August 26, 2016

Culture is something that seems to be a very human thing. We love to build tribes and around those groups; we add layers of knowledge and characteristics that describe the beliefs and traditions of a particular set of people. This is no less true in business. In fact, the culture of a business can influence everything about an organization, from its decisions, to its strategies, the way it operates, and how its people interact with each other, third parties and customers. It is with this in mind that the Ponemon Institute has created a new study focusing on third party risk management. The study looks at how risk management is impacted by a ‘top down’ C-level, culture driving important strategies and practices in this area. The study is called; “Tone at the Top and Third Party Risk” and this post will take a look at the report, its results and recommendations in third party risk management.

Setting Out The Landscape

Ponemon interviewed 617 respondents for the report. Their collective view was that cyber security, coupled with disruptive technologies is a major game changer in vendor risk management.  Cyber threats are increasing and 2015 has left everyone with a cyber headache – PWC concurring, finding 76% of executives are concerned about the effects of cybercrime on their organization. This is likely due to the massive increase in cyber threats that came out of 2015, an example being the Anthem breach, which resulted in 80 million records being exposed.  The report goes on to say that the introduction of new and disruptive technologies such as the Internet of Things (IoT) is compounding the issues by adding a new layer of threat to the already worrying cyber threat landscape – in the Ponemon study, 78% stated that their vendor risk profile is significantly impacted by these changes.


Why Are C-Level executives Not Engaged in Risk Management?


With the kind of press that cyber attacks are getting, and understanding the impact across the supply chain that a breach can have, you would expect full engagement from all levels in an organization. However, the report found a lack of interest in vendor risk management by top management. The reason for this lack of concern is thought to be because 63% of executives don’t believe they have ultimate accountability or responsibility for this area. In a related vein, board members were also disengaged from the vendor risk management process – communication was decoupled resulting in a lack of understanding or engagement.


It’s About Good Communication


One of the pre-requisites of cultural exchange of ideas is good communication.


The Ponemon report shows that poor communication is an issue in the majority of the respondents, with only 11% feeling they had effective communications with both internal groups and third party vendors. Seamless and effective communication is the ground stone of any organization – we may live in a digital age, but you still need to communicate to make things happen. The idea of ‘tone at the top’ is to have a top down approach to communicating the core values of an organization across the extended eco-system, drawing in third party vendors. In the study, 41% of respondents said that they expected this communication to start at the door of the CEO. Positive tone at the top, which incorporates ethics and values of the organization, will then filter down into the relationships with third party vendors resulting in better all-round trust and reduced risks.


But Its Also About Good Assessment


Two thirds of the respondents in the study admitted that their internal controls over the suppler eco-system were lax. Many of the respondents said that their third party management processes were undefined and ad hoc, with only 26% having effective controls in place. This lack of control extends out to the third parties themselves, with 33% of respondents saying that they wouldn’t terminate the contract of a third party who didn’t meet their expected levels of control. The areas that came up short were in the process of assessment and metrics. Over half of the respondents couldn’t identify what intellectual property was in the hands of third parties. Worryingly, less than half of those asked did any cyber security risk assessment of their third party partners. This ultimately leaves all open to increased risks.


A recent advisory put out by the U.S. and Canada to warn of ransomware attacks across the supply chain, is a stark warning to all that we need to get our houses in order.


Some of the Statistics From the Report


  • Section 2 of the report looks at some of the key findings. Here is a round up of some of the most interesting:
  • 75% believe that third party risk levels are increasing and serious.
  • The IoT and cyber attacks are the most significant in terms of increased third party risk
  • Minimizing downtime and business disruption is the main objectives in managing risk
  • There is a serious lack of formal programs for third party risk management
  • 50% of respondents didn’t believe that their risk management was aligned with business gals and that C-level management and board directors were not engaged in the process
  • 41% expected their CEO to set a positive tone for the entire organization which in turn results in more trustworthy relationships across the supply chain
  • Third party risk assessment is ineffective in 74% of respondent organizations and that checks are generally informal
  • Even if lack of controls were found in the third party vendor, their contract would not be terminated by most
  • 49% did no cyber security risk assessment at all


Having a Positive Tone at the Top


Image of a succesful casual business woman using laptop during meeting-1The report conclusion has a list of ten recommendations to improve the culture of vendor risk management. It also points out that ignoring the issues can cause ‘severe’ consequences citing an average of $10 million spent annually by the respondents on problems created by malicious or negligent third parties. The ten recommendations focus on positivity, communication and assessment to reduce risk. The conclusion is that the tone coming from top level executives will filter down through the company and across to partners and other third parties, imparting the vision and strategy of the organization. Communication of values and vision, especially around risk appetite will be part of this dissemination of the risk culture. The recommendations also focus on assessment, such as understanding the impact of disruptive technologies like Cloud and IoT and the threat of cyber security attacks.


The consensus of the study is that the engagement of C-level and board executives, is a vital part of the equation in managing third party vendor risk. By having a positive tone at the top, the message around company ethos, vision and strategy are disseminated across the third party vendor eco-system. This will result in a more coherent and tightly controlled extended organization that can better manage risk in a changing and disruptive environment. 


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