The Importance of Third-Party Risk Management

Many companies, be them big or small, in any different field, relate themselves with clients, partners or vendors – and all this confidential data needs to be protected. 

Third-party risk management – also known as TPRM – is a form of risk management that focuses on identifying and reducing risks relating to the use of third-parties (sometimes referred to as vendors, suppliers, partners, contractors, or service providers). 

The discipline is designed to give organizations an understanding of the third-parties they use, how they use them, and what safeguards their third-parties have in place. The scope and requirements of a third-party risk management program are dependent on the organization, and can vary widely depending on industry, regulatory guidance, and other factors. Still, many TPRM best practices are universal and applicable to every business or organization. 

While exact definitions may vary, the term “third-party risk management” is sometimes used interchangeably with other common industry terms, such as vendor risk management (VRM), vendor management, supplier risk management, or supply chain risk management. However, TPRM is often thought of as the overarching discipline that encompasses all types of third-parties and all types of risks. OneTrust has a great definition here. 

And why is Third-Party Risk Management important?

Disruptive events, such as the COVID-19 pandemic, have impacted almost every business and their third-parties – no matter the size, location, or industry. In addition, data breaches or cyber security incidents are common. In fact, more than half of the breaches that have occurred over the past two years were caused by a third party. The importance of using TPRM is directly linked with cybersecurity – if a third-party does not have a strong defense against cyber-attacks, one’s organization could easily end up “giving” access away to others. Therefore, making use of TPRM guarantees information protection. It is also efficient when it comes to reduction of costs over the long term or when one has to avoid any security incidents. 

Prior to now, vendor risk management has been time-consuming and error-prone, consisting of manual processes using emails, spreadsheets, and siloed vendor risk management tools. These processes and tools are simply inadequate, as neither the tools nor the teams can keep up with the growing number of third-parties. Common challenges faced by enterprises who haven’t implemented modern or comprehensive solutions include: 

Manual Processes
Low efficiency with monitoring third-parties and a longer amount of time to find and mitigate issues. 

Lack of scalability
Teams cannot keep pace with third-party management when they are using a tool that will not scale, which can increase risk
 

Siloes
Too many siloes can create difficulty accessing risk information across the organization
 

Disconnected
No enterprise context makes it difficult to prioritize third-party risks through the vendor lifecycle, or when requirements change
 

 TPRM can be used to deal with risks in the financial sector, legal sector or operational sector. Finance and reputation walk along when an organization has to pay fines usually followed by data breaches. Legally, an organization can be found liable of crime if a vendor violates the law. On an operational scale, a third-party can harm an organization’s data or not provide adequate service – and that is why risk-management is important: such issues must be avoided.

 

To protect the understanding of what TPRM is for, the Third-Party Management Program establishes a framework to manage third-parties within an organization. The establishment of the framework includes the definition of policies, procedures, methodology and templates to support the management of third-parties appropriate to the services and/or goods provided, and associated level of risk. 

A TPRM Framework outlines the key approach and continuous processes to embed across the organization to ensure appropriate control for all third-parties. It offers: 

  • A comprehensive database of third-party relationships 
  • A comprehensive catalog of specific risks to which third-parties can expose the firm
  • A risk-based segmentation of third-parties 
  • A disciplined governance and escalation framework 
  • Integrated technology across business workflow 
  • Effective executive transparency to risk through dashboards 

 

The Lifecycle of TPRM deals with the selection of vendors that deal with organization’s requirements, followed by onboarding. Inherent Risk Scoring is the risk level of a vendor an organization has to observe for. Any risks identified are to be scored regarding their likelihood and danger. This risk monitoring involves finances, screenings, cyber-related issues or business issues. With such monitoring and assessments, it can be easy to determine if selected vendors are meeting their criteria in-pair with the organization, and then, offboarding takes place – when all final obligations are defined. This is the complete lifecycle of TPRM!  

 

And this is where Third-Party Risk Management brings value: it identifies risks that could damage the relationship between vendor and organization, and – consequently – breaks such risks down. 

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