Fourth-Party Vendors: Managing Risk Throughout the Extended Supply Chain
What Is Fourth-Party Risk?
Fourth-party risk is any potential risk posed by the "vendors of your vendors," many of which the contracting organization may not even know. Even if your company has a well-developed information security program, unknown fourth parties and Nth parties can still cause significant disruptions in your supply chain.
For example, take the ransomware attack on the Colonial Gas Pipeline. Gas stations across the U.S. East Coast ran empty, and millions of consumers wondered how they would get to work. In many cases, individual gas stations may have never even heard of Colonial Pipeline, much less realized that a cyberattack could cripple it and, by extension, their supply chain.
An effective supply chain risk management program can help you identify, remediate, and manage risks across all vendors – third-party, fourth-party, and beyond. This article explains how vendors are classified and provides tips for effectively managing risk at all levels of your supply chain. We're going to cover:
- Identifying critical vendors and tolerance levels
- Mapping fourth-party vendor relationships
- Gaining visibility and control over 4th and Nth party risk
What Is the Difference Between Third-Party, Fourth-Party, and Nth-Party Vendors?
Third-party vendors are companies that your organization works with directly. Fourth parties are companies that contract with your third parties. For example, if your company contracts with a polyester supplier, that supplier would be classified as a third party. If your polyester supplier uses a manufacturer in Vietnam, the manufacturer is a fourth party. Now, if that manufacturer contracts with a Cambodian raw material supplier, that raw material supplier would be a fifth party. Should Cambodian laws change, making it more expensive to produce ethylene, a key ingredient in polyester, it could cause a ripple effect throughout your supply chain. Understanding these relationships helps you mitigate risks across your supply chain.
Sometimes, the further removed from the contracting organization that the Nth party is, the less impact a disruption causes – but this isn't always the case. Colonial Pipeline is a prime example of how one supplier suffering a cyberattack can cripple businesses up and down the supply chain. These risks are especially severe when your organization relies heavily on one vendor they cannot easily replace. The more visibility you gain into your organization's vendors and the vendors of your vendors, the more you will understand and effectively mitigate unacceptable risks.
Accounting for Fourth-Party Risk in Your Vendor Risk Management Program
Vendor Risk Management (VRM) has become critical for organizations of all sizes. However, many companies stop at third parties when considering vendor risk. Modern supply chains are increasingly global, relying on hundreds or thousands of fourth- and Nth-party vendors. An organization may be unaware of its reliance on an Nth-party vendor until a significant disruption occurs. Below are some guidelines to help you account for fourth and Nth parties in your broader VRM program.
Identifying Critical Vendors and Determining Risk Tolerance
Identifying the fourth parties that work with your mission-critical vendors is essential. If a crucial fourth-party vendor experiences a security breach, supply chain issue, or other interruption, your business will likely face consequences. To mitigate risk and plan appropriately, you need to know who your fourth-party vendors are. Examine your vendor portfolio for any fourth parties shared by several suppliers, such as Amazon Web Services or another common vendor.
In a perfect world, you could ensure that every company you work with applies the same standards to its vendors as you do. However, this is not always the case, yet you still need to work with 4th, 5th, and Nth parties to run your organization successfully. That's why it's essential to determine your company's risk tolerance related to fourth and Nth parties and build processes to assess their inherent and residual risks (i.e., risk levels before and after controls are applied, respectively). We recommend categorizing all vendors and including inherent risk as a key factor for establishing control requirements for each service tier. For example, your vendor's cloud service provider will be subject to more stringent requirements than their cleaning contractor.
It is also critical to align vendor contracts regarding fourth-party liability and accountability. Start by documenting relationship management practices with crucial stakeholder business units and identifying partner touchpoints throughout the supply chain. Then, build service-level agreements and control requirements into contracts based on each vendor's service, tier, or category, and implement change management to address any scope changes. Finally, ensure that requirements are met through ongoing vendor SLA and performance management practices.
On-Demand Webinar: Strategies to Mitigate Supply Chain Risks in Fourth and Nth Parties
Join Bob Wilkinson, CEO of Cyber Marathon Solutions and former CISO at Citigroup, as he discusses best practices for gaining deeper risk visibility into your organization's vendor and supply chain ecosystem.
