In today’s interconnected business world, a company’s cybersecurity posture is only as strong as its weakest link, often found among third-party vendors. Given the increasing complexity and interdependence of global supply chains, the role of Chief Financial Officers (CFOs) in managing third-party risks has become critical. Effective third-party risk management is not just an IT issue but a fundamental aspect of financial governance and strategic planning.
The financial implications of third-party breaches are staggering. According to a report by IBM and the Ponemon Institute, the global average cost of a data breach reached $4.45 million between March 2022 and March 2023, marking a 15% increase over the previous three years.
Notably, third-party breaches are a significant contributor to this rising cost. The report found that 40% of breaches were linked to third parties, with 33% identified by internal tools, and 27% disclosed by attackers as part of ransomware incidents.
With the rise of cyber threats targeting organizations globally, effective CFO strategies for third-party risk management become priority. In this context, The Cyber Express brings an all-in-one guide for effective CFO risk mitigation strategies to target the lapses in the industry.
An Overview of Third-party Risk Management and Lapses in the Industries
A 2023 study by SecurityScorecard and the Cyentia Institute further highlights the gravity of third-party risks, revealing that 98% of organizations worldwide had interactions with at least one third-party vendor that had suffered a breach in the past two years. This data highlights the pervasive nature of third-party vulnerabilities and the urgent need for robust CFO strategies for third-party risk management.
As boards of directors and CEOs become increasingly concerned about risk management, CFOs are expected to take a proactive role. The financial leadership is shifting towards a more strategic approach to risk mitigation. A recent CFO webcast sponsored by Deloitte and Coupa highlighted this shift, emphasizing that CFOs with advanced digital maturity and data visibility are achieving better outcomes in both risk management and overall performance.
The webcast poll revealed that 47% of CFOs considered cyber risks their biggest risk management concern, closely followed by business environment risks such as economic changes and trade policies. Operational risks, including gaps in processes and data, also ranked high among concerns. This shift in focus signifies the growing importance of integrating CFO risk mitigation strategies into broader business practices.
Marc Deluca, Senior Vice President at Coupa Software, observed a clear pattern: CFOs are increasingly aware of rising risks, with larger enterprises expressing more concern than their smaller counterparts. “Our CFOs see risks escalating over the next few years,” Deluca noted, adding that many are struggling to adapt to these evolving challenges due to their relatively recent introduction to risk management responsibilities.
The Challenge of Supplier Risk Assessment
Operational and strategic risks are increasingly linked to third-party and supplier risks, driven by the growth of outsourcing. Deluca highlights the need for CFOs to address three crucial questions in third-party risk management: the identity of business partners, the nature of these relationships, and the inherent risks involved.
A Deloitte survey of over 1,000 CFOs across 19 countries reveals that 83% of companies encountered third-party risk incidents in the past three years. More than a third of these incidents had moderate effects on customer service, financial stability, reputation, or regulatory compliance, while 11% had severe impacts. These findings emphasize the urgent need for effective supplier risk assessment and robust vendor risk management best practices.
Despite the growing recognition of risk management’s importance, many organizations still underinvest in this area. According to Deloitte, fewer than 30% of organizations believe their spending on risk management is adequate. Ryan Flynn, Principal at Deloitte Consulting LLP, noted that risk management is often perceived as an insurance policy rather than a value-driving component, leading to insufficient investment.
The lack of investment impacts a company’s ability to manage risks effectively. “Underinvestment in risk management weakens the ability to excel at the basics,” Flynn said. A survey revealed that half of respondents did not fully understand their third-party relationships, while 43% lacked knowledge of contract terms and 41% failed to monitor third parties based on their risk profile.
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CFO Strategies for Third-party Risk Management
To address these challenges, CFOs are increasingly turning to technology. Cloud-based platforms, robotic process automation, and visualization techniques are becoming essential tools for managing third-party risks. Flynn highlighted that more than half of survey respondents are adopting cloud solutions for risk management, while 45% are using robotic process automation, and over a third are leveraging visualization techniques.
Technology can enhance third-party risk management by identifying potential risks and informing better decision-making. Companies are using digital tools to assess suppliers’ data security measures, review incident response processes, and ensure proper data management and access controls.
The regulatory landscape around third-party risks is also evolving. President Joe Biden’s Executive Order 14028, issued in May 2021, emphasizes the need for enhanced cybersecurity standards across federal vendors. This order has led to increased scrutiny of vendor risk assessments and remediation policies.
Similarly, new cybersecurity rules from the Securities and Exchange Commission (SEC) require timely disclosure of significant cybersecurity incidents, including those involving third parties. The SEC’s stance reinforces the need for companies to manage and disclose risks related to third-party systems effectively.
Additionally, third-party issues can impact cyber insurance. CFOs must understand their organization’s and vendors’ data management practices to navigate the complexities of cyber insurance. Demonstrating robust data handling and access management practices is crucial for maintaining manageable premiums and ensuring coverage.
To effectively manage third-party risks, CFOs should conduct a thorough assessment of vendors’ data management and cybersecurity practices. This involves several key steps. First, reviewing incident response processes is crucial. CFOs should examine past breaches and the improvements made since those incidents, as well as understand the vendors’ response protocols and their plans for alerting and managing future incidents.
Another important step is to maintain and classify an inventory of data accessed or generated by third parties. Data should be classified based on sensitivity and regulatory requirements, with clear definitions of data access and usage rights to ensure proper management and protection.
Implementing consistent identity and access management practices is also essential. CFOs should enforce strict access controls, limit data access based on the principle of least privilege, and establish procedures for the return or destruction of data upon contract termination.
Finally, regularly reviewing and updating data security policies and procedures in collaboration with third parties is vital. This ensures that data handling practices remain aligned with organizational standards and can adapt to risks and regulations.
Conclusion
The landscape of third-party risk management is becoming increasingly complex, with rising risks in cybersecurity, supplier management, and regulatory compliance. CFOs are being called upon to step up and develop comprehensive strategies to mitigate these risks.
By integrating advanced technology, strengthening supplier risk assessments, and fostering collaboration with compliance officers, CFOs can enhance their organizations’ resilience and financial integrity. The shift from backward-looking activities to proactive risk management is essential for navigating today’s volatile risk environment and ensuring long-term success.
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