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Justifying the Cost of Outsourced Third-Party Risk Management

4 min read
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Budget constraints and competing business priorities are familiar struggles that affect nearly every organization. Outsourcing third-party risk management creates a lot of organization-wide value, but justifying the cost to senior management and the board can sometimes feel like an uphill battle.

Here are some practical strategies you can use to advocate for your needs and persuade the decision makers at your organization to invest more in your third-party risk management program.

How to Justify the Cost of Outsourced Third-Party-Risk Management

For anyone involved in third-party risk management, you probably know exactly how outsourcing can help in your day-to-day activities. Supplementing existing resources through outsourcing can ensure effective and compliant program management. This includes tasks such as due diligence document collection, contract management, subject matter expert (SME) reviews, and data management and reporting.

To make a stronger case for outsourcing, it may be helpful to mention some of the wider benefits to senior management and the board. Consider discussing these advantages to justify the cost:

  1. Highlight the ways it can enhance your program. Outsourcing third-party risk management activities can ultimately elevate your program from burdensome, to mature and efficient. Activities like risk monitoring services, personalized questionnaires, and triggered risk reviews can be outsourced to help you identify and mitigate risk more quickly. This can help your organization avoid fines, legal fees, and reputational damage that are often associated with unmitigated third-party risk. 
  2. Calculate full-time employee (FTE) cost savings. To run an effective third-party risk management program, collaboration is crucial. However, involving SMEs and other staff members who lack expertise or have limited capacity to perform certain tasks can cause problems. These issues can result in errors that are both time-consuming and costly to fix. Outsourcing specific third-party risk management functions ensures you can access professionals with the required skills and experience to get the job done without hiring additional full-time employees. Calculating the potential FTE cost savings is a good strategy that can further emphasize the benefits of outsourcing. 
  3. Provide information on how it improves contract management. Many organizations spend a lot of time negotiating and drafting their vendor contracts, only to file them away until the renewal period. This can result in unforeseen renewals, increased costs, and unmitigated risks if the third-party's risk or performance isn’t monitored and fails to align with the contract. By outsourcing the contract management process, you can help maintain safe and beneficial vendor relationships. 
  4. Give details on the increasing burden of regulatory expectations. Managing third-party risks is an ever-changing field and regulatory standards are constantly updated to keep up with the latest trends and best practices. Smaller teams may find it challenging to meet these standards, which is why outsourcing can be a viable option to ensure compliance. 
  5. Describe the benefits of better reporting. It's important to report your program data to the board and senior management, not only because it's a best practice, but it's also a regulatory requirement. However, a common challenge with reporting is trying to present large amounts of data in an easy-to-understand format. Outsourcing third-party risk management can help you obtain accurate and timely data that is easy to comprehend, which can inform your stakeholders and drive action.

justifying cost outsourced third-party risk management

3 Tips to Communicate Effectively

Trying to justify the cost of outsourcing third-party risk management can be an ongoing challenge, even if your reasoning is valid. Consider the following tips that can help you communicate more effectively and achieve your outsourcing goals:  

  • Use concrete data – When discussing the advantages of outsourcing, it's best to avoid abstract ideas and focus on concrete numbers from real data. Instead of making a general statement about improved efficiency, it's more effective, for example, to specify how outsourcing contract management can save your team X number of hours each week. 
  • Understand their perspective – Senior management and the board may be hesitant to outsource for various reasons, and it’s important to understand what those are. You may discover that they have some misconceptions about the cost and timing of implementation, which can be further discussed with the data you provide. Maybe senior management assumes that outsourcing functions like due diligence reviews will require several months before successful implementation. You might be able to approach this situation by acknowledging their concern, while also discussing the long-term benefits of outsourcing and how it can save valuable time on these activities. 
  • Emphasize regulatory importanceRegulatory requirements are often the driving force behind many third-party risk management programs, so it may be worth emphasizing how outsourcing can help your organization maintain compliance. Stakeholders are likely to respond well to any suggestions that will help prevent compliance issues that are expensive and time-consuming to resolve.  

In order to make a sound decision about outsourcing third-party risk management, it’s important to conduct a comprehensive evaluation of all available options. This should involve careful consideration of associated costs, potential risks, and potential outcomes. It’s also important to assess whether your organization has the necessary resources and expertise to handle these tasks internally. Finally, it’s crucial to consider how outsourcing may affect your business operations. By taking all these factors into account, you will be better equipped to suggest the optimal solution for your organization.

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