How to create a third-party risk management policy

How to build a third-party risk management policy

When putting together a third-party risk management policy, it might be helpful to base it on an existing framework. One model to consider is NIST's Cybersecurity Framework. The CSF is a flexible and comprehensive framework focused on risk analysis and risk management that aligns with global cybersecurity best practices.

The CSF is organized around six core functions: govern, identify, protect, detect, respond and recover. Let's examine each function and how they support a comprehensive third-party risk policy.

Govern: Establish oversight and accountability

Governance is increasingly recognized as a foundational layer underpinning all activities. Effective governance ensures accountability, oversight and alignment with organizational objectives.

Key governance actions for a third-party risk management policy include the following:

• Establish a risk management committee that includes third-party risk management.
• Develop policies, plans and procedures for third-party risk management. These plans should provide more organizational context to the following action items in this article.
• Ensure executive leadership input and buy-in.
• Perform regular reviews and updates of third-party risk policies.

Governance ensures third-party risk management efforts are sustainable, consistent and aligned with the organization's risk appetite.

Identify: Understand the third-party risk landscape

An important part of third-party risk management is to identify all third-party relationships and understand their potential risks. Develop an inventory of external parties, categorize them based on risk levels and define clear risk assessment criteria.

Key identification actions for a third-party risk management policy include the following:

• Create and maintain a third-party inventory.
• Perform a business impact analysis on third parties.
• Perform risk assessments for each third-party relationship.
• Define key risk indicators to measure and monitor third-party risk.

A strong identification process offers visibility into third parties and helps organizations proactively address high-risk relationships.

Protect: Safeguard systems and data

Once risks are identified, the next step is to implement controls to protect systems, data and operations from potential threats originating from third parties.

Key protection actions for a third-party risk management policy include the following:

• Enforce strong access control measures for third-party users and products.
• Implement encryption and data protection protocols.
• Require third parties to comply with security standards and controls, where possible.
• Regularly review and update contracts to include cybersecurity clauses.

Protective measures reduce the likelihood of unauthorized access, data breaches and security incidents resulting from third-party vulnerabilities.

Detect: Monitor third-party activities and anomalies

Continuous monitoring is critical to detect suspicious activities and anomalies within third-party environments. Implement tools and processes to identify indicators of compromise or noncompliance.

Key detection actions for a third-party risk management policy include the following:

• Implement monitoring tools for third-party activities.
• Perform periodic security audits and assessments.
• Establish a process for third-party incident reporting and escalation.
• Use automated tools to identify vulnerabilities and misconfigurations within visible systems.

Effective detection mechanisms enable organizations to respond swiftly to emerging risks and limit potential damage.

Respond: Address third-party security incidents

Despite preventive measures, third-party incidents can still occur. A clear incident response plan tailored to third-party relationships is crucial.

Key response actions for a third-party risk management policy include the following:

• Develop a third-party incident response plan -- this can be part of an overall incident response plan.
• Define roles and responsibilities during incident response.
• Communicate effectively with third-party stakeholders during incidents.
• Conduct post-incident reviews to improve future responses.

A well-executed response minimizes downtime, reduces reputational damage and enhances organizational resilience.

Recover: Restore operations and learn from incidents

The recovery phase focuses on restoring normal operations after a third-party incident and implementing lessons learned to prevent future occurrences.

Key recovery actions for a third-party risk management policy include the following:

• Develop a recovery plan specific to third-party incidents.
• Test recovery plans regularly.
• Maintain open communication with stakeholders and regulators.

Recovery processes help organizations rebound effectively, while enhancing their overall strategy.

Build resilience with the CSF

NIST's CSF gives organizations a solid foundation for building a comprehensive third-party risk management policy. Use the six core functions -- govern, identify, protect, detect, respond and recover -- to address third-party risks, improve resilience and protect digital assets.

Additionally, these principles help companies meet regulatory requirements and comply with industry best practices. Third-party ecosystems continue to grow more complex; adopting a structured and adaptable framework, like the CSF, is essential when building sustainable and secure third-party relationships.

As a result, organizations will be better prepared to manage emerging risks, respond to incidents effectively and build long-term trust with their partners and stakeholders.

Matthew Smith is a vCISO and management consultant specializing in cybersecurity risk management and AI.