Why is third party risk management important?
As each company is taking adequate measures to close cybersecurity risks, cybercriminals will locate the rest. Vendor risk management involves a lot to close the common security gap that is often exploited.
Organizations often work with vendors who need more security infrastructure and processes on par with the hiring company. Cybercriminals often derive benefits from such weaknesses by using them to gain access to intricate systems. To reduce risk exposure to any company, the impact of vendor risks is minimized. These firms create and implement vendor risk management programs to upgrade security and streamline the entire operations.
Types of Vendor Risk You Must Monitor
Now that you understand the essence of a strong vendor risk management program, you can hardly dive head-first into creating one. You have to know about the types of risks present. After identifying and assessing vendor risks properly, you can handle them effectively.
The following are a couple of types of vendor risks that the companies often face:
Cyber Security
The cost of cybercrime across the cybersecurity market is estimated to rise by $5.7 trillion between 2023 and 2028. Due to the pace at which third party cyber risks are evolving, it is important to monitor vendor risks. You should initially identify the company’s risk threshold at acceptable levels for assessing third-party security performance.
While assessing performance, it is essential to aim toward the affected system present in the vendor network and continue to update these evaluations to match the ever-rising cyber threats. This constant process helps build vibrant cybersecurity measures that can proactively manage the risks connected to third party vendors.
Strategic Risk
The possibility that the third-party vendor might prevent your firm from achieving its objectives, resulting in strategic risks. For instance, a reseller across the global markets is acquired by one of the competitors that closes every ability to sell the goods in the markets till you locate the new distribution channel.
It is important to remember that these are the topics that overlap frequently. For example, whenever a company is suffering from a security breach and customer data gets stolen, it presents compliance, operational, reputational, and financial risks and leads to strategic risk.
Regulatory Risk
Regulatory or compliance risk is the scope where the third party vendor violates the regulation or rule that you are contractually obligated to follow. Along with the internal institutional policies, vendors should follow the laws, regulations, and rules that are set through the regulatory bodies impacting the industry and business.
If compliance needs are not fulfilled, your firm is often subject to heftier fines, enforcement actions, and reputational damages.
Market Risk
At times, the changes in the climate and economic conditions of the market might impact the relationship between a supplier and a customer. For example, it is harmless to assume that owing to the evolving climates of the market, your firm will decide to move from this marketing-led growth to the product-based growth models.
The marketing operations for this model are significantly different from the earlier months as you require a series of features and operations that the SaaS vendors might not offer. In a couple of instances, the vendor might shift their direction to meet the evolving needs of the customers; however, these are the changes that need to align with your company.
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Reputational Risk
At times, suppliers might indulge in activities that leave a negative outlook toward your brand. This could range from using pirated tprm software to the ill-treatment of employees, with their behavior ending up throwing negativity toward your brand due to the customer-supplier relationship.
System Failure Risk
A system failure occurs when something happens to the system and is not communicated with the system of the third party provider or whenever the system fails. Service interruptions, data loss, and business downtime result from system failure. A trustworthy backup strategy is one tactic for minimizing the chances of system failure.
You should need your suppliers to have another plan satisfying your needs. You need to test the backup strategies regularly ensuring that it is operating as planned. However, before hiring the right vendor, it is important to get the pre-qualifications for vendor registration done, benefiting the company.
Financial Risk
It involves risks, including revenue losses or exorbitant expenses due to poor financial management by vendors. Proper audits are needed to ensure that suppliers’ expenses comply with the contract conditions. The risk is often minimized by identifying the suppliers who are important for revenue generation and performance monitoring.
