The Definitive Guide to Third-Party Risk Management

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.

What is Third-Party Risk Management (TPRM)?

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).

Why is Third-Party Risk Management So Important?

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:

1. Prioritize vendor inventory

Businesses may prioritize their vendors on the following parameters:

• Tier 1
  Tier 1 suppliers are strategic and critical to the company. They expose the company to high risk. Therefore, organizations carry out rigorous evaluations of tier 1 suppliers, including visiting their sites.
• Tier 2
  Tier 2 suppliers expose businesses to medium risk and are less significant than tier 1. However, they are essential, and proper due diligence needs to be carried out before appointing the third party.
• Tier 3
  These suppliers are low risk and less important to businesses and are easily replaced.

2. Leverage automation wherever possible

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:

• Vendor onboarding
• Prioritizing vendors/suppliers
• Reviewing supplier performance
• Reporting

3. Think beyond cybersecurity

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

Typical TPRM Challenges

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:

1. Exhaustive list of third parties and communication issues

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.

2. Lack of workflow automation and resources

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.

3. Lack of visibility and engagement

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

Key Benefits of a Robust TPRM System

A TPRM system’s major benefits are detailed below:

1. Better data visibility and reporting capabilities

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.

2. Faster vendor onboarding

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.

3. Increased time and cost savings

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.

Why Businesses Need TPRM Frameworks

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.

Conclusion

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.

Frequently Asked Questions