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What Is Third-Party Risk Management?

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Are you new to the world of third-party risk management (TPRM)? Perhaps you work in one area of TPRM, but struggle to understand how all the components work together in this highly complex system of interrelated processes and practices. We’re going to breakdown the WHO, WHAT and WHY of TPRM which should give you a solid understanding of some key concepts.

Who: The main roles in TPRM

TPRM involves many different roles and responsibilities within an organization. Depending on the complexity of your program, some of these roles may not be designated to a single person or team but may instead overlap with other positions or can be found external to your organization.

  • Third party: Also known as vendor, service provider, supplier or third-party vendor; this is any person or legal entity that is external to your organization. A third-party risk management program is built to manage the risk from these groups.
  • Fourth party: Your third party’s subcontractors or vendors are considered your fourth parties. Even though you don’t have a direct contract with a fourth party, they still play an important role in your TPRM program, especially if they’re related to your critical vendors.
  • Vendor risk management team: This team (either an individual or group of people) is tasked with the overall maintenance of the vendor management program. Other duties include reporting to senior management and identifying emerging risk issues. This team also plays an essential role in onboarding, monitoring and assessing third-party relationships.
  • Subject matter expert (SME): SMEs are very important to TPRM, especially during the due diligence process. These experts have obtained certification in their specialized field which qualifies them to review certain documents and provide reliable feedback regarding the third parties’ adequacy. A common example is a certified public accountant (CPA) who is qualified to review a financial statement or a certified information systems security professional (CISSP) to assess the information security controls of an organization. They can also assess the sufficiency of your organization’s risk controls and determine the severity of any issues within your program.
  • Vendor owner: This individual works with the third party on a daily basis. Typical duties might include completing risk assessments and monitoring and reporting on service level agreements. The vendor owner should also ensure that the vendor is staying in compliance with your organization’s third-party risk management requirements.
  • Regulators: These state and federal agencies are industry specific and will closely inspect an organization’s TPRM to report any regulatory violations.
  • Senior management: Your organization’s senior management should be actively involved in developing the processes and reporting infrastructure within your TPRM program. They should be the ones assigning responsibilities to the correct individuals and teams, while also making informed decisions regarding fluctuating risk levels and any SLA issues.
  • Executive leadership and/or board of directors: This high level group of your organization will essentially set the “tone-from-the-top” to approve the TPRM policies. Their involvement is required by regulators and is especially crucial when dealing with critical and high-risk vendors.
  • Auditors: Internal or external auditors are important to utilize within your TPRM program, as they can identify any gaps or issues before they’re discovered by an examiner. Auditors can also suggest improvements and best practices.
  • Oversight and accountability: These roles ensure that your TPRM program is operating as intended and complying with regulations. The board of directors or executive leadership with define these roles and assign them through governing documents.

What: The processes in TPRM

The following duties and processes are essential to have in a strong TPRM program. When utilized together, they make up parts of the third-party risk management lifecycle, which is one of the best strategic methods to manage your vendors.

  • Taking inventory: An early step in third-party risk management is to take a full inventory of your organization’s third-party vendors. This can be done with the help of your accounts payable department. Creating an inventoried list of your vendors will allow you to identify their significance based on the products or services they provide.
  • Risk assessment: The process of assessing a vendor’s risk and criticality is done prior to collecting due diligence and selecting a vendor. There are two factors that need to be assessed: inherent risk and criticality. Inherent risk is based solely on the vendor relationship with your organization, without any precautions or controls in place. Criticality refers to the significance of the vendor’s products or services to your organization’s operations. In other words, how much would your organization be affected if the vendor failed to provide its products or services?
  • Due diligence: The due diligence process is an important step for your organization to determine its risk appetite. This is where you’ll collect and review relevant vendor documents and apply controls to mitigate or reduce the inherent risk to residual risk. You can then decide if the residual risk is at a level that’s acceptable to your organization.
  • Vendor selection and contract management: After you decide on an acceptable level of risk, you can move on to the process of selecting a vendor and generating written agreements. A well-written contract with clear service level agreement (SLA) terms is widely beneficial for both your organization and the vendor. The contract will keep both parties on track and reduce the possibility of missing important contract term dates.
  • Ongoing monitoring: Many organizations neglect this important step after selecting a vendor and signing the contract. Your engagement with the vendor is ongoing and should therefore be continuously monitored for any new risks or issues. Data breaches or unmet SLAs are a couple of examples that can be identified through ongoing monitoring. Regular reports, risk assessments and SLA tracking should all be components in this process.

Why: The purpose of TPRM

Regulatory requirements are indeed an important objective for TPRM, but that’s just the start. Your TPRM program should also be implemented to benefit your organization from within. Here are some reasons why.

  • Regulatory requirement: Many will look to regulatory requirements as the primary purpose of third-party risk management. Failing to adhere to your industry’s guidelines can result in severe consequences, depending on the violation. And, even if not in a regulated industry, it’s a best practice to follow stringent industry regulations. A mild violation may simply result in an official notice with a deadline to correct the issue. However, consequent penalties may be much harsher such as heavy fines or a required suspension of business activities. While regulatory requirements are certainly an important factor, TPRM serves many other purposes.
  • Mitigate risk: Aside from regulatory requirements, perhaps the most obvious purpose of third-party risk management is to control and mitigate the risk that’s associated with your third-party vendors. There are many different categories of risk including, but not limited to, strategic, operational, reputation, compliance and cybersecurity. Depending on what products or services the vendor provides, its risk may fall under multiple categories. For example, a vendor that stores personally identifiable information (PII) would cause your organization to be responsible for compliance, cybersecurity, reputation and operational risk.
  • Cost and quality control: TPRM processes can be used to maintain a vendor’s expected performance, often done through the monitoring of service level agreements (SLAs). Through ongoing monitoring and regular risk reviews, there’s a significant reduction in costly rework and regulatory fines.
  • Crisis management: Business continuity (BC) and disaster recovery (DR) planning are an essential part of third-party risk management. In the event of a business disrupting incident, your organization and its vendors should have clearly detailed plans of how to lessen the negative impacts and resume operations.

To put it simply, third-party risk management is essential in overseeing and managing your organization’s vendors. Not only is it a regulatory requirement, but it also provides strategic advantages to other areas of business operations and allows you to maximize the value of your vendor relationships.

Now that you understand the basics, dive deeper and learn how third-party risk can enable your organization’s strategies. Download the eBook.

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