Thanks to globalization and digital transformation, businesses increasingly rely on external vendors, suppliers, and service providers as they expand. Third-party risk management (TPRM) mitigation is necessary in the wake of the business’s exposure to third-party risks, even to the fourth party.
Research by the Ponemon Institute found that 74% of businesses that experienced a data breach reported that it was due to third-party risk. This means most businesses are not properly managing or mitigating third-party risks.
This comprehensive guide will cover risk assessment approaches, explain how to develop TPRM mitigation strategies and measure their effectiveness.
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Key Takeaways
TPRM mitigation starts with risk assessments, then risk prioritization and deciding on appropriate risk mitigation methodology.
A business can adopt risk mitigation techniques, including risk transfer, avoidance, reduction, and acceptance.
Risk mitigation is not done only once. Rather, it is a continuous adaptation to an evolving risk landscape.
Understanding TPRM Mitigation
Risk is the calculation of the likelihood and impact of a threat. That is, the likelihood of a threat being exploited and the impact the incident has on the business. TPRM mitigation is an effort towards minimizing the likelihood and impact of a threat. That is, reducing the probability that the threat will be exploited and reducing the impact an incident will have on business operations.
TPRM mitigation measures and controls policies that a business puts in place to reduce the likelihood or potential impact of adverse events caused by external vendors, suppliers, and business partners.
In previous articles, we gave an overview of a TPRM program. One of the components of a TPRM program is mitigation. Let’s delve deeper into what TPRM mitigation entails.
The Role of TPRM Mitigation
Businesses strategizing TPRM mitigation will have the advantage of controlling their risk exposure where third-party relationships are concerned. Identifying vulnerabilities, threats, and risks early on can help businesses avoid financial setbacks in fines, penalties, and compensation for data breaches, non-compliance, or reputational damage due to incidents.
In addition, having a TPRM mitigation strategy is a strong pointer to business resilience. It shows rather than tells that such a business is proactive in responding to cyber incidents, thereby minimizing potential damage from service interruptions, data leaks, and other risks from third parties.
Core Components of TPRM Mitigation
In the broader scheme of risk management, mitigation is a sub-function. Several components of a TPRM mitigation program are detailed below.
Risk Assessment: Businesses cannot manage risk blindly. To know what they are up against, they must first assess their assets, people, and processes to identify potential or active risks.
Risk Prioritization: Depending on whether a risk is low, moderate, or medium, prioritizing will help businesses efficiently allocate their scarce resources in their mitigation efforts.
Mitigation Strategy Development: Businesses must decide on a mitigation method for each identified risk. Mitigation techniques include avoidance, transfer, reduction, and acceptance. More details on these soon.
Mitigation Planning: After deciding on a mitigation technique to adopt, it is necessary to plan the activities, timelines, resources, and success metrics necessary to implement the strategy.
Mitigation Execution: This is where technical controls, process changes, training, and contract clauses are implemented during onboarding, management, and offboarding of third parties.
Performance Measurement: Knowing how the adopted mitigation technique performs is helpful for evaluating effectiveness and identifying any gaps. Performance is measured against the success metrics earlier defined.
Reporting: In a dynamic business ecosystem where personnel change often, reports can help new hires stay grounded, serving as a playbook for their risk management efforts. Also, the board and executives (including external partners) need accurate reporting on the risk levels and mitigation strategies adopted.
Continuous Improvement: Risk management is not a one-off affair. Several factors, from new services and products to new regulations and policies, can change the status quo and risk dynamics. Periodic assessment, monitoring, and reporting will keep the business ecosystem safe.
The Risk Assessment Phase
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As already mentioned, the first step is to carry out a risk assessment of all third-party relationships, whether vendors or business partners. In the risk assessment phase, assessment activities identify risks based on the third party’s nature or entity type. Ongoing risk assessments can reveal residual risks after inherent risks have been mitigated.
Risk Identification Approaches
The risk assessment phase examines the internal environment and external ecosystem of third parties. But how is this done? This is where risk identification approaches come in. Common methods used to identify risks include:
Risk Surveys: In-depth questionnaires covering a wide range of risk and security topics such as privacy, incident responses, regulatory compliance, etc.
On-site Risk Assessments: This involves visiting a third party’s on-premise location to inspect the facilities, processes, systems, and controls through onsite audits.
Document Analysis: Review all legal agreements, insurance policies, financial statements, audit reports, incident response reports, and related documentation.
OSINT: Leverage open-source intelligence and research through social media, regulatory filings, judicial notices, web pages, and more for red flags.
Categorizing and Prioritizing Risks
Earlier, we mentioned that after risks are identified, the next step is prioritizing them so the business can decide what to handle first. Also, risks can be categorized based on their criticality. When categorizing and prioritizing risks, consider the following:
Likelihood of Occurrence: Considering the entity type, controls in place, and industry reports, gauge the probability of exploiting the threat.
Potential Impact: Peradventure, if an incident occurs, estimate the level of damage done to business continuity, service availability, finances, and customers.
