Developing and maintaining partnerships with third parties entails a variety of dangers. Whether your company is huge or little, you almost certainly have several third-party business agreements for various types of operations. When operational information and confidential data are shared with external parties, they become open to abuse and misuse. This is where danger enters the picture.
Developing and sustaining a third-party risk management policy is an important company decision when these third parties lack effective cybersecurity safeguards or compliance. This is where third-party risk management comes in.
What Is Third-Party Risk Management?
Third-party risk management (TPRM) is a type of risk management that aims at identifying and minimizing risks associated with the use of third-party suppliers. TPRM is frequently implemented during the acquisition process and should be continued until the off-boarding process is completed.
The discipline aims to help businesses understand the third parties they work with, how they work with them, and what precautions they have in place. The scope and objectives of a third-party risk management program vary greatly depending on the industry, regulatory guidance, and other considerations.
While exact meanings differ, the phrase “third-party risk management” is frequently interchanged with other industry terminology, such as vendor risk management (VRM) as well as supply chain risk management. TPRM, on the other hand, is frequently conceived of as a broad discipline that incorporates all forms of third parties and risks.
What Is the Significance of Third-Party Risk Management?
While third-party risk isn’t a new notion, recent events and increasing dependence on outsourcing have pushed it to the foreground like never before.
Disruptive events, like the COVID-19 pandemic, have had an impact on practically every company and its third parties, regardless of size, geography, or business. Data breaches and cybersecurity problems are very widespread. In reality, a third party was responsible for more than half of the compromises that happened in the last two years.
The majority of modern businesses rely on third parties to keep things running properly. When third parties, suppliers, or vendors fail to deliver, the consequences can be severe and long-lasting.
You could, for instance, use Amazon Web Services (AWS) to host a website or cloud service. If AWS goes down, so does your website or application. Another example is relying on a third party to ship products. If the shipping firm’s drivers go on protest, it can cause delays in delivery times, as well as cancellations and dissatisfaction among customers, all of which will harm your company’s bottom line and image.
Outsourcing is an important part of running a contemporary company. It not only saves money for a company, but it is also an easy method to tap into skills that a company might not have on staff. The disadvantage is that relying on third parties can leave your firm susceptible if you don’t have a robust third-party risk management program in place.
What Are the Most Effective TPRM Practices?
Countless third-party risk management best solutions can help you strengthen your program, whether you are just getting started with TPRM or looking to see where your current program can be improved. We’ve described what we believe are the three most important best practices that may be applied to almost every business.
1. Organize Your Vendor Inventory by Priority
Because not all vendors are equal, it is crucial to figure out which ones are the most important. Segment your providers into criticality tiers to optimize the efficiency of your TPRM operation.
Most businesses divide vendors into three categories:
- Tier 3: Low risk, low importance
- Tier 2: Moderately high risk, moderately high criticality
- Tier 1: Extremely high risk and criticality
2. Always Use Automation
When operations are uniform and repeatable, efficiencies develop. Automation is useful in several aspects of the third-party risk management life cycle. Because each third-party risk management program is unique, begin by looking from within for recurring activities that can be automated. Start small and take practical efforts to automate critical chores from there. This modest automation will add up over time, sparing your team time, cost, and resources.
3. Consider Alternatives to Cybersecurity Threats
Many firms instantly consider cybersecurity concerns when establishing a third-party risk or vendor risk management plan. But there’s a lot more to TPRM than that. While beginning small and simply focusing on cybersecurity threats is a smart start, other sorts of risks must be considered.
The essential point here is that developing a world-class third-party risk management program involves a thorough grasp of all relevant categories of risk (not just cybersecurity).