The retail sector has undergone massive changes in recent years with the rise of e-commerce and increased reliance on third-party vendors and service providers.
While these relationships allow retailers to scale operations and offer new services, they also introduce additional risks that must be properly managed.
24 percent of all cyber attacks were directed at retailers and the average cost of a data breach in 2022 was $3.28 million.
This shows how important third-party risk management has become for the retail industry.
Implementing a comprehensive third-party risk management program is essential for retailers looking to avoid costly data breaches, protect their brand reputation, and ensure compliance with regulations.
Where to Start
The first step in implementing third-party risk management is to gain visibility into all vendor and third-party connections.
This requires creating a central repository to track all external parties that handle sensitive data, provide critical services, or have access to key systems.
The inventory should include detailed information on the nature of the relationship, level of access, data sharing, and contractual terms.
With an inventory in place, retailers can identify their most critical third-party relationships that have the highest inherent risk, and even fourth-party risk management sometimes becomes necessary.
This risk ranking allows for prioritization of vendor due diligence, contract reviews, and ongoing monitoring based on potential impact.
Certain vendors should be at the top of the priority list due to factors like access to customer data, transaction processing, IT networks, and infrastructure support.
Due Diligence Processes
Robust due diligence during third-party onboarding is essential for evaluating risks. Retailers should implement in-depth assessments examining the vendor’s data security, cybersecurity practices, compliance processes, insurance coverage, financial stability, business continuity planning, and more.
Due diligence can include third-party questionnaires, document reviews, interviews, audits, and site visits.
The due diligence findings lead to risk scores that determine the appropriate controls and ongoing monitoring that will be required.
Higher risk vendors may require more contract safeguards, access limitations, frequent audits, or even prohibiting their use.
Due diligence is not a one-time activity and must be repeated according to set schedules depending on the risk level.
Contractual Controls
Water-tight contracts provide an important legal safeguard when engaging third parties.
Retailers should work with legal counsel to develop standard templates that address data protection, cybersecurity requirements, compliance with laws and regulations, audit rights, insurance, limitation of liability, indemnification, and termination rights.
It’s also important to develop contracting processes that ensure terms are negotiated appropriately and re-evaluated when contracts are up for renewal. No vendor relationships should begin without executed contracts in place.
For maximum protection, retailers should aim to make their terms and conditions the governing ones.
Ongoing Monitoring & Reviews
Due diligence and contractual protections are only the starting point for managing vendor risks.
Once third-party relationships begin, retailers must implement standardized ongoing monitoring to track performance, identify issues early, and evaluate changing risk levels.
This can involve gathering key performance metrics, having regular business reviews, updating due diligence, repeating audits at least annually, and continually monitoring for security events or compliance issues.
Designating ownership for third-party monitoring is essential. Often a sourcing or vendor manager is assigned to each critical vendor relationship to facilitate information sharing and track day to day issues.
Executive-level oversight of the entire program is also critical for identifying trends, making improvements, and enforcing standards.
Technology Solutions
Advanced technology solutions are emerging to help automate and strengthen third-party risk management. Options include:
- Shared risk intelligence databases on prior breaches/non-compliance
- Automated questionnaires and standardized assessments
- Continuous monitoring tools that scan for new cyber threats or negative news
- Automated scheduling and tracking for due diligence reviews and renewals
- Digital portals for uploading compliance documents from vendors
- Data loss prevention tools that limit access and monitor activity
Technology can vastly improve visibility, efficiency, reporting, and data-driven insights into vendor relationships. Retailers should strongly consider IT solutions to get their risk management programs up to par.
Risk Management Best Practices
Mature third-party risk management follows these essential practices:
- Inventory all vendor relationships in a central database
- Categorize third parties by risk level to prioritize oversight activities.
- Conduct intensive due diligence commensurate with inherent risk.
- Use risk-scoring methodologies to guide monitoring and audits.
- Maintain a formal governance structure and steering committee.
- Provide adequate staffing and budget for the risk management program.
- Continually gather intelligence on emerging vendor risks.
- Require all high-risk vendors to complete standardized risk assessments.
- Conduct regular vendor audits and site visits for critical relationships.
- Build compliance, security, and termination provisions into contracts.
- Maintain technology solutions to enable automated tracking and monitoring.
- Offer ongoing training to vendors on compliance requirements and changes.
Conclusion
Third-party risk management presents major challenges but is unavoidable in today’s complex retail ecosystem.
By approaching it strategically, dedicating proper resources, and focusing on the highest-risk vendors, retailers can effectively oversee their vendor relationships, reduce the potential for costly incidents, and build a resilient supply chain.
Implementing these best practices requires upfront commitment but pays long-term dividends in risk reduction and compliance.