Protection against the dangers associated with working with a third party, such as a vendor, is why third-party risk management (TPRM) is crucial to every business. Potential reputational, financial, and information hazards depend on third parties to supply essential business products or services. It’s crucial to investigate potential partners to ensure they’re reliable. Both sides often must reveal previously unknown facts to conduct business with a third party.
The use of third parties, especially those with access to sensitive data, might increase the likelihood of cybersecurity threats. In such a scenario, your information can get leaked quite easily. This means hackers will know whether you are using the internet to access the Optimum customer service number or for streaming your favorite show on Netflix. Since your firm has no say over the vendor’s security measures, it must put its faith in the third party’s word that the shared information will remain private.
Understanding Third-Party Risk Management
Risks that arise from using outside suppliers or service providers are evaluated and mitigated through a process known as “third-party risk management.” Subcontracting and on-sourcing arrangements are becoming increasingly important aspects of vendor management to lessen the impact of third-party risk.
This is especially crucial for high-risk suppliers dealing with confidential information. This necessitates conducting due diligence to ascertain whether or not a potential partner is a good fit for the job at hand and, increasingly, whether or not they can maintain the confidentiality of sensitive data.
Due diligence refers to the research done on a third party to ascertain its suitability. As new security threats are added over time, suppliers must undergo continual assessment throughout their lifespan in addition to the initial due diligence. To that end, any program for managing risks associated with using outside parties should aim to lessen the following:
1. Cybersecurity Risk
It involves potential harm or financial loss due to cyber activity, such as hacking, data breaches, or other security issues. Due diligence before onboarding new suppliers and continual monitoring throughout the vendor lifecycle are commonly used to reduce this risk.
2. Legal, Regulatory, and Compliance Risk
The possibility that a third party will affect your company’s compliance with local legislation, regulation, or agreements is known as “legal, regulatory, and compliance risk.” Companies in the banking, medical, and government sectors and their suppliers may find this information particularly useful.
3. Financial Risk
The possibility that an external factor will hurt your company’s financial results is known as financial risk. For instance, if your company has bad supply chain management, its new product may not be successful in the market.
4. Operational Risk
Refers to the possibility that outside forces will interfere with regular operations. Service level agreements are commonly used to regulate this (SLAs). You should consider having a backup vendor in place to maintain business continuity, especially if your primary vendor is crucial to your operations.
5. Strategic Risk
It’s the possibility that your company may fall short of its business goals because of an external supplier.
6. Reputational Risk
The risk to one’s reputation when another party is responsible for a decline in esteem. Problems with unhappy clients, rude staff, and subpar suggestions are only the beginning. Third-party data breaches caused by inadequate security procedures, like Target’s data leak in 2013, are the most devastating catastrophes.
Benefits of Third-Party Risk Management
The widespread interest in external risk assessment shows that company executives globally recognize its significance. The advantages of third-party risk management include:
1. Mitigate Third-Party Risk
Continuous monitoring reveals third-party security risks. Instead of a calendar date, changes in security rating or regulations might prompt an evaluation. This guarantees that the assessment is driven by the need to perform one and avoid the risk that is unacceptable from being introduced into the third-party environment since it’s not time for reassessment yet.
Businesses with inadequate risk management often struggle with compliance issues, as government laws constitute a significant source of stress for these companies. Sanctions can harm a company’s reputation, which can cost money and customers or partners.
3. Risk Reduction
Knowing the risk associated with each supplier allows you to maintain uniformity. Doing so may reduce risks by negotiating with suppliers to ensure they all adhere to corporate policy.
Your company, like most others, probably deals with a wide range of suppliers. When analyzing vendor relationships, it is simple to fail to consider a particular vendor owing to familiarity or sheer volume. Setting up a formal evaluation system by a third party guarantees a thorough and unbiased analysis of all of your commercial relationships.
5. Strategically Collaboration
Some vendors are so good that they can work with the company on a more advanced level. Over time, organizations form bonds. Knowing and trusting each other makes conflict resolution simpler. In this circumstance, partners often search for methods to enhance their skills, leading to continuing financial success on both sides.
Automation of vendor risk management is now a no-brainer. The growing number and complexity of risks make it impossible to track them all by hand in Excel spreadsheets. New threat vectors and access points that might compromise your company are discovered every day. Therefore, one must adopt a scalable strategy for managing cyber and third-party risks.