Inherent vs. Residual Risk: It’s possible to categorize risk as inherent if it’s related to the type of third-party relationship or residual if it still falls through the gaps after implementing mitigation measures.
Risk Interdependencies: Several risks combined may compound their impacts on a business.
Developing Mitigation Strategies and Controls
Assessing and prioritizing risks helps businesses decide on an appropriate mitigation strategy tailored to their risk appetite and ecosystem. For instance, risk reduction or transfer may be adopted for high-likelihood, high-impact risks. Earlier, we briefly listed the different mitigation techniques a business can adopt. Now, let’s explore them in detail.
Risk Avoidance: Businesses decline to engage with third parties classified as unacceptably high risk. Where there is an ongoing assessment, risk avoidance is when a business discontinues a third-party relationship where the identified risks cannot be mitigated to acceptable tolerance levels.
Risk Transfer: Businesses shift risk liability to another, usually through taking up insurance or ensuring third parties have insurance policies.
Risk Reduction: Businesses implement controls, training, processes, and tools to lessen the likelihood of exploiting a threat or potential impact materializing.
Risk Acceptance: Where the cost of impact is less than the cost of mitigation, some businesses may opt to adopt risk acceptance. These are often residual risks where mitigation may not be feasible or cost-effective.
Transferring Third-Party Risks
In a risk transfer mitigation strategy, businesses assign liability to another entity or the third party in question through:
Indemnification Clauses: Contract terms obligate the third-party vendor, supplier, and business partner to pay damages resulting from their actions.
Insurance Requirements: Businesses require their external business partners to hold adequate cyber insurance coverage for risks, errors, and omissions.
Performance Bonds: They are similar to insurance requirements requiring third-party insurance guarantees.
Outsourcing Agreements: Businesses outsource risk mitigation efforts to another entity, like Captain Compliance.
Own Insurance Policy: The business uses a cyber insurance policy to help recover from third-party incidents.
Avoiding Unacceptable Risks
Avoidance may be the only advisable option when a third party is classified as high-risk. In this case, businesses can adopt any of the risk avoidance tactics below:
Termination: Amicably ending partnerships and engagements where the third-party risk levels exceed the business risk tolerance levels.
Transition: Rather than using an external business partner, businesses can hire in-house roles to fill the need or partner with another lower-risk risk third party.
Rejection: Businesses can opt not to engage prospective business partners that pose a high risk.
It is important to note the other side of the coin when adopting these risk mitigation strategies: potential business disruption, longer procurement cycles, and lost business opportunities.
Reducing Risk Likelihood and Impact
To decrease the likelihood of the occurrence or impact of an incident, businesses can employ various means of risk reduction through implementing policies, controls, tools, and other safeguards. Examples of these include:
MFA: Multi-factor authentication reduces the risk of unauthorized access.
Encryption: Data encrypted in transit and at rest protects sensitive data from leaks or exposure.
Access Controls: Implements the least privilege principle that limits access to only what is necessary to perform job tasks.
Data Loss Prevention: Configuring this ensures that users do not send sensitive business data out of the systems. It reduces the risk of unauthorized exfiltration.
Business Continuity Planning: How fast can a business get back on track after an incident? This policy helps lower potential downtime.
Ongoing Audits: The business landscape and cyberspace are dynamic. Periodic monitoring helps improve visibility into emerging risks.
Security Training: The weakest links are humans. Training can help reduce human errors and lower the chances of falling victim to phishing attacks.
Accepting Residual Risks
For low-risk levels, businesses may consider formally accepting it where the impact cost is lower than the cost of mitigation. Formal acceptance means defining the particulars of a risk acceptance policy. The following must be in place to be valid.
Risk Acceptance Authority: Obtain appropriate sign-off from management on accepted risks.
Risk Exposure Limits: The business must have defined thresholds for risk exposure and adhere to them.
Risk Acceptance Documentation: Accepting risk is not to be done orally, perhaps during a board meeting. Oral acceptance should be reduced to writing. Also, all risks accepted should be well documented and categorized.
Reassessment Protocols: The business ecosystem is dynamic; acceptable risk today may be unacceptable tomorrow. Ensure accepted risks are re-evaluated periodically.
Creating Mitigation Action Plans
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So far, we have discussed how to carry out risk assessments, prioritize the risks identified, and adopt risk mitigation techniques. In this section, we suggest an outline to follow for your business risk mitigation action plan. A documented plan creates transparency and accountability, including serving as a future reference.
Mitigation Objectives: The three legs—risk reduction goals, business risk appetite, and strategic priorities—must balance equally.
Mitigation Scope: Define the risks and third parties the risk mitigation plan will cover.
Required Resources: In implementing the risk mitigation plan, what resources—funding, personnel, and tools—will be required?
Implementation Timeline: A time-bound roadmap for deploying mitigation plans includes milestones, phases, and schedules.
Mitigation Procedures: Like standard operating procedures, documentation can serve as a playbook for executing risk mitigation plans.
Mitigation Enforcement: Businesses must ensure third parties comply with risk mitigation requirements like passing assessments and audits and keeping to contractual obligations.
