In May 2021, a study conducted by the Ponemon Institute found that 51% of companies had been the victim of data breaches brought about by subcontractors. This fact not only illustrates one of the many cybersecurity challenges for companies in 2022, but also highlights the need to put the management of third-party cybersecurity risks at the top of your priorities.
Over the past years, a lot of effort has been made in cybersecurity to try to develop better ways of managing risk, and companies that have invested in Third-Party Risk Management programs have turned out to be more resilient to the COVID-19 crisis. These organisations protect themselves simultaneously against operational risk, legal risk – regarding compliance with the General Data Protection Regulation (GDPR) –, and financial risk.
As the “extended enterprise” model has been a huge success for quite some time, the necessity of managing cybersecurity third-party risks has emerged.
The extended enterprise model has been dominant since the mid-1990s, with car manufacturer Chrysler being the first to adopt it. The extended company model relies on the digitalisation of its processes to propel partnerships even further. As a "lead firm”, it creates added value, while third-party companies provide the skills it lacks.
These third-party vendors interact with the lead firm through new ways of sharing digital information. The extended enterprise is characterised by this digitalised sharing of information and processes, whether that is via computer networks, software, messaging, or data exchange systems.
This broad third-party ecosystem has the advantage of creating new growth synergies. However, this ecosystem also constitutes a favourable ground for the emergence of cyber risks, as each partner represents a potential entry point for cyberattacks.
At C-Risk, our method of risk management, vulnerability assessment, and cybersecurity control is based on the FAIR™ standard, according to which, risk is an uncertain event capable of generating an asset-related loss. That loss is characterised by its probability of occurrence. Risk thus becomes “the expected frequency and magnitude of future loss”.
Information security risks are diverse and can take different forms from one company to another, although third-party cyber risks tend to remain the same:
Third-party cyber risk therefore falls under operational, but also financial, reputational, legal, and regulatory risk.
In legal terms, "third party", or "third-party company", designates a legal entity external to a business relationship. Third parties can be made up of many external stakeholders:
Obviously, the types of third parties differ from one lead firm to another. It is always necessary to go through cyber risk assessment and cybersecurity strategy reviews to identify those third parties. These are critical processes because they prevent the third-party ecosystem – whose purpose is to bring additional skills – from threatening either the activities or the reputation of the lead firm.
Third-Party Risk Management (TPRM) involves designing and then executing a continuous preventive procedure. In cybersecurity, TPRM is, indeed, more about preventing damage than repairing it. This approach calls for management centralisation and continuous monitoring of third-party network and IT processes.
The task may therefore require putting someone (risk manager or CIO) in charge of cybersecurity TPRM, and in any case, several divisions will have to cooperate:
There are various methods for setting up an effective TPRM programme, all of which rely on two mainstays: verification of third-party due diligence, and continuous monitoring of the risk for as long as the business partnership lasts.
At C-Risk, our third-party risk analysis is based on the FAIR™ Analysis method, whose process starts by determining the extent of the risk, i.e., the potential “loss event”.
You first need to determine which asset is at risk – in other words, which element of your operation would lose value or result in your civil or criminal liability if it were compromised. In such a scenario, you also need to pinpoint the threat agent, which is why you should list all the suppliers with which your structure exchanges data.
Finally, you should also estimate the consequences of that risk. According to the CIA model, those consequences can fall under three categories:
The second step of this process is to estimate the expected frequency and magnitude of the potential financial loss. Ultimately, you should schedule a meeting with the most exposed partners of your supply chain to discuss their cyber risk mitigation strategies. Some third parties are more vulnerable than others, due to their:
First and foremost, here are a few fundamental requirements:
In the event that a third-party risk becomes remarkably high, you should follow the 4T rule and select one or more of the following options:
The current interest in Third-Party Risk Management can be explained by the increase in information security and confidentiality breach events.
Whether they are IT-related or not, third-party risks can have operational, reputational, legal, regulatory, and financial repercussions on the lead firm.
If you conduct third-party cyber risk assessments on a regular basis, you will be able to prevent behaviours that might entail IT vulnerabilities. This is also one of the best possible means of preparation for ICO inspections.
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