In property management and real estate, operations simply could not thrive without reliance on third-party service providers. Whether maintenance contractors, cleaning or landscaping services, construction workers, or many others, these vendors help keep a property going – but they also bring risks to its operation.
Third-party risk management (TPRM) is the process of identifying and mitigating risks that external partners introduce. Effectively managing third-party risks is critical for property managers in order to protect assets, maintain tenant trust, and ensure legal compliance. Additionally, it is important to consider fourth parties, which are the indirect vendors connected through third-party relationships, as they can pose additional risks, particularly in cybersecurity breaches.
In this blog, we’ll cover some of the many risks that could emerge as a result of working with third parties in property management and discuss strategies for reducing and proactively managing your risk exposure.
Introduction to Third-Party Risks in Property Management
Third-party risks in property management refer to any potential issues or liabilities associated with working with external parties like contractors, vendors, and service providers. All of these partners expose their hiring companies to risk because they can have a direct impact on the organization’s operations, finances, compliance, and reputation.
Placing a major focus on risk management is crucial for companies to maintain operational efficiency, tenant satisfaction, and financial stability, as well as for keeping up compliance standards. It is important to hire third parties that align with your property manager’s standards and to enforce proper agreements and boundaries to mitigate liabilities.
Some of the common challenges that occur related to third-party risks include ensuring compliance, maintaining transparency, and managing vendor performance. Without adequately managing these risks, they can spiral, leading to negative consequences such as regulatory risks, legal issues, and financial liabilities, which threaten property value, tenant safety and satisfaction, your organization’s credibility, and more.
Learn more about Third-Party Risk Management in Construction.
How to Mitigate Against Third-Party Risk?
Now that we’ve laid the groundwork for understanding third-party risk in property management, let’s outline a simple three-step action plan to mitigate it. This is a common TPRM framework used across industries.
- Assessing risk potential and impact. The first step in mitigating third-party risks is conducting a thorough risk assessment. This includes evaluating all potential threats posed by all vendors or service providers. Consider various factors like their financial stability, compliance history, current level of coverage, and operational reliability. Consider exploring this further by assessing both the likelihood and the impact of these risks, which will empower you to prioritize and address them effectively.
- Establishing strong contracts and agreements to mitigate risk. Clearly defined contracts protect property managers by outlining a third party’s responsibilities, deliverables, and penalties for non-compliance. These official agreements are the perfect platform for communicating your needs and expectations that a vendor must agree to or forgo signing so you can find another partner that will. Consider including clauses related to performance standards, liability, confidentiality, and dispute resolution to ensure accountability and minimize your areas of vulnerability.
- Implementing regular audits and monitoring. Finally, ongoing monitoring and audits allow you to assess vendor performance and compliance in real time. These regular reviews will ensure that service providers continue to meet agreed-upon standards, providing you peace of mind. If you find that they’re not adhering to their contractual obligations or industry-wide standards as agreed upon, or if new threats have emerged, you can address them proactively before they have a large impact. It is crucial to have ongoing strategies to mitigate third-party risk throughout the vendor relationship, ensuring that risk mitigation efforts are effective beyond the initial contracting phase.
How Do You Mitigate the Risk When Using Third-Party Components?
How Do You Mitigate Risk From a Third Party? In our increasingly globalized and digital world, businesses no longer rely on just third–party organizations or individual service providers but also on third-party software components or operations. However, using third-party components introduces unique risks, especially when it comes to cybersecurity.
When considering onboarding a new digital product to your business’s collection of tech tools, evaluating the security posture of third-party providers before integration is vital. Conduct due diligence by looking into their data protection measures, industry compliance, and history of handling sensitive information. Managing third-party breaches is crucial, as these breaches can lead to significant regulatory, financial, and reputational risks.
Once onboarded, continuous monitoring and evaluation are also crucial. This involves conducting regular vulnerability assessments and implementing updates to address emerging threats. Proactive monitoring allows businesses to quickly detect and mitigate potential breaches.
Finally, incorporating robust cybersecurity practices is an ongoing strategy that businesses should use to protect themselves from all kinds of digital threats. Consider measures like multi-factor authentication, data encryption, access controls, and regular team training, which can protect sensitive information and reduce the impact of potential security threats.
Cyber threats are ever-changing, so businesses must stay resilient and adaptable in an evolving digital landscape.
How to Manage 3rd-Party Risk?
When a risk emerges, it is imperative to deal with it swiftly and strategically. As previously mentioned, implementing comprehensive risk assessment procedures is a necessary first step. A strong risk management process will generally begin with identifying all third-party relationships and their associated risks, as well as categorizing risks based on severity and likelihood. Whether it’s landscaping, cleaning, repair, or other vendors, it’s important to note where they could expose you, your property, or your tenants to risk. Ongoing monitoring and assessment are crucial in managing the vendor relationship effectively.
From there, the next step is to manage third-party risk by developing a risk response strategy for all threats, starting with those of high likelihood and/or impact. Prepare contingency plans for the different risk scenarios. These might include things like alternative vendors, renegotiating contracts, or addressing compliance gaps so you can ensure you can respond quickly when issues arise.
