As organizations become increasingly dependent on others for supplies, services, and expertise, more are asking what is third-party risk management – and how do we do it right?
Outsourcing to third parties can save your organization time and money. But third parties come with their own set of risks that become your risks. One misstep by a third party can have unfortunate consequences for your business operations, customers, and other stakeholders.
Taking that a step further, your suppliers likely work with their own suppliers, which have their own suppliers, and so on down the line, adding risk to your organization at every level. And a robust third-party risk management – or TPRM – program is an essential element of an organization’s overall risk management strategy.
Types of Third-Party Risks
Third-party risks fall primarily into the following categories:
Strategic risk. Your organization could be at risk if third party’s actions or decisions don’t support your organization’s goals. Will your suppliers help you achieve your strategic objectives – or will they get in your way?
Compliance risk. You could be at risk if your suppliers don’t comply with government or industry laws, rules, or regulations that apply to the products and/or services they provide to your organization.
Environmental, social, and governance (ESG) is an emerging compliance risk. Corporate practices regarding the sustainability of the world, human rights, and business practices/ethics have come under increased scrutiny from customers, regulators, employees, and investors. Although ESG reporting requirements and compliance are currently fragmented, forward-thinking organizations are taking steps to track and manage their ESG practices and progress to prepare for future developments.
Operational risk. You could be at risk if a third party has a breakdown with its internal processes, people, or systems. These failures can impede your ability to meet deadlines, expectations, and other performance benchmarks. Like any organization, third parties are also at the mercy of external risks such as natural disasters, acts of terrorism, and pandemics. While these risks are beyond the control of a third party, contingency plans for maintaining business continuity need to be factored into your TPRM program.
Financial risk. A third party’s financial troubles – losing a line of credit, taking on too much debt, filing for bankruptcy, and so forth – can be passed on to your organization in the form of increased costs or unfulfilled orders, which can negatively impact your bottom line.
Cybersecurity risk. You could be at risk of a data breach or cyberattack if your suppliers are lax in their cybersecurity standards. Third parties that pose the most serious risks are those that have access to your internal systems, finances, or confidential data such as customer and employee PII. When a third party has access to this type of information, you’ll want to make sure these suppliers are in continuous compliance with your security protocols.
Reputational risk. Your reputation is at stake if you experience a cyberattack, a supply-chain disruption, a decline in the quality of your products/services, or any other incident that affects customers and stakeholders. Even if a third party is responsible, it’s your reputation that will be damaged.
Geopolitical risk. 68% of executives said that geopolitical risks have a very high impact on their company. The war in Ukraine, pandemic-related lockdowns in China, and slow response to social issues are just a few geopolitical risks that continue to constrict access to talent, goods, and services for companies around the globe. Consider where your suppliers are located and closely assess the potential for conflicts, tariffs, sanctions, and more to understand your risks and where extra mitigation is warranted.
How to Protect Yourself from Third-Party Risks
Managing third-party risk requires constant oversight to ensure strategies and remediation plans are appropriate and align with your overall risk management program. Here are six steps to fine-tune your TPRM program:
1. Seek out the likeminded.
Look for third parties that have excellent credentials, sound financial histories, strong security controls, and shared values. Spend time developing relationships and building trust with your third-party suppliers. Have honest conversations about your requirements and expectations, and then spell them out in your contracts.
2. Know whom you are working with.
Maintain a complete database of all third parties, the products/services they provide, and areas of potential risk.
3. Conduct regular assessments.
Use detailed questionnaires to assess the risks of your suppliers – and track their responses and any follow-up actions.
4. Categorize your vendors.
Calculate a risk score, and use that to sort your third parties into high, medium, and low risk categories to prioritize actions. High-risk vendors – like suppliers and distributors of products, IT cloud services, or electronic billing services – should be reassessed more frequently and more thoroughly than low-risk vendors like marketing consultants.
5. Evaluate access to sensitive data.
Make sure your suppliers have access to the information they need to perform their function and nothing more.
6. Have a feedback loop.
Your relationships with third parties are dynamic, and it’s important to regularly reassess their financial, operational, security, and compliance status to uncover any new or changing risks, so you can make any necessary adjustments.
Many companies rely on thousands or tens of thousands of suppliers – any one of which could cause damage. Protecting your organization from that many threats is impossible to do efficiently with spreadsheets. It takes sophisticated software that can track every aspect of your third-party relationships from beginning to end.
Third-party risk management software consolidates important information in one, easily accessible place. It automates processes, standardizes assessments, and streamlines onboarding. It also can send automatic alerts and notifications if a supplier falls out of compliance or other experiences another status change.
What is third-party risk management to your organization? Defining what TPRM means and how to manage it will protect your business – and help you build trusting, long-term relationships based on mutual respect and a shared purpose.