As a small business owner, you likely rely on various vendors, suppliers and service providers to keep your operations running smoothly. While these third-party relationships are important for any business, they can expose your business to significant risks. Third party risk management (TPRM) is identifying, assessing and controlling risks associated with these external parties. For small businesses starting with TPRM, this guide will walk you through the fundamentals and provide actionable steps to protect your business.
Table of Contents
1. Importance of Third Party Risk Management
Small businesses often assume third party risk management is only for large corporations with complex supply chains. However, companies of all sizes face potential threats when working with external partners. Here’s why TPRM matters for your small business:
Protection Against Data Breaches: Your vendors may have access to sensitive customer or business data. A security breach at their end could compromise your data too.
Business Continuity: If a key supplier suddenly goes out of business or experiences significant disruption, your operations could halt without proper planning.
Regulatory Compliance: Depending on your industry, you may be legally responsible for the actions of your third parties. Non-compliance can result in hefty fines and penalties.
Reputation Management: Poor third party performance can damage your reputation. Remember, customers don’t distinguish between you and your vendors; they’ll hold you accountable for any issues.
Think about it in terms of a healthcare practice: What would happen if their billing service provider experienced a data breach, exposing patient information? Despite the breach occurring at the vendor’s end, the practice can face regulatory fines and lost patient trust. Implementing basic TPRM could have identified the vendor’s security weaknesses beforehand.
2. Understanding the Third Party Risk Management Process
The third party risk management process doesn’t need to be overly complex for small businesses. Here’s a simple plan to get you started:
Identify Your Third Parties: Create a comprehensive inventory of your business’s vendors, suppliers and service providers. Include cloud services, payment processors, marketing agencies and anyone else with access to your systems or data.
Categorize by Risk Level: Not all third parties pose the same level of risk. Categorize them based on:
- Access to sensitive data
- Impact on critical business functions
- Regulatory implications
- Difficulty in replacing them
Assess the Risks: For each third party, identify potential risks they might introduce. These could include:
- Data security risks
- Operational risks
- Financial stability risks
- Compliance risks
- Reputational risks
Monitor Continuously: Third party risk management isn’t a one-time activity but an ongoing process. Regularly reassess your vendors as your business relationship evolves.
For example, a small e-commerce business should pay special attention to its payment processor and web hosting provider, as these third parties directly impact customer transactions and data security.
3. Implementing Third Party Risk Management Framework
Even with limited resources, small businesses can implement a practical TPRM framework by focusing on these essential components:
Establish Clear Policies: Create written policies that outline your expectations for third parties, including security requirements, performance standards and compliance obligations.
Due Diligence Questionnaires: Develop a basic set of questions to evaluate potential vendors before engaging them. These might cover:
- Security practices
- Business continuity plans
- Compliance certifications
- Financial stability
Contract Management: Make sure that your contracts include appropriate clauses regarding data protection, service levels, the right to audit and termination conditions.
Risk Assessment Schedule: Based on each vendor’s risk level, determine how often you’ll reassess them. Higher-risk vendors might require quarterly reviews, while lower-risk ones could be assessed annually.
Consider starting with a simple spreadsheet to track your vendors, risk levels and assessment dates. As your TPRM program matures, you can explore more sophisticated tools.
4. Best Practices for Third Party Compliance
Make sure that your third parties comply with relevant regulations and standards is important. Here are some best practices to implement:
Clear Communication: Clearly communicate your compliance expectations to vendors from the beginning of your relationship.
Documentation: Keep detailed records of all vendor assessments, communications and remediation efforts. This documentation is invaluable during audits.
Right-to-Audit Clause: Include provisions in your contracts that allow you to verify vendor compliance through assessments or audits.
Compliance Certifications: When possible, work with vendors with relevant certifications (like SOC 2, ISO 27001 or GDPR compliance) that demonstrate their commitment to security and privacy.
Periodic Reviews: Schedule regular compliance checks rather than assuming ongoing compliance.
A small accounting firm might require its cloud storage provider to sign a business associate agreement to ensure HIPAA compliance when handling client financial information. Regular checks ensure the provider maintains appropriate controls over time.
5. Boosting Cybersecurity with Third Party Risk Management
Third party cybersecurity risks represent one of the most significant threats to small businesses. Here’s how to address these risks:
Security Questionnaires: Use basic security questionnaires to evaluate vendor security practices before signing contracts.