Finally, regularly updating your risk management plans is key to ongoing success. Socioeconomic trends, industry-wide or local regulations, weather surrounding your properties, and other external factors will evolve, so your risk planning efforts must, too. Regularly review and update strategies and train staff to adapt to new challenges to ensure ongoing, efficient risk mitigation.
What Are the 5 Phases of Third-Party Risk Management?
As we’ve explained, third-party risk management (TPRM) is essential for organizations to understand in order to mitigate potential risks that could arise from external partnerships. Below, we break the process into five structured steps to provide a comprehensive approach to effectively managing risks.
Step 1: Identification
Identify all third-party vendors and partners that your organization works with. This includes suppliers, contractors, and service providers. Create a comprehensive list to ensure no entity is overlooked.
Step 2: Evaluation
Conduct a thorough third-party risk assessment to evaluate the potential risks associated with each third-party vendor. This involves designing questionnaires, performing legal compliance checks, and utilizing technology to streamline the process. Ongoing evaluations are crucial to ensure that risks are managed and reduced effectively.
Step 3: Prioritization
Perform a vendor risk assessment to assess and prioritize the risks associated with each vendor. Categorize vendors by risk level and conduct thorough assessments before onboarding. Utilize service level agreements (SLAs) to mitigate potential risks effectively. A robust risk mitigation strategy is essential to address identified vulnerabilities and ensure proactive risk management.
Step 4: Monitoring
Continuously monitor the performance and risk levels of third-party vendors. Regular audits and reviews help identify any changes in risk profiles and ensure compliance with agreed-upon standards.
Step 5: Response
Develop and implement response plans for any identified risks or incidents. This includes having contingency plans in place and ensuring that all stakeholders are aware of the procedures to follow in case of a risk event.
Step 1: Identification
The first phase involves identifying all third-party relationships within an organization. Create an inventory of your external vendors, suppliers, and other service providers and outline their roles in your operations. Note which partners and providers have access to important data or systems that could become compromised. Accurate identification will ensure that no business relationship gets overlooked. Additionally, we recommend initial vendor screening and due diligence before beginning a relationship with a third party.
Step 2: Assessment
Once identified, businesses should subject their third parties to a thorough risk assessment to evaluate their potential impact on the organization. Research and investigate your third-party vendors in areas like reliability, financial stability, compliance with standards and regulations, and cybersecurity measures to manage operational risk. This could mean background checks, compliance reviews, financial stability assessments, reaching out to current or previous partners, and more.
Examine vendors’ past performance as well as how much information you are currently sharing with them or the many risks they could expose your business to. Consider using a framework like a risk scoring system to prioritize the most critical vendors based on highest-impact and/or highest-likelihood scenarios.
Step 3: Mitigation
After assessing and prioritizing risks, mitigation strategies must be put in place to address identified vulnerabilities. This essentially means implementing safety controls, improved contractual terms, and other safeguards to reduce the likelihood or potential impact of unfortunate incidents on your company. Some common risk mitigation strategies include:
- Strong contracts. When contract terms are clear, they put the onus on third parties to comply, rather than your business being caught off guard by bad behavior. Consider including performance metrics, non-compliance penalties, and data protection clauses.
- Cybersecurity practices. Requiring third parties to adhere to data protection policies and secure communication platforms helps protect important information. This is especially important to protect sensitive tenant data if you use a digital property management system.
- Redundancy plans. Also known as contingency plans, these are backup service providers to rely on so that one vendor’s lack of performance doesn’t disrupt your operations completely.
Step 4: Monitoring
TPRM is an ongoing process that depends day-to-day on vendor compliance, safety, and adherence to agreed-upon regulations and contractual obligations. Things like changes in the external environment, internal staffing shifts, evolving cybersecurity threats, new regulations, and much more can also affect operations. Therefore, whether we like it or not, it is necessary to ensure that third parties remain compliant throughout a partnership through continuous monitoring.
This phase includes checks like regular audits, performance reviews, and ongoing evaluation of third-party activities. Organizations must remain adaptable and vigilant in order to watch out for new risks and ensure that all hired third parties keep up with agreed-upon standards over time.
Step 5: Review and Reporting
Finally, along with monitoring, it is important to review and report all TPRM findings. Analyze outcomes of third-party activities to gauge how effective your risk mitigation strategies were at reducing the likelihood or impact of identified risks.
Reporting is also essential for maintaining transparency with stakeholders and demonstrating due diligence to regulators. By summarizing findings, highlighting important trends, and proposing actionable steps, you can incorporate learnings and improve your TPRM process going forward.
Key Takeaways on Managing Third-Party Risks
Together, the five phases explained above—identification, assessment, mitigation, monitoring, and review and reporting—provide a holistic framework for third-party risk management. When executed effectively, they help organizations minimize vulnerabilities and build stronger, safer, lasting business relationships.
While this can all sound like a lot to consider, remember that proactive risk management not only minimizes the threat of risks but also fosters trust with tenants and stakeholders, helping preserve a property’s long-term value. Regulatory compliance is crucial in this context, as it ensures adherence to privacy laws like GDPR and CCPA, securing sensitive data from potential risks.
Finally, continuously updating and innovating your risk management approaches is your best bet for long-term success in an ever-evolving industry.
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Don’t delay – proactively manage your third-party risks today. Still unsure of how to start? Give us a call to learn more about how you can reduce your risk exposure, or book a demo now.