Why Is Third-Party Risk Management Important?

Outsourcing activities and services to third-party vendors has become a common practice for most organizations. However, these relationships often come with risks that need to be mitigated. After all, you wouldn’t want to work with just anyone without checking their credentials, right? Third-party risk management (TPRM) is the practice of identifying, assessing, mitigating, and monitoring the risks in your third-party business relationships.

Third-party risk management involves many processes, steps, and activities, which can seem complex and overwhelming. It can be easy to lose sight of why third-party risk management is important. However, TPRM acts as a safety net for your organization – it ensures your third-party vendors have the right controls in place to protect your business and your customers. This blog will highlight the importance of third-party risk management and why it’s an essential practice for every organization. 

Understanding Why Third-Party Risk Management Is Important

Third-party risk management is an important practice because it helps protect your organization from damages that may be caused by third-party vendors. Although incidents like third-party data breaches are obvious examples, there are also other scenarios that could impact your organization. While none of these consequences are entirely unavoidable, a TPRM program can greatly minimize the risk and damage. 

Here are four reasons why a third-party risk management program is important:

1. Meets regulatory requirements: This is often the strongest motivation for many organizations to have effective third-party risk management. For example, the financial industry must follow the detailed TPRM requirements in the Interagency Guidance on Third-Party Relationships: Risk Management. There are also several third-party requirements for the healthcare industry in the Health Insurance Portability and Accountability Act (HIPAA). Many other industries must comply with regulations that require third-party risk management activities. Your organization may face severe noncompliance fines and penalties and legal issues if your organization’s TPRM practices aren’t aligned with regulatory guidelines. A well-developed TPRM program is quickly becoming a universal expectation. However, if your industry doesn’t have specific TPRM requirements, it’s still an important best practice to follow. 
2. Protects your reputation: Customer trust and brand loyalty are key factors for your organization to gain business and grow. Without a third-party risk management program, your organization is in danger of losing valuable trust due to third-party risks. Third-party vendors can impact your organization in a number of ways. For example, if your third party commits privacy violations that impact your customers’ data, it can lead to a public lawsuit. Or your third party may experience a data breach, and your customers discover that their personal data is being sold on the dark web. Third parties that directly interact with your customers, such as outsourced call center services, can also damage your organization’s reputation. 
3. Prevents financial losses: There are many hidden costs of failing to manage third-party risks. Third-party compliance issues can bring expensive lawsuits and regulatory fines. Third-party data breaches can also lead to lost business and added expense of an incident response. There are also less obvious financial losses, such as duplicative third-party services that go unidentified or third-party contract renewals that include surprise price hikes. TPRM activities can help your organization identify any potential issues with a third party before an incident occurs. It also identifies who your third parties are and what products and services they provide. 
4. Maintains operational resiliency: Third-party incidents and disruptions can sideline an organization’s operations and leave them unable to do business for an extended period of time. Third-party risk management is important because it identifies critical vendors to your operations, spots weaknesses in your third parties’ business continuity and disaster recovery planning, and prevents operational disruptions from impacting your business. 

Not only does third-party risk management protect your organization from negative consequences, but it also offers numerous benefits to improve your organization and give it a competitive edge. 

Here are five benefits a third-party risk management program provides to your organization:

1. Nets a positive return on investment (ROI): Third-party risk management is designed to protect your organization from unexpected costs. It removes duplicative services and shadow purchasing throughout the organization through a comprehensive third-party inventory and consistent due diligence practices. Third-party risk management also drives compliance with regulations, avoids regulatory fines, and minimizes negative impact from the loss of third parties. 
2. Enables better third-party selection: Third-party vendor selection is a strategic process to help your organization save costs and select the best option. When you go shopping for an item, especially one with a big price tag or that you’re putting value in, do you just pick the first one that pops up on your search? No, you’re probably more likely to do your research and look at reviews before making a decision. The same principles apply in third-party risk management. Activities like due diligence and risk assessments are important steps to select the right third party for your organization’s goals and objectives. It also presents cost-savings benefits with contract negotiations that create a mutually beneficial relationship.
3. Drives improved service and innovation: Are the third parties you contract with helping you address a problem or realize an opportunity? A TPRM program helps your organization fully realize the benefits of outsourced relationships. By using practices like risk assessments, performance monitoring, and due diligence, you can ensure third parties perform as expected and deliver value to your organization. 
4. Creates a strategic advantage: A TPRM program is a good way to improve your overall business strategy. Strategies like proactive contract management and ongoing performance monitoring allow your organization to save costs and receive the best value from your third parties. With a third-party risk management program, your organization will be more strategically positioned to deliver the best products and services to customers. This can give your organization a competitive advantage in your marketplace. 
5. Increases risk mitigation: When working with third-party vendors, risks aren’t entirely unavoidable. However, a TPRM program will help your organization better identify and mitigate those risks. The better prepared you are to manage potentially risky situations, the less likely your organization will face financial, operational, or reputational setbacks.

Tips to Implement Third-Party Risk Management

Implementing a third-party risk management program can seem like an overwhelming process with many different steps involved. Maybe your organization hasn’t yet dedicated the resources to managing third-party risks or is struggling to know where to get started.

Following these steps is a good start to third-party risk management:

• Identify your goals: Every organization has their own unique goals for what a third-party risk management program will help them accomplish. Identify what those goals are for your own organization – whether that’s improving third-party onboarding times, enhancing data protection, or ensuring compliance. This enables your organization to prioritize what matters most and make informed decisions to support your goals. 
• Begin with small, manageable activities: Your organization likely won’t be able to develop an entire TPRM program overnight. Instead, it can be helpful to begin with a few management steps, like creating a third-party inventory across the entire organization and identifying the most critical third parties. 
• Stay consistent: Third-party risk management is most effective when activities and processes remain consistent across the entire third-party inventory. This will help your organization build a framework for managing third-party risks. 
• Leverage third-party risk management software: Third-party risk management software can be extremely beneficial for new programs. Your organization can use their expertise to develop key documents like policies and procedures and save time and resources by outsourcing some TPRM activities like due diligence document collection. 

By proactively managing the risks associated with your third-party vendors, you can protect your reputation, ensure compliance, mitigate financial risks, and enhance operational efficiency. Remember, implementing a third-party risk management program doesn’t have to be overwhelming. Start small, stay consistent, and leverage the right tools and resources to make the process smoother.