Risky Business: Defining 3rd Party Vendor Risk
It’s affordable, it’s convenient, it’s effective —
here’s the catch.
Hiring third-party vendors to provide services at an affordable rate has gained traction as a major trend among businesses, and exponentially so for businesses in need of IT support. Paying a trained team by a flat monthly fee or the hour in lieu of hiring new full-time staff for an empty role can definitely make business sense. Businesses can even employ these service vendors to supplement their existing staff for specific projects. It’s affordable, it’s convenient, and — above all else — it’s effective.
With outsourcing on the rise, and as more businesses entrust vital elements of their operations to third-party vendors, a lot of concern has been raised around businesses protecting themselves against third-party risk — especially after federally-mandated cybersecurity regulations like the European Union General Data Protection Regulation (EU GDPR) were introduced in 2018.
Here’s the catch: “risk” is a pretty broad umbrella term, with no two vendors or regulators defining risk in the same way. To effectively create assessments for third-party vendors, and to better understand the required assessments, let’s break “risk” down: We’ve identified three common types of risk that assessors tend to keep an eye on.
Operational & Financial Risk
Operational and Finance Risk is the catch-all category for types of risk that threaten to damage your revenue or disrupt your daily operations. Incidents ranging from receiving faulty products to impromptu software maintenance in the middle of your workday have the potential to negatively impact your business.
- Strategic Risk is derived from ill-advised business decisions, as well as from failing to make and implement the right business decisions that align with your strategic goals. If a vendor is failing to meet its own expectations, you can hardly expect it to meet yours.
- Operational Risk becomes an issue when a business’s internal processes, people and systems don’t function as well as intended, resulting in the potential for loss. Employing a third-party vendor can actually increase operational risk, potentially making your company’s internal processes more complex than you may be prepared to handle.
- Transaction Risk is focused on service and product delivery. Any number of situations, such as technology failure, fraud, and even basic human error can result in a major third-party vendor faux pas that affects not only a vendor’s company, but could affect yours as well.
Legal & Regulatory Risk
Companies and vendors are tied to each other with legally-binding contracts. Risk arises from a vendor’s potential to break these contracts and not fulfil their expected duties. On top of that, a vendor’s violation of government regulations regarding anything from cybersecurity to environmental laws can have negative repercussions on that vendor’s clients as well.
- Compliance Risk is increasing as more regulations are put in place to protect customers as well as companies from cyber threats. While a vendor’s failure to comply won’t directly reflect poorly on your reputation, it can put you at greater risk of being targeted. Clients can be hit with malware, ransomware and other methods of cybercrime through the vendor’s lack of security compliance.
- Legal Risk involves any activities of a third-party vendor that exposes you to potential legal expenses and lawsuits. As previously mentioned, a vendor’s unlawful actions — whether they’re actively violating laws or neglecting to bring their own compliance up to par with government regulations — can have negative repercussions on you as a client.
As our sister company BizRatings says, “Reputation Is Your Wealth.” A vendor’s potential to damage your reputation is, of course, a major risk factor in hiring third-party services. This isn’t to say your vendors are going around gossiping with your client base about your business; being associated with a third-party vendor that gets itself into a bad situation can reflect poorly on your brand.
- Reputational Risk exists wherever a vendor’s services can directly or indirectly affect their clients’ customers. It doesn’t matter to your customers that it’s the vendor’s fault their experience was compromised — your vendor’s mistakes in front of your customers has the biggest negative impact on your brand.
Keeping on top of your third-party IT vendor can be difficult, and becomes especially confusing for businesses who outsource multiple services from multiple different vendors.
If your IT vendor is up to snuff (or if you outsource your IT support to Domain Computer Services), this is an excellent resource to use when deciding what to include in your Third Party Risk Assessments for vendors, as IT vendors receive these assessments from the majority of their clients and are typically well-versed in how they’re constructed. With these helpful notes and your IT provider’s guidance, you’ll be well on your way to perfecting every Third Party Risk Assessment your company writes and receives.
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