Home » The Importance of Third-Party Risk Management for Businesses
As the need for third-party products and services grow, so do the risks the parties present. In the following article, we’ve outlined the importance of third-party risk management.
What is Third-Party Risk Management?
Third-party risk management, more commonly known as TPRM, is a form of risk management performed by a business that identifies and reduces the risks associated with conducting business with third parties. These risks can be evaluated by the organization itself or by using TPRM software.
What are Common Risks?
Third-party vendors can present several different risks, and below we have identified the common ones.
Cyber security is one of the biggest risks that a third party may present. When sharing software or services with third parties, there may be times when confidential information and data will be sharedwith the third party. While your organization may have the highest cybersecurity standards, the third party might not, and this is where the cybersecurity risk can occur.
Cyber-attacks are common, and there are many people who want to get their hands on confidential information. These attacks can happen to any institution, large or small, and by conducting business with a third party without robust cyber security measures, the confidential information of your organization and your clients may be exposed.
All organizations are obligated to follow laws, rules, and regulations that are passed down by regulatory bodies. Additionally, your organization may also have rules and regulations that you have obligated them to follow contractually. Third-party vendors must comply with these, but there is always the chance that they won’t; they might resort to deceptive marketing practices or violate laws protecting consumer rights by releasing confidential information. Failure to meet these compliance regulations can result in harsh fines for both the third party and your organization.
When under a contract with a third party, the operation of their organization is directly linked to the operation of yours. Two operational risks can come from inadequate or failed internal processes within the third-party; internal operational risk and external operational risk.
Internal operational risk occurs within the organization and is created by the actions, processes, and decisions of the employees within that organization. It can be caused due to poor planning, design failures, or inadequate employee skill levels. External operational risks are outside of the control of the vendor and can be caused by inflation, increased taxes, or natural disasters.
Because your organization’s operations are dependent on the third party, a failure on their end can bring work in your organization to a halt.
The reputation of an organization is one of the most important things; it has weight and whether a consumer will interact with your business. Not all third-party’s will adhere to rules and regulations set on them, and they may violate ethical guidelines as well by treating their employees poorly. Third-party’s can harm the reputation of your organization by dropping in the quality of their service or products, engaging in inappropriate behavior at work and in public, or disclosing sensitive customer information.
Ultimately, your relationship with this third party can have consequences on the reputation of your business.
Fortunately, this is why TPRM Frameworks exist. The TPRM framework helps organizations in managing third-party vendor relationships through the third-party management life cycle, which includes the following stages.
Profiling and Risk Tiering: Here, the organization identifies the third-party challenges it faces. It creates a TPRM profile and ranks the different levels of risk based on their criteria. The organization also implements business requirements for the relationship and identifies stakeholders.
Selection: At this stage, the organization conducts third-party risk assessments, evaluations, and reporting, and puts controls into place.
Onboarding: The organization begins to negotiate its contracts and performs interviews for proper onboarding. The organization will use the information and insight it gathered through the selection and onboarding phases to build its requirements for risk management and mitigation into the contracts.
Monitoring: TPRM doesn’t stop after onboarding. The organization continues to monitor the third party, along with their performance, their technical infrastructure, and the relationship they have with clients. Based on performance, third-party relationships can continue or end.
There is a consistent evaluation of the third party for their potential risks.
TPRM companies and providers exist to help businesses manage their third-party risks. These platforms should include the following:
Support Contract Management: Contracts are not a one-time occurrence. Most contracts are set for a specific period of time, and once they are up, they can be renegotiated and implemented. Additionally, organizations need to revisit and evaluate contracts regularly as they witness the third-party’s performance. And if need be, the organization can include more security and risk assessments.
Manage Risk Evaluation Workflows: TPRM providers need to be ready at all times to respond to vendor activities, which includes auditing and streamlining critical workflows.
Continuous Monitoring: Most TPRM platforms provide tools to help the organization monitor their third-party for potential risks, and the provider can collaborate with the client to conduct assessments.
It is crucial to monitor third-party risks using TPRM software to avoid potential risks and consequences to your organization.