Performance Metrics: How will the success of TPRM mitigation be measured? What KPIs have priority? These will help measure effectiveness and identify any gaps.
Implementing and Monitoring Mitigation Controls
In managing third-party risks, businesses must ensure consistent execution and continuous monitoring of risk mitigation plans.
Consistent Execution
For better results in risk mitigation, businesses must ensure consistency in executing their risk mitigation plans. This means:
Implementing controls and processes by deploying technical, legal, and administrative controls based on security standards and best practices may also require training all personnel, from executives down to the last person standing.
Incorporating vital contract terms like indemnity, insurance policy, and audit rights.
Third parties that fail risk assessments will be mandated to make procedural changes or adopt policies that address priority risk areas.
Perform audits of internal and external systems of third parties to account for risks and decide on risk mitigation strategies.
Monitoring compliance through security requirements, policies, questionnaires, and certifications.
Continuous Monitoring
As earlier mentioned, executing a risk mitigation plan is not a one-off affair, as risk levels may change with changes in the business ecosystem. In addition, continuous monitoring helps businesses discover residual risks. There are approaches businesses can adopt for continuous monitoring.
In the preceding sections, we talked about how to identify risks. This can also be used to develop a risk indicator that alerts businesses to any risk levels of likelihood and impact changes.
Performing periodic risk reviews will help a business detect control gaps or lapses after prior risk mitigation plan execution. Lastly, tracking KPIs can draw attention to metrics like policy compliance rates, control adoption, and audit findings.
Reporting on the State of Risk Mitigation
Instilling a reporting culture will help maintain stakeholder visibility into TPRM mitigation plans. Moreover, reporting might be mandatory in highly regulated industries to foster the sharing of information about security best practices.
Outline of a TPRM Mitigation Report
What should you include in your first TPRM mitigation report? The list below will be helpful.
Executive Summary
Mitigation Plans and Implementation Status
Risk Assessment Results
Risk Mitigation Implementation
KPIs, Metrics, and Performance
Residual Risks and Control Gaps
Reporting Practices
Internal reporting often reflects TPRM mitigation and is usually a must-have for several purposes, ranging from confirming business partners to fulfilling regulatory obligations.
Further reporting practices could include different versions of a report for different audiences, such as the executive and board, departments, and regulators.
Measuring TPRM Mitigation Effectiveness
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Businesses can use metrics to quantify the performance of a mitigation plan. Metrics also enable data-driven reviews of a risk mitigation plan and identify improvement areas.
Key Performance Indicators
So, what exactly should businesses measure? The list below can get your business started.
Risk tolerance levels
Risk assessment findings
Audit findings
Mitigation policy compliance rates
Residual risk levels
Service level impacts or disruptions
Another way to measure the TPRM mitigation plan’s effectiveness is to conduct a post-mitigation risk assessment. This evaluation will provide direct insight into the success of the risk mitigation plan. Also, it can help determine the maturity level of the business risk posture.
Continuous Improvement
The threat landscape and the business ecosystem continuously evolve, necessitating a risk mitigation plan incorporating continuous improvement.
Lessons learned from previous risk mitigation executions should be embedded in updates to new plans. Are there any audit deficiencies, such as lapses or gaps? Their mitigation can be prioritized. After an incident, was the root cause identified?
New CVEs are announced weekly, and OWASP is updated with new risks annually. This means businesses must update their risk mitigation plans to reflect newly identified threats.
Lastly, maintaining detailed documentation of plans, implementation, results, and challenges can strengthen management commitment.
Closing
Managing third-party risks involves several components, including mitigation. TPRM mitigation is essential for the security of a business ecosystem.
Regardless of your business’s chosen risk mitigation techniques, our experts at Captain Compliance can help drive the successful implementation of the desired risk mitigation plan.
FAQs
How do you mitigate third-party risk?
TPRM techniques include risk avoidance, transfer reduction, and acceptance. Avoidance means the business could terminate the partnership or refuse to accept a proposal where the third party is at high risk. Transfer means the business picks up a cyber policy or requires third parties to maintain an insurance policy. Reduction means the business implements technical, legal, and administrative controls to reduce the likelihood and impact of risks. Acceptance is when a business formally accepts a risk, usually because the impact cost is lower than the cost of mitigation.
What is TPRM Mitigation?
The process of identifying risks, prioritizing them, and implementing controls to reduce their likelihood of occurrence and impact is known as TPRM mitigation.
Learn more about risk mitigation with this ultimate guide to Third-Party Risk Assessment Checklist.
How can you measure the effectiveness of TPRM mitigation?
KPIs and metrics such as risk tolerance levels, risk assessment findings, audit findings, mitigation policy compliance rates, residual risk levels, and service level impacts or disruptions can help measure the effectiveness of a TPRM mitigation plan.
What are some best practices for TPRM mitigation?
TPRM best practices include comprehensive risk assessments, risk prioritization that aligns with business goals and risk appetite, incorporating indemnity clauses and other relevant contractual obligations, implementing appropriate controls, and continuous monitoring of risk mitigation plans.