What is Third-Party Risk Management?
Organizations rely heavily on their third parties for improved profitability, faster time to plug, competitive advantage, and decreased costs. However, third-party relationships accompany multiple risks that include:
Strategic Risk — Risk arising from adverse business decisions, or the failure to implement appropriate business decisions during a manner that’s according to stated strategic goals.
Reputation Risk — Risk arising from negative public opinion. Third-party relationships that result in dissatisfied customers, interactions not consistent with policies, inappropriate recommendations, security breaches resulting in the disclosure of customer information, and violations of laws and regulations.
Operational Risk — Risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.
Transaction Risk — Risk arising from problems with service or product delivery.
Compliance Risk — Risk arising from violations of laws, rules, or regulations, or from intentional or inadvertent non-compliance with internal policies or procedures or with company business standards. This risk exists when the products or activities of a 3rd party aren’t according to governing laws, rules, regulations, policies, or ethical standards.
Information Security Risk — Risk arising from unauthorized access, use, disclosure, disruption, modification, inspection, recording, or destruction of data. It is a general term that will be used no matter the shape the info may take.
Third-Party Risk Management (TPRM) is the process of identifying, assessing, and controlling these and other risks presented throughout the lifecycle of your relationships with third parties. This oftentimes starts during procurement and extends all the way through the top of the offboarding process.
Given the breadth and potential severity of risks that are inherently present with third parties, TPRM has quickly evolved from a ‘check-the-box process to a substantive function, complete with policies, procedures, and systems, in companies that are serious about managing third-party risk.
These companies are now taking more comprehensive steps to make sure that their third parties not only suits regulations, but also protect confidential IT information, avoid unethical practices, keep up a safe and healthy working environment, strengthen supply chain security, handle disruptions effectively, and sustain top quality and performance levels.
An effective third-party risk management function provides for, at a minimum:
Central visibility into all third-party relationships and contracts
- A formal, pre-contract risk assessment and due diligence process
- Use of standardized, risk-mitigating contractual terms and provisions
- Risk-based monitoring and oversight
- Formal offboarding at the end of the relationship
An effective third-party risk management function also includes the identification and evaluation of fourth parties; that’s, the downstream vendors, suppliers, and contractors employed by your own third parties. Risk flows down all the thanks to the last supplier within the chain, so it’s key you recognize who they’re and the way they’re managed.
Remember, the responsibility of managing third-party risk falls on you. To protect your business from issues related to profitability, reputation, regulation, and even litigation, it’s important to determine processes that will allow you to oversee these issues. Regulators have stepped up their standards regarding how companies protect themselves against third-party issues, so this area is becoming a more important part of your risk management plan.