Understanding the Nuances of Risk – Explore Types of Third Party Risks

By: Beaconer, Dec 19, 2023

Understanding the Nuances of Risk – Explore Types of Third Party Risks

It takes a lot of complexity management to develop a third-party risk management (TPRM) program that works.


You are likely to get a migraine if you try to list all the specific risks that vendors and suppliers pose to your company. Because of this, it is beneficial to organize your TPRM program around various risk categories and to make sure that you have a strategy in place to deal with each of them.

The “known” and “unknown” hazards categories are at the most significant level. The Risks that are brought by external variables such as cyber criminals hacking are called Unknown risks. I am going to concentrate on known risks in this post. These hazards can be found by evaluating IT and OT vendors, their security protocols, and operating environments.

What Is Third-Party Risk Management?

Third-party risk management refers to the process of identifying, assessing, and mitigating risks associated with vendors, suppliers, partners, and other entities that have access to an organization’s assets, systems, or data. As companies increasingly rely on third parties for critical business functions, they can expose themselves to significant risks if those relationships are not properly managed. An effective third-party risk management program includes developing a strategy to determine which third-party relationships require oversight, performing due diligence on prospective third parties, inserting appropriate terms and conditions into contracts, and continually monitoring third-party activities for compliance.

Three Main Types of Third-Party Risks

1. Profile Risk – Definition, Examples & Mitigation

The vendor’s services for your business are the subject of the profiled risk. A third-party payroll firm most likely offers a lot higher risk to your business than an advertising agency because they have access to much more sensitive information. To support more informed, risk-based decisions and actions, each type can be assessed separately or in combination.

A vendor’s services and the environment in which they operate are taken into account while determining their profiled risk (also known as risk categorization or stratification). Since it has access to and is bound by more regulations than your advertising agency and has access to more sensitive data, your payroll provider, for instance, will be at a higher risk. Internal vendor managers or procurement teams frequently have the data needed to calculate profiled risk. Some examples of variables influencing profiled risk are as follows:

  • Services rendered by the supplier.
  • handled data types and volumes.
  • Location (for reasons like geopolitics).
  • Industry (for compliance factors, for example).

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You can automate profiling and other crucial steps in the vendor onboarding process with the aid of TPRM solutions. They incorporate profiling questionnaires, distribute them automatically, and manage the workflow of responses. With the resulting profiles, you can efficiently rank vendors for upcoming inherent risk analyses and choose other requirements for due diligence. You should be able to manage and update profiles throughout the vendor lifecycle using TPRM technologies as part of a more all-encompassing vendor performance management approach. Make sure you do not skip the profiled risk step because it provides important context for choosing the right questionnaires for each level of your third-party ecosystem’s vendors. You will invariably ask the incorrect questions, gather irrelevant data, and arrive at inaccurate inherent risk scores without the context of profiled risk.

2. Inherent Risk – Definition, Examples & Mitigation

An inherent risk is one that already exists and is posed by the vendor before any remediation actions are taken. Poor financial standing, poor information security procedures, or operational inefficiencies are a few examples of inherent risk.

Prior to considering any controls required by your company, inherent risk is the degree of risk associated with a vendor. By supplying information about a vendor’s current security, privacy, compliance, and other risk factor policies and practices, inherent risk goes beyond profiled risk. Internal risk assessments are useful in this situation. Vendor assessment forms and risk assessment frameworks consist of:

  • The Custom Vendor Security Questionnaire.
  • Industry-recognized surveys, such as those from the Health Information Sharing and Analysis Centre.
  • Compliance checklists like the Beaconer Compliance Framework, which corresponds to several laws and business regulations.

Internal risk assessments and ongoing, external threat monitoring should be the foundation for inherent risk scores.

Prior to considering any particular controls required by your company, Because of this, you are only getting a partial picture of third-party risk if you are basing inherent risk scores solely on assessments. Since assessments are trust-based, you must rely on the information supplied by your vendor or supplier. They are also time-dependent, so the risk picture you receive only pertains to the assessment’s timing (typically once a year). Because of this, it is crucial to include external vendor risk monitoring in your system of internal risk scoring. By utilizing ongoing external vendor risk monitoring and threat intelligence services, you may confirm assessment replies and close any gaps that may exist between point-in-time assessments. By merging cyber, enterprise, and financial event data for every supplier from numerous sources, you can connect publicly available risk findings with reported controls data. Consider the possibility that you will find discrepancies between the vendor’s stated password management procedures and proof of hacked credentials on the dark web. Additionally, because monitoring is ongoing, you can keep track of outside developments that might affect the level of risk you assume from a particular vendor.

