In today’s globalized, interconnected business landscape, third-party risk management (TPRM) has become a vital practice for organizations that work with external vendors and partners within a third-party ecosystem.
In this blog, we’ll explore what third-party risk management means, examples of when it’s necessary, and walk through how to create a TPRM strategy to keep your company protected.
What Is Third-Party Risk Management?
Third-party risk management is essentially the identification, third party risk assessment, strategizing, and ongoing monitoring of potential risks associated with working with third-party partners and vendors. In simple terms, it’s about understanding the risks that could come from business relationships and taking steps to negate or reduce them.
The importance of managing third-party risks can’t be understated. Without a structured approach to managing these risks, organizations can face unexpected disruptions, security breaches, regulatory penalties, and more.
Incorporating third-party risk management into a broader enterprise risk management framework ensures that all organizational risks are identified and addressed comprehensively.
A comprehensive TPRM framework helps businesses better understand and control these risks, safeguarding their regulatory compliance, daily operations, and levels of internal and external trust.
What Is Third-Party Management Examples?
Third-party risks are present for businesses and external partners across industries. Managing risks associated with third party providers is crucial for maintaining compliance and protecting sensitive data across various industries. Let’s walk through some examples of industries with prevalent third-party risk concerns.
TPRM in Financial Services
Financial institutions like banks might outsource something like their IT services to a technology provider. While this might be a good idea for them in terms of operational efficiency, it also opens them up to risks. If the external provider doesn’t have a robust security posture, the bank could face the serious ramifications of a data breach. TPRM here would involve elements like conducting regular audits of the IT provider’s security measures, requiring specific certifications or procedures, or building other protections into the contractual agreement.
TPRM in Healthcare
Healthcare is another industry that deals with highly sensitive data – and faces threats of third-party cybersecurity risks. Hospitals also often rely on medical suppliers to deliver the necessary materials. Whatever the external relationship, it inherently comes with risk, and managing third-party relationships is crucial for ensuring compliance with HIPAA regulations. A TPRM system would help ensure that each partner complies with HIPAA regulations to protect patient data from unauthorized access and make standards for supply delivery to ensure compliance.
TPRM in Retail
Most retail companies rely on a few suppliers for the materials used in the merchandise they sell. Some specifically choose to work with third-party vendors in other countries where labor is cheaper for more cost-effective production. However, if these suppliers fail to meet labor standards or are found to follow unethical practices, it could lead to compliance issues, operational delays, and significant reputational damage to the retailer in question.
TPRM in Manufacturing
In the manufacturing sector, companies that rely on global suppliers face risks related to supply chain disruptions or even geopolitical issues. Compliance is also a hugely important concept in construction, especially when it comes to ensuring proper insurance coverage for all contractors and subcontractors. A successful TPRM framework in this context might involve establishing a vendor risk assessment process for suppliers, developing contingency plans to mitigate potential disruptions, and requiring certificates of insurance (COIs) as mandated proof of coverage for all workers within contractual agreements.
What Skills Do You Need for Third-Party Risk Management?
While TPRM is a necessary business practice for any company working with third parties, there are a few key skills required for effectively managing third-party risks:
- Risk assessment: The ability to evaluate a vendor’s potential impact on operations, reputation, financials, and more through a structured third-partyrisk assessment.
- Data analysis: The skill of parsing through large amounts of data to draw conclusions and inform strategy. This can be especially helpful in the ongoing monitoring portion of TPRM.
- Communication and interpersonal skills: Strong verbal and written communication skills and the ability to converse well with others are also helpful here, as maintaining positive vendor relationships with clear communication is essential to reducing risks.
A robust third-party risk management team will include various roles and responsibilities that cover these skill sets. Some of these include risk analysts, compliance officers, cybersecurity specialists, and vendor managers, each responsible for different aspects of the process. Relevant training and certifications that could empower third-party risk professionals are the Certified Third Party Risk Professional (CTPRP) and the Certified Information Security Manager (CISM).
How Do You Create a Third-Party Risk Management Program?
Building an effective vendor risk management program requires a structured, systematic approach. Let’s walk through the basic steps to develop a third-party risk management program:
- Identify which vendors and risks are most relevant to your business and list the potential threats that could occur. Identify the tasks associated with the activity. Conduct comprehensive risk assessments to identify potential vulnerabilities and classify vendors based on their risk level.
- Assess and prioritize risks based on their likelihood of happening and potential impact.
- Create strategies for reducing the likelihood and or impact of threats brought by the most high-risk vendors identified. Develop contingency plans for if a third party encounters issues or fails to meet contractual obligations.
- Conduct ongoing monitoring and regular vendor reviews to ensure you’re reducing the threat of ongoing risks and staying ahead of new ones.
Consider streamlining your business’s efforts with various tools and technologies that support third-party risk management. Common examples include vendor risk management software, cybersecurity assessment tools, and certificate of insurance (compliance management) services.
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How Can I Get Started With TPRM?
Ready to take the first step toward a secure vendor ecosystem? Reach out to explore how our TPRM solutions can help you strengthen your risk management practices. Request a demo today!