How to Mitigate Third-Party Risks

Failing to address your organization’s third-party risks can have serious consequences. Picture this: your organization is a ship sailing smoothly through calm waters. The dangers of reputational damage, financial losses, and operational disruptions loom like dark clouds on the horizon. If you're not ready to navigate these turbulent waters, the impact can be devastating, leaving your organization struggling to regain stability.

So, how do you mitigate third-party risks? Following key third-party risk management (TPRM) activities throughout the lifecycle of your third-party relationships will equip your organization to address potential risks proactively. This blog will show you the steps for effectively mitigating third-party risks, empowering your organization to navigate these challenges with confidence. 

Identifying Vendor Risk Before Mitigation 

Before your organization can effectively manage third-party risks and establish appropriate contract provisions, it’s essential to first identify the risks associated with the third party to determine if the products or service is critical to your organization and assign a risk rating.  

This identification occurs during the risk assessment and due diligence process, where your organization evaluates the types and levels of risks present in the relationship, including financial, operational, reputational, and information security risks. Once these risks have been identified, your organization can determine the necessary contract provisions to mitigate them.

Mitigating Third-Party Risks with Vendor Contract Negotiations 

Your third-party contract is one of your most important tools for mitigating third-party risk. A good third-party contract is negotiated during the third-party onboarding process and will clearly outline how the third party will mitigate identified risks. This is done using both preventative controls (meant to prevent an action) and/or detective controls (meant to identify an action after it happens).  

Your organization has the most leverage before the contract is signed. A carefully negotiated and written contract will legally require the third party to minimize specific risks. Once a contract is signed, your organization has little recourse. To effectively protect your interests, contracts should be thoughtfully crafted and written to proactively address and minimize potential third-party risks. 

Related Content: Mitigating Vendor Risk Through Effective Contract Management Practices 

Here are key provisions to help mitigate third-party risks: 

• Insurance and indemnity – Your contract should be specific when it comes to the types and amounts of insurance you require your third party to have. It should also explicitly state that the third-party vendor is indemnifying your organization against loss or damage resulting from the vendor's actions or inaction. 
• Service level agreements (SLAs) – The contract should include a clear set of minimum guidelines (performance, timeliness, quality, etc.) for the third party’s products or services. You may also choose to specify any penalties that will be enforced if the third-party vendor fails to meet your SLAs. 
• Compliance – Compliance provisions compel your third-party vendor to ensure they have the required licenses to conduct specific activities. You should also detail the regulatory and internal requirements the third party must comply with.  
• Use of subcontractors – Your third-party contract should specify whether your vendor can use subcontractors (their third parties/your fourth parties) to provide or support your products or services. If you’re planning to allow subcontractors, consider adding language requiring the third party to disclose any primary existing subcontractors and obtain written permission before adding new subcontractors that support your organization’s products or services. Consider adding a clause requiring your vendor to provide evidence of sufficient due diligence for their subcontractors. 
• Right to audit – Including a right to audit clause in your contract ensures you can review your third party’s policies, procedures, work products, or other information when needed. This should allow you to inspect the vendor’s processing facilities as well. 
• Ownership and license – Contracts should address the ownership of intellectual property, proprietary processes, data, and any other information assets. 
• Right to terminate the contract – Make sure the contract includes termination conditions. Termination for cause, such as breach of contract, is standard. Consider adding a clause allowing for termination for convenience. Don't forget to review termination notification periods and early termination fees. 
• Confirm information security practices – Information security and privacy provisions require your vendor to take measures to safeguard data – both yours and your customers'. Confirm that the vendor has documented policies related to access management and data handling, including encryption, storing, transferring, and destroying data. 
• Employee training – User errors are a leading cause of cybersecurity incidents, so it's best to validate that your vendor provides regular and effective training for its employees. 

4 Ways to Mitigate Third-Party Risk During the Vendor Relationship 

Third-party risk is a moving target. New risks emerge, and existing risks evolve throughout the course of your relationship. That’s why proactively mitigating third-party risk is a must.  