Supplier Hazard Table For accurate identification of inherent risk, use a matrix that combines impact and likelihood when calculating risk assessment scores.

Combining profiles, internal evaluations, and external monitoring can provide you with more thorough and current insights on third-party risk. You can correlate and analyse this data with the aid of a good third-party risk management system to identify specific risks and offer remediation advice. Additionally, it will provide reporting and workflow management features that let your team work with your vendors on corrective action plans.

Using a third-party risk management platform can simplify vendor collaboration.

3. Residual Risk – Definition, Examples & Mitigation

Risk that is still present after a vendor has implemented sufficient corrective measures is known as residual risk. Your risk management team will determine what residual risk is and isn’t acceptable.

Establishing an appropriate degree of residual risk across your vendor ecosystem is one of the main objectives of TPRM. Even though it’s impossible to eliminate vendor risk, there comes a time when the benefits of their service outweigh any potential drawbacks that may still exist.

Therefore, residual risk is the amount of risk that is still present after the vendor has implemented the mandatory controls for your organization. Your vendors must implement any “must-have” precautions required by your business to provide safe and legal services in order to reach the specified level of residual risk. These could involve implementing corrective actions to immediately address an exposure, like patching an out-of-date billing system. They also cover the implementation of corrective measures, such as stepping up supervision when dealing with particularly sensitive data.

It is noteworthy that residual risk is contingent upon the extent of the vendor engagement and the risk tolerance of your organization. Small to medium-sized businesses usually accept industry-standard or baseline risks and don’t have any particular “must-have” controls. But if you have determined which controls are essential, then just comparing risk to a benchmark would put you in the category of inherent risk. If you mistake it for residual risk, it could give you the wrong sense of security and result in inaccurate reporting.

You can successfully navigate the route from profiled risk to inherent risk and residual risk with the aid of a third-party risk management system. For instance, your TPRM solution should automatically connect monitoring, assessment, and profile data to any specific security controls or compliance requirements that your company has established.

Mitigate Third-Party Risk With Beaconer

It is of paramount importance to comprehensively manage and mitigate third-party risk as the threat actors mold their old ways and are building sophisticated methods to make successful intrusions.

Here are the various methods of mitigating the third party risk with the help of Beaconer:

Assess Vendor Risk

Beaconer’s platform allows you to thoroughly evaluate third-party vendors across several risk categories like financial health, security standards, compliance controls, and more. Customizable risk scoring provides visibility into vendor weaknesses.

Continuously Monitor Vendors

After initial vendor screening, Beaconer’s software continuously monitors your entire vendor ecosystem for emerging risks and changes in existing vendor risk profiles. Automated alerts notify you of vendor risk increases.

Respond to Incidents Quickly

When vendor risk incidents occur, Beaconer’s platform equips you with mitigation workflows to respond appropriately. Impact analysis features assess damage severity so you can prioritize response. Remediation tools facilitate direct vendor engagement.

Report on Risk Reduction

Dashboards and reports in Beaconer track your third-party risk exposure over time, proving the risk reduction value delivered by our software. Custom reporting illustrates ROI and risk mitigation progress to leadership and auditors.

With preventative assessment, ongoing monitoring, swift response capabilities, and robust reporting, Beaconer empowers organizations to effectively reduce third party risks.

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With Beaconer you gain unprecedented visibility into third-party risk. Our platform goes beyond questionnaires to derive insights from thousands of public and private data sources. This allows quicker, more accurate risk assessments to help inform business decision-making. Whether you need to evaluate new suppliers or monitor existing relationships, Beaconer has the tools to systematically manage and mitigate third party exposures.

Author Bio

Nagaraj Kuppuswamy

Nagaraj Kuppuswamy is the Co-founder and CEO of Beaconer, an esteemed enterprise specializing in managed third-party risk using the cloud native AI based solution. With an extensive portfolio of accolades and industry certifications, Nagaraj stands out as a seasoned expert, boasting over 16 years of dedicated involvement in the field of Cybersecurity. Throughout the course of their career, he has predominantly focused on elevating the realm of third-party risk assessment.


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