Imagine this: Your company’s groundbreaking product launch turns into a PR nightmare when your cloud provider suffers a breach, exposing your customers’ sensitive data. As regulators circle and your stock plummets, the painful realization sets in: your organization’s reputation hangs in the balance because of a vulnerability you never directly controlled.
In today’s interconnected business ecosystem, your security is only as strong as your third-party relationships. Will you see the threat coming before it’s too late?
That’s why rigorous third-party risk management (TPRM) is critical. To be effective, TPRM must follow current best practices. This includes using technology solutions that can reliably investigate and monitor third-party risks.
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What is third-party risk management?
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What is third-party risk management?
Third-party risk management (TPRM) is a type of risk management that systematically identifies, assesses, monitors, and mitigates risks that arise from an organization’s relationships with external vendors and business partners. Modern organizations can engage with dozens or even hundreds of third parties. This creates extensive risk exposure that can threaten business continuity, regulatory compliance, and organizational reputation. Effective TPRM ensures continuity by identifying and mitigating these risks.
In today’s interconnected business environment, TPRM is essential for maintaining customer trust, protecting sensitive data, ensuring regulatory compliance, and preserving operational resilience. And given the risks not only to individual organizations but to the economy and even the global financial system, regulatory bodies including the U.S. Office of the Comptroller of the Currency (OCC), the Federal Reserve, FDIC, and several international regulators have established expectations for third-party risk oversight. These entities can levy significant penalties if a TPRM program is inadequate.
To develop truly effective TPRM, an organization needs a clear understanding of the types of risk that third parties can introduce.
Operational risks
Operational risks arise due to reliance on third-party suppliers for key materials, components, or services. For manufacturers, this can create vulnerabilities in their supply chains, potentially leading to production delays and increased costs.
Cybersecurity risks
Third parties increase an organization’s cybersecurity risks by broadening its attack surface. Their security vulnerabilities can expose a company to financial penalties, legal repercussions, and reputational damage.
Financial risks
As UNFI’s retail customers discovered, a third-party provider’s operational failure can impact an organization’s ability to deliver products or services, resulting in lost revenue and customer dissatisfaction. In that sense, TPRM is a form of financial risk management.
Regulatory and compliance risks
If a third party fails to comply with relevant regulations or industry standards, it can expose a company to legal and financial penalties, even if it isn’t directly involved.
Reputational and strategic risks
Negative events or actions on the part of a third party can damage a business’s image in the marketplace—and thus its financial well-being. A data breach is an obvious example of such an event.
The TPRM lifecycle
The third-party risk management lifecycle is a structured process for identifying, assessing, mitigating, and continuously monitoring risks associated with external vendors, suppliers, and service providers throughout the entire relationship, from initial selection through contract termination.
TPRM encompasses the entire spectrum of risk oversight functions from initial vendor selection through contract termination. For most organizations, the TPRM lifecycle consists of five “phases.”
Phase 1: Risk assessment and due diligence
This involves thoroughly vetting potential vendors and other third-party providers before engaging with them, including assessing their security practices, operational stability, and compliance history.
Phase 2: Contract negotiation and onboarding
Organizations should clearly define service level agreements, security requirements, and contingency plans in contracts.
Phase 3: Ongoing monitoring and management
Key events to monitor throughout a third-party relationship include regulatory changes, security vulnerabilities, and media reports that might affect the vendor’s risk profile.
Phase 4: Incident management and issue resolution
Organizations should conduct periodic audits of third-party providers to identify and address any contractual or security risks. They also should develop contingency plans to manage possible disruptions, identifying backup vendors in case current providers can’t deliver needed products or services.
Phase 5: Contract renewal or termination
When ending third-party relationships, organizations will want to ensure that all shared assets and data are returned or disposed of. They’ll also need to generate detailed paper trails of the offboarding process for compliance purposes.
To thoroughly manage the TPRM lifecycle, many organizations, particularly smaller ones, face some significant challenges:
- Resource and capacity constraints. Staff time and other resources are often in short supply.
- Vendor relationship and operational problems, as discussed earlier under the various risks. Technology and data management issues, particularly those involving security of an organization’s proprietary information.
- Fourth-party supply chain risks. Third parties usually have their own third-party suppliers, which introduce additional risks for organizations.
- Regulatory and compliance complexity.
Best practices for TPRM
For hundreds of grocers across the U.S., UNFI has long been a trusted vendor. Supermarkets large and small will continue to rely on the wholesaler as a source of supply, even as it works through the fallout of the cyberattack.
Clearly, even a reputable third party can introduce risk. All the more reason for organizations to follow best practices throughout the TPRM lifecycle:
- Strong governance and oversight. Conduct thorough due diligence before onboarding vendors. This includes using standardized risk assessment frameworks.
- Risk-based strategies and categorization. Some third parties are more crucial than others. A risk-based approach focuses most of an organization’s TPRM resources on higher-risk outside parties.
- Regular compliance management. With changing regulations and technologies, it’s essential to verify third parties’ good standing.
- Comprehensive reporting. TPRM is an ongoing process, not an occasional task. Rigorous documentation helps keep the program on track.
- Continuous monitoring. Risks often evolve, and TPRM policies and procedures need to evolve with them. Organizations should regularly engage with third parties to uncover and address these changes.
- Leveraging technology and automation. Digital tools can streamline TPRM tasks, thus helping establish consistent, repeatable, and scalable risk management protocols.
While leveraging technology is a key best practice, these digital tools must be able to conduct vendor due diligence thoroughly and efficiently. Thomson Reuters Risk & Fraud Solutions can help organizations implement robust third-party risk management. Powered by CLEAR, an investigation platform that rapidly analyzes a wide variety of large datasets to deliver pertinent know-your-vendor information.
CLEAR provides a trustworthy single technology resource for:
- Validate identities to prevent fraud before onboarding
- Screen entities for global sanctions to identify risks
- Assess risk tolerance levels before entering a business relationship
- Monitor on-going activity and be alerted of new adverse matters
- Investigate concerns that could harm your business
CLEAR Third-Party
Create a consistent, repeatable process for vendor, investor, and third-party review
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