Outsourcing has become increasingly more common as the global marketplace is made more accessible by digital technologies. While this can be a cost effective business strategy, it also increases risk. Every time a business engages with a third party, the exposure to potential risk increases. The extent of that exposure depends on a number of factors – some generic, and some unique to the third party in question.
Third-party risk can take on many forms, ranging from reputational damage and contract disputes to cyber-crime and theft of intellectual property. Third-party connections are points of vulnerability, the severity of which is determined largely by issues outside of your control. Third-party risk management (TPRM) is the only real control you have over the extent to which your business engages with others.
A third-party risk management plan is essential to protect your business. Your staff, customers, and stakeholders all rely on the efficacy of your company, thereby they rely on your approach to managing risk.
Risk Tolerance vs. Risk Appetite
Risk tolerance is the level of risk an investor or a business is willing to take. Risk appetite is the level of risk that is deemed acceptable to the business. Both of these measurements are defined in the context of the business objectives agreed by leadership. Once your business has defined the level of risk that is acceptable, and the level of risk it can safely experience while continuing to pursue goals, you have clear framework against which risk can be assessed and measured.
Every vendor is different. Your relationship with each of them varies, and the level of risk they each pose to your business fluctuates according to factors outside of your control. By classifying your vendors, you establish a process that decreases risk. Avoid applying valuable resources where they are not needed, or of failing to apply resources where they are needed. Your business should define vendor categories according to risk factors and classify vendors according to current information.
Further efficiencies and greater risk management can be achieved through standardization of third-party risk assessments. Once you have defined your risk categories, you can develop risk assessments that are standardized but flexible enough within the framework of those categories. This reduces waste in terms of resources and also reduces the risk of human error. Standardized assessments must incorporate external risk factors that need to be monitored. These include:
The overall financial position of the third party
Whether the third party is currently dealing with regulatory or legal action of any kind
Whether the leadership of the third party – executives and shareholders – are currently under investigation for any reason.
The scheduling of the risk assessments should also be standardized to make them both continual and consistent.
Similar to third-party relationships, your staff can be potential points of vulnerability as well. Employees need to collaborate in ways that do not compromise the cybersecurity of your business. Human error can also trigger contract disputes and incidents of non-compliance. Identify and address any gaps in training to ensure personnel is up to date on all policies and procedures.
Reducing the amount of administrative or manual labor takes the risk out of human error makes the third-party management more efficient. Overall compliance levels are increased, and risk in all categories is minimized.
TPRM as a Lifecycle
The application of standardized risk assessments becomes easier to automate by viewing each third-party relationship as a self-contained lifecycle. It is important to clarify each stage in the lifecycle including tender and selection, negotiation and onboarding, performance monitoring, management, and termination. Breaking supplier relationships down in this way enables a more organized and structured approach to TPRM.
Data location is paramount to third-party risk management. Knowing where your data is and keeping it secure is essential when dealing with suppliers and vendors. Every third-party relationship requires the exchange of data at various levels creating a port of access to your operation. TPRM software centralizes all data inside a secure repository and delivers a host of features that effectively minimizes the risk posed by each supplier relationship.
Match Risk Models
Once you have developed your understanding of the risk appetite and tolerance of your business, your TPRM software can be configured to match the predefined risk models. This increases the accuracy and consistency of your third-party due diligence allowing you to enforce your standards and processes across your operation.
As your data accumulates in the centralized TPRM software repository, you can use that information to design, build, and publish intelligent questionnaires. These questionnaires are also stored centrally, ensuring that all authorized personnel have access to the latest versions and the most up-to-date resources when launching new business relationships.
Automated Audit Trails
Ensure your TPRM software uses permission-based access where every user action is automatically logged and tracked. This, coupled with the centralization of data increases transparency and accountability and ensures a higher rate of compliance with regulatory and contractual commitments.
TPRM software can connect with external databases including Dun & Bradstreet, Dow Jones, LexisNexis, and Thomason Reuters for the purpose of background checks and security profiling of potential third parties. These integrations enable you to scrutinize both businesses and individuals, thereby increasing the efficacy of your due diligence.
Minimize risk by incorporating automation to reduce the potential for human error. Automation of workflows has a significant impact on risk reduction. Workflow bottlenecks are a notable source of internal risk when it comes to third-party relationship management, and these are often caused by issues with training, standards, and professional development. Automation of the workflow process ensures that the right tasks are flagged to the right person at the right time. This increases the rate at which deadlines and milestones are successfully met and reduces the probability of conflict and dispute.
Third-party risk management is all about gathering information and making decisions from a fully informed perspective. The customizable reporting functions turn information into actionable data and can be built to match the overall needs of your business and your predetermined risk models.
Keep Everything In-House
Minimize risk by ensuring all processes and data are kept in-house. When access to your operation is needed by third parties, be sure it happens on your terms and within the parameters you have defined. Create accurate and consistent risk profiles so you can make data-based decisions about which third parties to deal with, and what further risk mitigation strategies are needed to protect your enterprise.