Data Sharing Limitations: Only share the minimum data necessary with third parties. Not every vendor needs access to all your information.
Access Controls: Implement proper access controls for third party users accessing your systems. Give them only the permissions they need.
Monitoring for Data Leaks: Consider using monitoring tools to detect potential data leaks. Assumed Seeds, for example, allows you to plant artificial contacts in your databases and track if these contacts receive unauthorized communications, helping identify if your data partners are mishandling information.
Incident Response Planning: Have a plan for how to respond if a vendor experiences a security breach that affects your business.
Remember that cybersecurity is about continuous improvement. Start with essential measures and reconfigure your approach as your business grows.
6. Tackling Regulatory Third Party Risk Management Requirements
Handling regulatory requirements can be challenging for small businesses. Here’s a simplified approach:
Identify Applicable Regulations: Determine which regulations apply to your business and third-party relationships (e.g., GDPR, CCPA, HIPAA).
Translate Requirements: Break down complex regulatory requirements into practical actions your business and vendors must take.
Incorporate into Contracts: Check that your vendor contracts explicitly address relevant regulatory requirements and allocate responsibility appropriately.
Stay Informed: Regulations evolve. Subscribe to updates from relevant regulatory bodies or consider joining industry associations that provide guidance.
For instance, a small online retailer collecting customer data from California residents must align its marketing analytics provider to comply with CCPA requirements regarding personal information.
7. Effective Third Party Risk Solutions
Small businesses have several options for managing third-party risk effectively:
Start Simple: Before investing in specialized software, begin with basic spreadsheets and questionnaires.
Templates and Frameworks: Instead of creating everything from scratch, leverage existing templates for risk assessments. Resources like the Standardized Information Gathering (SIG) or Minimum Viable Secure Product (MVSP) questionnaires offer good starting points.
Automation Where Possible: Look for opportunities to automate routine aspects of vendor management, such as sending periodic assessment questionnaires.
Consider Monitoring Tools: Tools like Assumed Seeds can provide an additional layer of security by monitoring how your partners handle your data. These “honey tokens” act as artificial contacts that alert you if vendors misuse information, and you can see exactly what your third parties are communicating.
Collaborative Approach: Join industry groups where businesses share information about vendor risks and best practices.
Remember that effective TPRM solutions don’t need to be expensive or complex; consistency and diligence matter more than fancy tools, especially when starting.
8. Streamlining Third Party Risk Reporting
Regular reporting helps you monitor your third party risks and make informed decisions. Here’s how to implement effective reporting:
Establish Key Metrics: Determine what matters most for your business; this might include:
- Number of high-risk vendors
- Percentage of vendors assessed this year
- Number of identified issues and their remediation status
Create Simple Dashboards: Develop straightforward visual representations of your third party risk status.
Regular Review Cadence: Schedule consistent reviews of your TPRM reports monthly for high-risk vendors and quarterly for an overall program review.
Action-Oriented Reporting: Reports need to highlight required actions, not just data. Each report should lead to specific next steps.
Document Everything: Document all risk reports and actions taken. This creates an audit trail and demonstrates due diligence.
A simple risk report might be a color-coded spreadsheet showing each vendor’s risk level, last assessment date, identified issues and remediation status. This gives you a quick overview of where to focus your attention.
Starting Your Third Party Risk Management Journey
Third party risk management doesn’t need to be overwhelming for small businesses. Start with these steps:
- Create an inventory of your vendors
- Categorize them by risk level
- Implement basic assessments for high-risk vendors
- Establish clear contracts with security and compliance provisions
- Monitor vendors on an ongoing basis
Remember that Third party risk management is an ongoing process that will mature with your business. The most important thing is to start somewhere and improve over time.
Take Action Today
The simplest way to start third party risk management is to set up some data leak monitoring practices to get a good idea of where you’re at with your third parties. Assumed Seeds offers an affordable solution to monitor how your partners handle sensitive data. Our artificial contacts act as “honey tokens” that help you detect potential data leaks and verify that your third parties are treating your information with the care it deserves.
Starting at just $1 per contact, Assumed Seeds provides small businesses with enterprise-level monitoring capabilities without the enterprise price tag. Sign up today and take the first step toward better third-party risk management.