Here are four activities to mitigate third-party risk during the relationship: 

1. Conduct periodic due diligence – Regularly collect, review, and assess due diligence throughout the third-party engagement. Periodic due diligence should confirm that the third party’s control environment is still sufficient and identify any new or emerging risks. If there are any changes to the vendor’s risk, this should be documented, and a mitigation plan should be determined. How frequently periodic due diligence occurs depends on the third party’s risk rating and criticality. However, other factors can trigger a review, including regulatory changes or performance issues.  
2. Manage third-party performance – This third-party risk mitigation strategy can identify potential problems before they become an issue. Once SLAs are determined in the third-party contract, they should be monitored and tracked. A decline in performance or quality can indicate other potentially hidden problems, so it’s crucial to pinpoint the root cause early.  
3. Perform risk monitoring – In addition to formal periodic risk reviews and due diligence, you need to monitor your third party’s risk year-round. Remember, third-party risk mitigation is never just a one-time or periodic activity – it should be consistently monitored throughout the relationship. Consider adding monitoring and alert services to help you keep track of changes in your third party’s financial health or cybersecurity posture and stay aware of negative news or lawsuits. 
4. Regular communication – Don't forget the importance of regular communication and dialogue with your third party as an ongoing risk mitigation strategy. Don’t operate under the assumption that "no news is good news. Real-time person-to-person conversation can help both the third party and your organization communicate about upcoming changes, any potential issues, and overall priorities. Third-party risk mitigation is most effective when both parties are invested. It’s recommended to schedule formal conversations and also casually check in once in a while too. 
   
   Related Content: Dollars and Sense – The Real Value of Ongoing Third-Party Monitoring 

How to Mitigate Third-Party Risk During Offboarding

Third-party risk mitigation is a crucial process during both onboarding and ongoing monitoring. However, it’s equally important for your organization to address risk mitigation when ending the relationship with the third party. There are many risks associated with the termination process, so your organization should have a clear risk mitigation strategy in place for the offboarding stage as well. 

Let’s look at some strategies to mitigate third-party risk during offboarding: 

• Review the contract – Your third-party contract should outline the process for terminating the relationship and any requirements that both parties should follow. Before initiating the offboarding process, you should review the contract to ensure your organization follows the correct steps. 
• Ensure data is returned or destroyed – Your organization may still be subject to third-party risk even after the relationship has ended. To mitigate these risks, it’s important to ensure any of your organization’s data is either returned or destroyed. This process may also be outlined in the third-party contract. 
• Understand continuing service requirements – When notifying a vendor that you'll be terminating the relationship, be prepared for the work to stop before the agreed-upon date. Products or services you may have relied upon for an extended time may be cut off prematurely, so your organization should have a plan to either replace the product or service, end it, or transfer it to another third party. 
  
  Related Content: Vendor Offboarding: How to Prevent Common Challenges 

4 Tips on How to Mitigate Third-Party Risk 

By mitigating third-party risks, your organization will be better protected and prepared for any potential risk events or consequences. However, this can also be a challenging process, especially if your organization has limited resources or extensive third-party inventories. 

Here are four tips to ensure your third-party risk mitigation strategy is effective: 

• Build a third-party risk management framework – A third-party risk management framework provides a structured and consistent approach to risk mitigation. This helps ensure all third parties are monitored and managed consistently, reducing the likelihood of unexpected disruptions. A framework should include third-party risk management governance, oversight, documentation, reporting, roles, responsibilities, tools, and processes.  
• Understand your organization’s risk appetite – Your organization should use multiple risk mitigation techniques to effectively mitigate third-party risks. For example, insurance and indemnification clauses can allow your organization to transfer financial responsibility for third-party incidents. However, while implementing preventative and detective measures can help minimize the risks, some risks can’t be fully mitigated. Your organization will have to decide whether to accept the remaining risks or move on from the third-party relationship. Establishing a third-party risk appetite for your organization can help guide you through these decisions.  
• Document everything – Good documentation is essential for reducing risks associated with third parties. From conducting risk assessments, performing vendor risk reviews, and collecting due diligence documentation, keeping evidence of your activities is not only a best practice but also a regulatory requirement for many industries. It’s important to monitor and track the terms of third-party contracts, as well as the related activities, issues, and processes that occur after the contracts are signed. When problems with third parties arise, they should be documented and tracked until they are resolved, ensuring effective risk mitigation. Thorough documentation is also crucial for demonstrating that your third-party risk management program is functioning properly. 
• Keep senior management informed (and involved as necessary) – When it comes to your critical third parties, your senior management should be involved in approving contracts and risk mitigation plans. Senior management should always approve any risk acceptances or exceptions to your third-party risk management policy. 

Navigating third-party risks can feel like sailing through uncharted waters. However, by charting a clear course that includes essential risk management activities, you can ensure your third-party relationships provide more benefits than liabilities for your organization. By creating strong contracts, actively monitoring potential risks, and adhering to best practices, your organization can effectively navigate and mitigate these risks effectively.