September 13, 2022 | Risk Management Blogs
Businesses outsource their tasks to third-party service providers to lower costs and improve customer deliverables. These third parties could be vendors, suppliers, contractors, or even partners.
However, businesses face myriad challenges, including data security, financial, compliance and reputational risks due to such outsourcing. Companies therefore need to conduct due diligence on crucial risks on a continual basis.
Corporations face many risks due to outsourcing their tasks to third-party service providers. These are called third-party risks. The process of identifying, reporting, managing, and mitigating such risks is called third-party risk management (TPRM).
Most organizations have third-party relationships for managing different aspects of their operations that may negatively impact them financially or otherwise. TPRM helps businesses manage the consequences of such adverse impacts and protect them when facing third-party incidents.
Some of the best practices of TPRM are as follows:
Businesses may prioritize their vendors on the following parameters:
Organizations can leverage technology to drive scalability and automation besides custom reporting. Automating routine and repetitive tasks helps save resources — time, money and materials.
Here are a few ways businesses can leverage automation:
In addition to cybersecurity, businesses are exposed to risks that need equal consideration. They should monitor service level agreements (SLAs), vendor performance, supplier creditworthiness, compliance, logistics, financial, weather and geopolitical risks.
Also read: Decoding The Best Practices In Third-Party Risk Management
Managing third-party risk is essential for an enterprise, but the absence of uniform reporting and ongoing tracking poses risks that could expose an organization to threats. Given below are some of the typical TPRM challenges faced by companies:
Most organizations find collating their extensive list of registered third parties difficult. Further, the vendor database may be incomplete, lacking crucial information, thus exposing the business to increased risks. Furthermore, communicating and maintaining close relationships with multiple third parties at the same time can be incredibly challenging.
Many businesses follow inefficient paper-based TPRM processes instead of adopting automation – because they find it daunting. Lack of resources could also be a reason for the lack of automation.
Lack of visibility and third-party engagement are the most significant reasons that impede growth. It prevents the business from mapping out all its risks across the supply chain and does not allow for third-party collaboration, thus adding to unforeseen risks.
Also read: How BFSI Companies in Europe Can Supercharge Third-Party Risk Management
A TPRM system’s major benefits are detailed below:
An effective technology-based TPRM program provides end-to-end visibility and accurate AI-driven data insights for better decision-making, planning and reporting. It also provides a user-friendly dashboard for customizing reporting to pinpoint domains needing improvement and remaining compliant.
The onboarding process is highly complex and vital for a business and may take several weeks to complete. Automating this process can make it efficient, uniform and secure. In effect, when onboarding is quicker and more transparent, supplier relationships tend to grow stronger.
A third-party risk management solution increases efficiency, saving time and costs by monitoring vendor performance on a real-time basis. Although a TPRM solution requires an initial investment, it saves money and time for the business in the long term.
Establishing a TPRM program is challenging as it may require managing hundreds of vendors across several countries while considering third-party risks and performance issues. However, several widely used frameworks, such as those by the National Institute of Standards and Technology (NIST) and the International Standards Organization (ISO), provide an excellent place to start.
Although businesses cannot eliminate risks, they can create and implement a risk management strategy to reduce the adverse impact on operational efficiency. This could include prioritizing risks, planning for their minimization, and active participation from critical stakeholders.
A vendor management program is a planned program for managing suppliers and enhancing their influence on the buyer's business. It involves monitoring vendor deliveries, cooperating to create new practices, managing compliance, and paying invoices.
The role of TPRM is to evaluate, analyze, and manage unplanned events resulting from a company's interactions with third parties, such as suppliers or vendors.