Why Third-Party Risk Management Matters in a Struggling Economic Climate
Organizations are looking to reduce costs, but is it worth it?
The economy has faced many challenges the past few years, from the pandemic, supply chain issues, and more. These events present many challenges for organizations, and some are looking to cut costs. However, reducing third-party risk management may be a big mistake, as it can help protect your organization and its customers.
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Hi – my name is Ramin Zacharia with Venminder.
In this podcast, you’ll learn why third-party risk management should continue to be a priority for your organization, even during times of financial hardship or economic downturn.
At Venminder, our platform and team of certified industry experts help organizations of all sizes and industries develop and maintain effective third-party risk management programs and practices, even with tighter budgets and more limited resources.
It’s a well-known fact that the economy has faced many challenges during the past few years with the pandemic, supply chain issues, bank failures, numerous global wars and conflicts, and other macro events. These events present many challenges for businesses, and organizations across many industries and all of these organizations have had to experience reduction in personnel, restricted access to credit and debt lines, and are subject to high interest rates, and of course, have to deal with rising costs and inflation across their business.
As we move into 2024, many organizations have either acted on reducing costs or are exploring cost reductions to improve their financial outlook and financial position. As a result, some third-party risk management teams may be facing the possibility of budget cuts, staff reductions, and/or layoffs. While it may be tempting to cut down on third-party risk management resources to meet an organizational objective of preserving money and capital, there are numerous reasons why this strategy is penny wise, but pound foolish.
There is no denying that an organization's financial health is of utmost importance. However, it’s essential to also understand there are better strategies than blindly reducing or eliminating third-party risk management resources. In fact, some measures could eventually cost the organization more money than it would save.
Let's explore why third-party risk management should be a priority for organizations with three things:
- First, it's essential to remember that every third-party relationship is meant to either solve a problem or realize an opportunity. Whether your organization uses third parties to store sensitive data, create marketing materials to attract new customers, increase revenue and market share, or even provide software and hardware to run your business, all third-party relationships must deliver their anticipated value and either provide revenue growth to your business or help your business manage its cost structure.
Third-party risk management ensures contractual service levels are met, quality and timeliness are as required, and your organization is adequately receiving value from vendors.
Third-party risk management also holds vendors and service providers accountable for delivering products and services as expected, which drives the attainment of revenue growth and cost management goals. Without sufficient third-party risk management, your organization risks losing money due to poor oversight and management of third parties and their contractual obligations to your organization.
- Second, preventing negative impacts from avoidable risks is the heart of third-party risk management. Third-party risk management, as a practice, is meant to identify and assess the risks associated with those third-party relationships. Without effective third-party risk management practices in place, your organization is at risk of:
- Data breaches
- Cybersecurity attacks
- Operational failures
- Financial losses
- Compliance violations
- Reputational risks and harm
- And many more!
- And finally, third, even in times of economic downturn and financial challenges, sufficient investment in third-party risk management is still necessary to protect your organization's assets, revenue, customers, and legal compliance.
Let's cover some examples that share consequences of not having the necessary third-party risk management practices in place:
- First, without the necessary third-party risk management resources, your organization's third parties may not be effectively vetted. Crucial controls, such as those required to maintain good cybersecurity posture, may not be verified on time or at all, potentially resulting in costly data breaches and regulatory fines.
- Second, suppose the third parties are not meeting service level agreements or failing to meet customer service standards. In this case, your organization will pay the price through poor third-party performance, which can ultimately impact your organization’s reputation and leave you paying for a third party that isn’t delivering the value you deserve.
- And finally, let's not forget those third parties providing products and services that are critical to your operations. You must ensure those third parties have documented and tested business continuity and disaster recovery plans. If you do not, your organization is at risk of being unable to serve its customers if an unexpected event disrupts your third-party operations and therefore also disrupts your operations.
Whatever way you look at it, third-party risk management serves as a must-have and an essential function for organizations.
Remember that third-party risk management is a best practice and regulatory requirement for many reasons, including protecting your organization and customers from all manner of third-party risks. Smart organizations understand that third-party risk management is a necessary investment that protects their organization and their customers. It also helps your organization meet your revenue and cost management goals, which become even more important in uncertain economic times.
Just like you wouldn’t buy a car without seatbelts just to save money, reducing or eliminating essential third-party risk management resources should never be on the table. The cost is just too high, in both the short and long term.
Thanks for tuning in and catch you all next time. Take care.
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