Understanding the Importance of Cybersecurity Due Diligence

By Jeff Aldorisio

Posted on Apr 20, 2020

Organizations are increasingly relying on third and fourth-party vendors and service providers to carry out day-to-day operations. As this trend grows, organizations must be sure to monitor third-party vendors and acquisition targets and perform a thorough due diligence review of all prospects in order to successfully protect against cyber threats and avoid liability for damages should sensitive information be compromised. Cyber due diligence is especially important in the case of mergers and acquisitions as it helps acquirers make better informed decisions regarding cybersecurity and related responsibilities.

What is cybersecurity due diligence and why does it matter?

Cybersecurity due diligence is the process of identifying and remediating the cyber risks of third-party vendors. This is often used to identify risks associated with potential targets for mergers & acquisitions. When conducting due diligence, organizations should collect insights into a third-party vendors’ existing cybersecurity posture and IT security efforts. This way, the acquirer becomes aware of the cyber risks and vulnerabilities they may be inheriting from the third-party.

Cybersecurity due diligence should also reveal any issues that might be considered deal-breakers, or that call for a restructuring of the price and terms of the acquisition. An acquirer needs to not only identify, but quantify, any issues so that the organization can remediate them, or a system can be put in place to address the vulnerabilities moving forward.

Benefits of cybersecurity due diligence

There are many benefits of conducting cybersecurity due diligence as organizations are able to:

  • Accurately assess risk before taking on liability in mergers and acquisitions
  • Identify any issues that warrant a restructuring of the deal
  • Understand the threat landscape and identify common threats
  • Allow for the identification and quantification of a vendor’s cybersecurity posture

Assessing third-party cybersecurity defenses

Cybersecurity due diligence provides acquirers with a more precise look into a vendor’s existing security network, it’s risk level and vulnerabilities, and what it’s doing now to mitigate said risk. The threat landscape is going to vary by industry, so each potential acquisition should be evaluated on a case-by-case basis using the following framework:

Measure the cyberhealth of acquisition targets

The first step in the due diligence process is to measure and assess the cyberhealth of acquisition targets so you can understand each risk before you accept liability. Examine the vendor’s cybersecurity posture, compliance status, and ability to quickly address cyber attacks.

Compare the target’s performance against industry competitors

Industry comparisons can uncover hidden security issues that may have otherwise gone undetected by analyzing trends and patterns in the industry and identifying outliers. Comparing a vendor’s cybersecurity posture to other industry players or competitors helps determine any potential holes in security coverage, and highlights areas for improvement.

Establish a centralized management platform

A cybersecurity management platform enables organizations to monitor their third-party vendors and get a holistic view of their network. With the ability to see cybersecurity quantified, security teams can more easily and efficiently manage risk. Consider a risk management platform that allows you to easily add vendors, and makes it simple for them to report on the cyberhealth of their ecosystem, saving your team hours in review.

Provide frameworks to guide future cybersecurity strategies

Provide vendors or potential targets with a cybersecurity framework that will help guide the organization through the mitigation process. An example of this would be the NIST Framework, which acts as the first line of defense against cyber attacks by outlining the steps to identify, protect, detect, respond, and recover from them.

Identify any necessary additional security measures

After establishing a centralized platform, assess any vulnerabilities or threats that were identified through the due diligence process, and determine the next steps for the vendor to address and mitigate the issues. These include but are not limited to, multi-factor authentication, installing anti-malware mechanisms, software patches, and disk encryption.

Continuously monitor portfolio risk

The integration of existing systems can open up new attack surfaces and vulnerabilities that may not have previously existed in the parent company’s network. Additionally, the threat landscape changes at a rapid rate and new threats are constantly being generated. Continuous monitoring is crucial for identifying new issues in real-time, maintaining compliance and standard regulations, and ensuring that third-party vendors are consistently working to regulate their cybersecurity.

Legal and technical questions to consider

Thorough due diligence requires that you address any relevant legal or technical issues before deciding to work with any third-party vendors.

Take a look at the types of questions you should be asking throughout the process:

  • Is the organization subject to any specific industry standards or compliance regulations?
  • What policies and systems are currently in place to mitigate cyber risk and protect data across the organization?
  • Does the organization have adequate cybersecurity insurance?
  • Have employees been trained on the best cybersecurity practices?
  • What is the process for responding to breaches or attacks? What has been done in the past?

How SecurityScorecard can help

Because your third-party vendors are likely to have access to your organization’s sensitive information, it’s important to continuously monitor their cybersecurity posture. SecurityScorecard’s security ratings give your organization insight into a vendor’s cybersecurity by providing a letter grade ranging from A-F. This enables security teams to understand their risk across 10 groups of risk factors, and it highlights areas for immediate improvement within the enterprise. As security ratings are constantly updated in real-time, organizations can feel confident that they’re getting an accurate, holistic view of their cybersecurity network as it relates to third-party vendors.

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