You might hear a lot about third-party partnerships. That’s because they’re extremely important and common in modern-day business operations.
We can’t do it all ourselves, and a thriving economy relies on people specializing and working together to provide great service. However, any time you work with a service provider outside of your own business, you’re inherently exposing your organization to risk.
No need to worry, though; it’s nothing you can’t handle with a little preparation! Understanding the types of risks involved in working with partners and learning how to implement effective third-party risk management strategies is crucial for protecting business interests and enjoying successful collaborations.
Having a business continuity plan to address operational risks and ensure smooth functioning during disruptions caused by third-party failures is essential.
Follow along as we discuss the (more than) six risks associated with managing third-party partners, their implications, and actionable steps for mitigating them.
What Are the Types of Risks Associated With the Third Party?
Let’s begin by highlighting some of the most common risks businesses are exposed to when working with third parties.
- Operational Risks. Operational risk refers to the critical issue arising from disruptions caused by third-party vendors. These disruptions can lead to delays or full stops in operations, usually stemming from inefficiencies in a third-party process, system, or service that trickles down to affect your business.
- Financial Risks. Third-party partners can face financial instability on their ends, such as cash flow problems or even bankruptcy, that impact their ability to honor agreements and adequately deliver services. This financial risk can have a potential negative impact on an organization’s finances, leading to excessive costs and lost revenue.
- Reputational Risks. Whether intentional or accidental, third-party actions can reflect poorly on your business and damage your brand reputation.
- Compliance Risks. When third parties fail to comply with relevant laws and regulations, it can result in hefty fines, penalties, and even legal action against your business.
- Strategic Risks. Strategic risk occurs when the actions of third parties hinder an organization’s ability to achieve its strategic objectives. These risks arise when a third party’s objectives don’t align with your business’s, which can lead to wasted resources, inefficient operations, or other conflicts.
- Information Security Risks. Because some third-party vendors require access to sensitive data or information systems, if they experience security breaches or data theft, it can compromise sensitive data and negatively impact your business.
What Are the Risks of Third-Party Access?
When talking specifically about digital information security, also known as cybersecurity, there are a few major risks that can happen as a result of providing third parties with sensitive data access.
For example, third-party access to sensitive systems increases your risk of data breaches or information leakage, especially if they don’t have good cybersecurity measures in place. Robust data security measures are crucial to prevent a data breach, which can expose confidential information of customers, tenants, businesses, etc., leading to potential financial and legal consequences. Depending on the kind of information leaked, this could also threaten your business’s competitive advantage if intellectual property is shared. Additionally, without properly managing access controls, you could unintentionally allow unauthorized individuals to infiltrate your systems, which could lead to malicious activities like data theft.
Third-party data breaches highlight the importance of managing third-party access to sensitive data. Implementing identity and access management and a zero-trust approach can mitigate risks from a third parties.
Ultimately, any time you allow third parties to access or manage your data, you are losing direct control over its security and management. You are no longer solely in charge of how data is stored, shared, or protected, increasing your overall risk. Third-party breaches can lead to severe repercussions for organizations, including operational disruptions and loss of trust.
What Are the Risks of Third-Party Dependency?
Zooming back out to third-party relationships as a whole, while business-to-business collaboration is encouraged, outright dependency on a third party can create big vulnerabilities for your organization.
One major concern is service disruptions since any operational failure from a third party can lead to an operational failure for you, whether in the form of delays, downtime, or shoddy production. This dependency can also lead to a loss of control, as businesses give over control of some of their critical functions to third parties, where priorities may be misaligned or accountability is lacking. Engaging with a third-party vendor necessitates ensuring adequate protection of data both at rest and in transit.
Another risk here is increased costs, which can occur when working with vendors from situations like renegotiations, unexpected fees, or the cost of switching to a new vendor in the case that one doesn’t work out.
Finally, regulatory pressure can develop when third parties fail to adhere to industry standards or legal requirements. Maintaining compliance is one of the simplest ways for businesses to mitigate risk, as it helps them avoid costly fines, penalties, and potential claims or litigation.
The importance of third-party vendor risk cannot be overstated. Continuous risk monitoring is essential to safeguard organizational data and operational integrity, as vendors often have access to sensitive information.
What Are the Key Elements of Third-Party Risk Management?
The risks mentioned above are just some of the many threats businesses are exposed to when working with external parties. However, the list highlights the need to manage third-party risk effectively, emphasizing the importance of careful oversight, balanced reliance on third parties, and strategic, ongoing third-party risk management efforts.
Establishing a robust party risk management program that incorporates collaboration with internal and external auditors is crucial to mitigate risks associated with third-party relationships.
To start, here are the key elements of TPRM:
- Risk Assessment. Comprehensive risk assessments help businesses identify vulnerabilities, as well as the probability and potential impact of working with each of their external partners.
- Contractual Obligations. Strong contracts are the foundation for strong business relationships. Clearly defining enforceable expectations helps mitigate risk and protect your business in the case of disputes.
- Vendor Selection and Monitoring. Vendor risk management involves assessing various vendor risks and implementing continuous monitoring to ensure that organizations can effectively manage and respond to potential threats posed by external parties.
- Relationship Management. Building strong, clear, communicative relationships with third-party partners helps keep you and them safe, compliant, and operationally efficient.
- Continuous Monitoring. Regular monitoring and review ensures that third parties are adhering to agreed-upon measures and that new risks aren’t emerging unexpectedly.
Strengthen Your Business Relationships with Our Help
Third-party partnerships bring many benefits but require dedicated risk management to succeed. By understanding the six types of third-party risks and the key elements of TPRM, businesses can protect their operations and create beautiful, mutually beneficial collaborations.
Prioritize proactive risk management and consider investing in a comprehensive risk management solution like myCOI. Contact us today!