Third-Party Risk Management

Service providers, suppliers, partners, contractors, vendors, distributors... If you run a business, it's more than likely that you rely on other people, companies and organisations to operate smoothly. No matter your industry or the size of your enterprise - partnerships, cooperations, or outsourcing can help you boost the productivity and efficiency of your business processes. However, it also exposes your enterprise to a whole new set of threats.

Third-party risks involve everything that can threaten your business as the result of your reliance on other entities. And while you have no control over other companies and service providers, there's a lot you can do to prepare for various scenarios, minimising the risks and potential damages. It has become crucial in today's highly digitised world where a significant number of processes is automated, the outsourcing trend is rising in popularity, and cyber attacks have become more and more sophisticated and complex.

That's why it's vital to invest some time and effort into third-party risk management, sometimes called vendor risk management. Below, we delve deep into what TPRM is, how to develop it, and why it is vital for your business to stay afloat.

What Is Third-Party Risk Management?

Well-developed TPRM will provide you with due diligence regarding risk assessment, business continuity plans, regulatory compliance, security measures, etc. In short, it will help you determine how much you can rely on the entities you work with and whether you can trust them.

While third-party management is often associated with vendor management, it can be applied to all third parties, including contractors, freelancers, suppliers, distributors... Basically, any organisation or person you work with on a regular basis. As a result, there's no single way of developing TPRM. It all depends on the nature of your cooperation, industry, and other factors. For example, if you're working with a software developer to create an app, the approach will be different from working with a payroll outsourcing provider.

However, there are some general principles you can follow when creating your TPRM. This includes collecting information about the third party, reviewing potential threats and mitigation approaches, implementing security measures, performing audits and assessments, etc.

Why Is Managing Third-Party Risk Important?

Because you have no control over other companies, the goal of TPRM is to minimise losses in case your service providers suffer from cyber attacks or data breaches, go out of business, or don't deliver the goods or services they promised. As you may imagine, this is crucial for companies that rely on any third parties be it for outsourcing or collaboration.

The risks associated with third-party relationships may vary, but they can be classified into different categories:

• Reputation Risk refers to the possible damage to your business reputation and professional image if a third party fails to meet expectations.
• Financial Risk is pretty straightforward. It involves the possibility of working with an unsuitable financial services provider or a financial loss if you are dealing with an organisation that makes fraudulent, corrupt, or negligent business decisions. It might also refer to currency risk, which is the possibility of currency exchange rate fluctuations.
• Information Security Risk refers to the risk of a cyber-attack or data breach, stealing personal data, customer information and other valuable files. Particularly relevant in the era of big data and cloud computing.
• Compliance Risks involve the risk of non-compliance with federal, state, and local laws and regulations. For example, if your vendor does not comply with HIPAA or FERPA, you can end up in trouble.

Ultimately, third-party risk management will help you minimise the danger associated with working with third parties, thus reducing the number of problems and issues that may arise in your business.

How to Develop Third-Party Risk Management?

As mentioned above, there is no single way of developing a TPRM program. However, some steps you can take to develop your third-party risk management strategy include:

Understanding Your Business Needs and Priorities

The first step of developing a TPRM strategy is to define your business needs and priorities. Whether you're a mid-size business owner who's interested in outsourcing services or a large corporation that's planning to develop a software application, it's essential to understand what you're trying to achieve. For example, you might be a small business owner who wants to outsource someone to take care of your social media marketing campaigns. Thus, you'll have to find a reliable social media marketing agency that offers the right services at the right price.

Risk Assessment

Once you have set your goals and objectives, you'll need to evaluate the potential threats associated with each third-party relationship. This means identifying all potential threats and determining how each can impact your business. Does working with this particular organisation make your company more vulnerable to cyber-attacks? Is this enterprise/vendor/service provider reliable enough? Are they dealing with data properly and are secure enough?

Mitigation Strategies

After performing a thorough risk assessment and evaluating all possible scenarios, you'll need to determine the best mitigation strategies for the risks that pose the most danger for your business. For example, if you've identified that working with some organisation might put your company's reputation at risk, you'll need to consider how to minimise this danger. The solution might include conducting regular compliance audits and carrying out personality tests on employees before hiring them or looking for other third-party providers for your business.

Implementing Security Measures/Procedures

Once you've created a risk assessment and mitigation strategy, you'll need to implement security measures and procedures that address all issues identified during the third-party risk assessment process. These measures and procedures will help you protect your company from cyber-attacks and data breaches, as well as minimise other risks that may affect the proper functioning of your business.

Auditing and Assessing

To ensure that everything is running smoothly, it's vital to conduct regular audits and assessments of your third parties. This will allow you to analyse their performance and identify any risks or issues that could negatively impact your business. As already mentioned, there are different ways of assessing third parties. For example, software development companies may be assessed based on the number of apps they developed, code quality, experience, and security measures. A payroll outsourcing provider may be assessed based on their reputation, available employee benefits, range of services, and financial strength.

The Bottom Line

Third-party risk management is an essential step towards success in the modern business environment, a process that helps organisations minimise the risks they can face due to their reliance on other entities. While there's no single approach to developing a TPRM strategy, knowing what lies ahead is crucial. The more you learn about the danger you might face, the better prepared you will be to deal with them effectively and efficiently.

It may seem like a daunting task, but it's actually not that difficult to implement. All you need is to be proactive and invest some time into developing a strategy that will help you manage risks and minimise your losses.