Mapping Fourth-Party Relationships
Because you don't directly interact with fourth parties, it is vital to have a sound strategy for identifying them during the procurement and due diligence process. If you're going through a competitive bidding procedure with prospective third parties, your proposal request (RFP) should include a question concerning fourth parties. Once you've narrowed it down to a finalist, you must ask additional questions during the vendor onboarding phase. Besides identifying the fourth parties your vendor will use, you should ask the following questions regarding each fourth party:
- Will they deal directly with your clients, customers, members, or employees?
- What kind of due diligence have you done on them in the previous 12 months?
- Were there any noteworthy discoveries, and if so, what were they, and how were they addressed?
- Do you have a contract with them right now?
- What kind of client information do they have access to?
- Will any of the vendor services be performed in another country?
- Do you require information security certifications for third parties?
Taking Control with a Vendor Risk Management Platform
Your head may spin a bit as you consider the broader scope of your supply chain, start identifying fourth and Nth-party vendors, and understand the risk they potentially bring to your business. That's why companies with large vendor ecosystems and deep supply chains usually implement a centralized vendor risk management platform to deliver more visibility and control over their vendor populations.
A vendor risk management platform can be a central repository for your third-, fourth- and Nth-party data. While these platforms are known as third-party risk management (TPRM) solutions, many offer robust capabilities for managing and reducing fourth- and Nth-party risk. The process starts with bringing your third parties under management and then leveraging the solution to extend your visibility to the fourth, fifth, and Nth levels. To start, you can leverage sources of vendor intelligence to build a comprehensive supplier profile that includes industry and business insights and ownership and identifies 4th-party relationships.
During third-party onboarding and periodically after that, you can leverage a vendor (or third-party) risk management solution to automate questionnaire-based risk assessments designed to gather information about each third party's vendor relationships. Prevalent's solution also includes relationship mapping capabilities that enable you to identify connections between your organization and third, fourth, and Nth parties to discover dependencies and risks in your extended vendor ecosystem.
Once you gain visibility into fourth and Nth parties that impact your business, you can use continuous vendor monitoring to monitor critical vendors. Continuous monitoring of private and public sources of vendor threat intelligence can provide early warning of cyber, business, and financial events and exposures that could ultimately affect your operations. All assessment and monitoring content should be correlated and mapped to the vendor profiles in your VRM solution.
You can bring additional scale to your third, fourth, and Nth-party risk management by tapping into vendor intelligence networks containing completed assessments, monitoring data, and standardized risk scores on thousands of vendors. Organizations with limited internal resources should also consider leveraging managed vendor risk assessment services to scale their vendor data collection, analysis, and remediation initiatives.
Finally, since effective vendor risk management relies on collaboration between IT security, procurement, risk management, legal, and other stakeholders, be sure that your VRM platform provides role-based access, workflow management, and task management capabilities.
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A Programmatic Approach to Fourth-Party Risk Management
A successful fourth-party risk management program is not a one-and-done project but an integral aspect of your vendor management strategy. Fourth-party risk should be identified as a risk category to manage in your vendor management policy, and fourth-party evaluations and monitoring should be built into your standard operating procedures. Vendor risk management should be a continuous, programmatic process that accounts for risk at all levels of the supply chain.
Prevalent can help you build a holistic risk management program with unmatched visibility, efficiency, and scale, regardless of where you are today. We’ll work with you to find a mix of managed services, network membership, and/or TPRM platform access that works best for your organization. You’ll gain a fast time to value, be equipped to make intelligence-driven decisions, and measurably reduce vendor-related risk – all with fewer headaches for you and your team.
Next Steps for Managing Your Fourth-Party Risk
With recent breaches and supply chain disruptions, understanding downstream risk is more critical than ever. Businesses often disregard fourth-party risk management because they assume their third parties apply the same due diligence to their third parties. Whether you employ an internal team, leverage a vendor risk management platform, or use managed services, you must evaluate all fourth parties that impact your business.
Find out how Prevalent can help you identify and mitigate fourth and Nth-party risk in your supply chain. Request a demo today.
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