What Are the Key Elements of Third Party Risk Management?

November 2, 2024
What are the key elements of third party risk management

In any industry, businesses take on some degree of liability when beginning a project – especially when third parties like suppliers or vendors are involved. Anytime you establish a new business relationship, it may be an exciting step, but it also opens up the door to potential risks. Evaluating these potential threats involves assessing the inherent risk posed by third-party vendors, which is determined based on factors such as industry benchmarks, business context, and the criticality of the vendor.

In this blog, we’ll delve into third-party risk management (TPRM) and discuss how businesses can use risk mitigation strategies to proactively strategize and protect themselves from potential threats.

What Is a Third-Party Risk?

Let’s begin by describing a few main examples of risk across industries, that third parties, like vendors and external partners, can open your business up to. Managing relationships with third-party providers is critical, as it involves responsibility regarding their actions and the associated risks such as:

  • Operational risks affect a business’s ability to operate smoothly. For example, if a supplier fails to deliver necessary parts, it could halt a manufacturing line, causing delays in the project timeline.
  • Compliance risks are the risk of third parties not adhering to legal or regulatory standards. If a healthcare provider partnered with a vendor who wasn’t compliant with HIPAA regulations, it could result in a costly investigation and penalties.
  • Reputational risks are scenarios where third-party failures hurt a company’s public image. For example, if a clothing retailer was found to use a supplier that violates labor laws, it would likely lead to negative media coverage and public backlash.
  • Financial risks are when a third-party vendor’s financial instability affects their ability to deliver services. For example, a construction firm’s subcontractor could go bankrupt mid-project, causing delays and bringing increased costs to the firm.
What Is Third-Party Risk Management?

What Is Third-Party Risk Management?

In today’s highly globalized business environment, companies are relying on third-party vendors more than ever before. These arrangements are generally made in good partnerships that help businesses save money and operate more efficiently, but they can also introduce risks, like the ones mentioned above, that must be carefully handled. Managing COIs in Risk Management also plays a role in this process, to ensure unbiased decision-making when evaluating and managing coverage across third-party relationships.

Third-party risk management (TPRM) and vendor risk management are the processes of identifying, assessing, mitigating, and monitoring the risks posed by third parties. It begins with a detailed evaluation of potential risks that external relationships may expose to you as the hiring party. You’ll then develop strategies to reduce the likelihood of those risks occurring. Finally, it is essential to regularly monitor and communicate with your third parties in regards to compliance, while you’re evaluating and mitigating your third-party risk exposure over time, to ensure that your business is within health risk standards and is aware of its “risk appetite” – while protecting future business.

What Are the 3 Components of Risk Management?

There are a few major facets to include when building a robust TPRM strategy, including:

  • Risk assessments, or evaluating the level of risk posed by each third party to identify vulnerabilities that could potentially lead to data breaches or other cyberattacks.
  • Risk control means taking actions to minimize or eliminate identified risks.
  • Risk monitoring, or analyzing vendor performances and watching for threats as business relationships continue.

What Are the 3 Key Factors That Contribute to a Risk?

When identifying third-party risks, it can be helpful to understand the key elements that contribute to the severity of a risk. Implementing a structured third-party risk assessment framework is essential for systematically evaluating vendors before onboarding them. Three components that can make up a risk are:

  1. External factors. These can be industry-wide risks, market changes, and even geopolitical conditions – anything beyond a company’s control that can impact third-party relationships. For example, when regulations change in different countries, compliance risks can increase.
  2. Internal vulnerabilities. These are weaknesses within an organization that could cause or exacerbate third-party risks. For instance, if a company has weak (or no) data protection measures in place, they’ll be more vulnerable to cybersecurity risks from third-party vendors.
  3. Potential impact. This refers to the consequences of a risk if it were to happen. As we mentioned, the impact can range from financial losses to regulatory fines, operational delays, reputational damage, and more. Understanding the potential impact of a risk is crucial when deciding which risks to prioritize mitigation strategies for.

What Are the Key Elements of the Risk Management Process?

An effective third-party risk management framework includes several critical steps to ensure that risks are effectively identified and controlled. Below are the key elements involved in the process:

Identifying risks. The first step is to note all potential risks associated with a third-party relationship, considering various types of risks—financial, operational, compliance, reputational, and more—that could arise. Gather comprehensive information on vendors and their operations through due diligence, leveraging tools like questionnaires, site visits, or cybersecurity assessments to get a full picture.

Assessing risks. Once you’ve identified possible risks, evaluate the likelihood and potential impact of each risk within your vendor risk management program. Businesses can organize vendors based on their level of “criticality,” using clear criteria such as their access to sensitive data, regulatory obligations, or their role in business operations. High-risk vendors should understandably receive more attention, with dedicated risk mitigation and monitoring strategies.

Mitigating risks. Risk mitigation involves developing tailored strategies to reduce the impact of identified risks—particularly the more likely and potentially impactful ones. These strategies could include establishing clearer contracts, requiring third parties to comply with specific standards, or implementing technical safeguards such as encryption and multifactor authentication. Engaging stakeholders across departments ensures all relevant risks are addressed.

Monitoring risks. Even when mitigation plans are in place, continuous monitoring is crucial to ensure that new risks don’t arise or existing ones don’t escalate. Regularly review vendor performance against agreed-upon standards, using third-party risk management software to automate alerts and streamline assessments. Training programs can also ensure both employees and vendors remain aligned with your organization’s risk expectations.

Reporting and reviewing risks. Clear documentation and reporting processes are essential for successful third-party risk management. Maintain detailed records of risk assessments, mitigation plans, and vendor performance reviews to inform audits and refine strategies. Regularly evaluate the effectiveness of your TPRM program, incorporating lessons learned to address emerging threats and evolving business needs.

Building a culture of risk awareness. Beyond these steps, fostering a culture of risk awareness across your organization is vital. Ensure all employees understand their role in managing third-party risks, and establish clear protocols for escalating issues if vendors fail to meet compliance standards.

By addressing these key elements and integrating advanced tools, stakeholder collaboration, and continuous improvement, organizations can build a robust third-party risk management process that safeguards their operations while enabling growth.

What Are the Five Key Elements of the Risk Management Process?

Ready to Strengthen Your Third-Party Risk Management?

Managing third-party risks, including supply chain risk management, is a complex but essential process for businesses that work with external partners. By following a strategic risk management framework and focusing on the key elements of identifying, assessing, mitigating, monitoring, and reporting risks, organizations can protect themselves from a wide range of potential threats.

Ready to start strengthening your TPRM efforts? Reach out today to explore how our solution can help you streamline third-party risk management and maintain peace of mind. Reach out today!

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