prevent data leakage due to third-party breaches, phishing attempts, ransomware, endpoint vulnerabilities, and other cyber threats
- 24/7 Continuous Monitoring: Receive real-time updates when your vendor’s security ratings change
- Third-party integrations: Configure UpGuard within your existing security tools and web applications
These tools make it easy for every level of an organization to stay up-to-date on the status of their third-party ecosystem and be aware of the risks impacting their security posture.
If you'd like to learn more about how to communicate third-party risk to your board, download our FREE PDF guide at the top of this article.
