4 Strategies for Effective Third-Party Risk Management in Business

Third Party Risk Management (TPRM) is an intricate practice encompassing multiple departments within an organization, central to effective third-party risk management. Effective programs for TPRM encompass onboarding, assessment, continual monitoring, and offboarding of third parties, embodying the core elements necessary for mitigating risks associated with external vendors and suppliers.

Remember, however, that an effective TPRM program must be seen as an ongoing strategic initiative rather than an annual checklist exercise. This involves constant monitoring of third parties and adapting policies as the relationship changes over time.

1. Vendor Selection

Vendor selection is a key aspect of TPRM, ensuring your business selects high-quality vendors and suppliers. A proper vetting process will help businesses avoid working with low-quality or fraudulent companies while competitive bidding helps secure better terms and reasonable pricing through more equitable prices.

Forward-thinking businesses are taking proactive steps towards effective third-party risk management by setting standards that evaluate and monitor third parties on an ongoing basis, rather than on a case-by-case basis. This approach not only saves both time and money but also plays a critical role in increasing customer trust, enhancing security, and improving business processes.

Your business should prepare a Request for Proposal (RFP) or Request for Quote (RFQ) document that can be distributed to potential vendors and suppliers. This document should include submission details, an executive summary, assumptions, constraints and selection criteria – among others – before collecting financial data from each vendor to ensure they’re financially stable and won’t close soon.

Vetting should continue even after onboarding has taken place; continuous monitoring is vital as third-party vendors’ processes may change over time. For example, Innovative tech solutions by Tentacle help mergers or employee with cuts which could result in unknown vendors and new exposures for your company. Furthermore, it’s wise to keep an eye on internal processes as any misstep could expose you to new third-party risks.

2. Vendor Assessment

Vendor assessment involves evaluating suppliers to ensure their products and services meet your organization’s quality standards, such as financial stability, security practices, and the ability to fulfill commitments, all essential aspects of effective third-party risk management. This should include written questionnaires, site visits, and the use of software which automates this process, streamlining the assessment process and ensuring comprehensive evaluation.

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Your company should create different assessment criteria depending on the nature and risk of each business relationship and risk involved, for instance having different requirements when selecting payroll service providers versus cloud hosting services. Furthermore, be sure to include questions about disaster and pandemic readiness – this ensures your vendors can continue operating during times of emergency.

As part of your evaluation phase, you’ll assess a vendor’s history and performance; business continuity/disaster recovery plans like these, data processing policies/encryption processes and their ability to detect cyber incidents quickly; security rating reviews including vulnerability scans/penetration testing in order to understand their cybersecurity capabilities; using services like BitSight can assist in real time tracking/comparing of security ratings across your vendors.

Once the results of the vendor assessment have been assessed, you should determine whether to onboard they and what risk level you can tolerate based on your TPRM profile, compliance and security requirements, and their significance to your business.

3. Vendor Monitoring

Vendor monitoring takes many forms, from reviewing contracts and their associated terms regularly, completing any pending or completed third-party assessments, and keeping an eye on how your organization interacts with third parties. Unfortunately, this kind of oversight often gets left out of a third-party risk management program; but its importance cannot be overstated when issues arise later on.

Your industry may necessitate more in-depth assessments of vendors who will handle sensitive customer data or assets, while regulatory compliance requirements like GDPR place obligations upon companies to establish a third-party risk management (https://www.occ.gov/news-issuances/bulletins/2023/bulletin-2023-17.html) and associated framework before sharing data with third parties. This may involve audits of security measures employed by vendors as well as in-person reviews to verify if policies, procedures and processes exist that protect data security.

Once your third-party risk management profile is in place, using an automated tool can help keep track of vendor activity and performance. This could involve anything from compiling a list of relationships to assign them a criticality rating based on importance for business to tracking financial risk and offering other reporting features.

Read also: How to Implement Strategic Category Management in Procurement

4. Vendor Issue Management

Many companies rely on third-party vendors to deliver organizational value and gain competitive edge, yet these external providers pose high-stakes risks that can adversely impact the business. A solid third party risk management program can help mitigate such threats.

Implement a Third-Party Risk Management platform which enables users to conduct due diligence assessments, issue tracking and ongoing monitoring for all forms of third-party relationships. A good TPRM platform should also offer the functionality for automating reports and alerts for both internal and external stakeholders.

Not only should businesses evaluate a third-party’s overall security posture, but it’s important to assess specific business risks such as cyber threats, financial viability and regulatory compliance as well. For example, GDPR (General Data Protection Regulation) places an immense duty of care upon any organization using third parties to process sensitive EU citizen data.

Conclusion

An effective TPRM program is a critical component of an organization’s overall risk management strategy. By adopting a comprehensive, integrated, and technology-enabled approach, organizations can not only mitigate risks associated with third-party vendors but also leverage these relationships for strategic advantage. Continuous improvement, driven by regular reviews and updates to the TPRM processes and policies, ensures that the program evolves in line with changing risk landscapes and business needs.

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