Risk is always associated with any type of business, especially third-party risks and challenges. This blog gives you a complete overview of Third-Party Risk Management (aka TPRM) to safeguard your business and vendor management strategy.
What is third-party risk management?
It’s a form of risk management that concentrates on identifying and mitigating risks. This form relates to the third parties (sometimes referred to as vendors, partners, suppliers, service providers, or contractors ).
The discipline gives organizations a complete understanding of the third parties, how they use them, and what security measures their third parties use.
The scope and requirements of a third-party management program are organization-dependent. It also can vary widely depending on the industry, regulatory guidance, and other factors. Nevertheless, many TPRM best practices are universal and apply to every business or organization.
While precise definitions may vary, “third-party risk management” is sometimes interchangeable with other general industry terms, such as vendor risk management (VRM), supply chain risk management, or vendor management. However, TPRM is often a broad discipline that includes all kinds of third parties and all kinds of risks.
Why is third-party risk management critical?
While third-party risk is not a new concept, recent developments and greater reliance on outsourcing have brought the discipline like never before. Unexpected events like the COVID-19 pandemic have affected almost every business and third party, regardless of location, size, or industry.
Moreover, data breaches or cyber security incidents are common. More than half of breaches in the past two years come from a third party.
Most modern firms and companies rely on third parties to keep the operations running smoothly. Therefore, disastrous and long-lasting effects can occur when your third parties, vendors, or suppliers cannot deliver.
For example, you can rely on a service provider like Amazon Web Services (AWS) to host a web application or website. If AWS goes offline, your entire online presence or application also goes offline.
An additional example might be a dependency on a third party to ship goods. Suppose the drivers of a shipping company go on strike. In that case, it can delay expected delivery times and lead to customer cancellation and mistrust that negatively affects your business’s bottom line and reputation.
Outsourcing is an essential component of running a modern business. Not only does this save the business money, but it is an easy way to take advantage of the expertise that an organization may not have in-house. The downside is that relying on third parties can leave your business vulnerable if no proper third-party risk management program is in place.
Typical Challenges with TPRM
Third-Party Involvement and Feedback:
Obtaining third-party vendors’ feedback was often time-consuming, requiring substantial human intervention.
- Different methods needed
A one-size-fits-all approach to managing the risk of all firm vendors was not practical. The procedures were then adapted in proportion to the scope and scale of the risks presented.
- Client expectations
Unlike traditional banking relationships, vendor management consultants should have access to all clients’ information. Like most vendor management firms, Aspirant does not store this client information directly but is kept by some third parties.
- User Access
Junior sales team members are often the most privileged users. They are the person to scan confidential documents and place them in client folders.
This type of access demands additional levels of information security controls and requires background checks of all employees. The firm relies on a third-party provider to conduct those investigations and stresses the need for sound third-party risk management.
- Fourth parties
Many organizations that work with firms outsource their servers to fourth parties. So it is essential to understand who has access to their clients’ data and how it is secured at rest and during transit.
- Physical Security
This is also worth noting the importance of physical or hard data security when protecting customer information, particularly those relating to fourth parties.
A fourth party has full access to your physical location and can easily view sensitive or customer data if left on an employee’s desk.
Accountability in third-party risk management
This is one of the frequent concerns of third-party risk professionals — the reluctance of first-line business owners to perform TPRM tasks.
We agreed that TPRM is a crucial business practice, but it is often overlooked until something goes wrong.
To demonstrate the importance of TPRM and ensure both internal and external accountability, he recommends the following approaches:
- Share personal experiences
People can relate to real events, so personal stories are helpful in understanding risk better. Ask people to connect with it personally and involve them in both the process and the improvement of problems when they occur.
- Use internal oversight
A TPRM program will not control itself. There should be a person who has an internal role to play in holding people accountable and ensuring the completion of various activities.
- Highlight rewards and consequences
Using a “carrot and stick” approach can encourage desired actions and help others understand negative consequences. For example, an organization may say that a seller will not receive payment unless they perform third-party risk processing adequately.