In today’s interconnected business landscape, organizations increasingly rely on third parties to drive efficiency and achieve strategic objectives. However, this reliance brings inherent risks that can disrupt operations, compromise data security, and damage reputation. To mitigate these risks, implementing a robust Third-Party Risk Management (TPRM) program has become crucial. In this blog, we will explore the importance of TPRM, its lifecycle, key risk pillars, and steps to effectively manage third-party risks.
Third-Party Risk Management:
Third-party risk management (TPRM) is a form of risk management that focuses on identifying and reducing risks relating to the use of third parties (sometimes referred to as vendors, suppliers, partners, contractors, or service providers).
The discipline is designed to give organizations an understanding of the third parties they use, how they use them, and what safeguards their third parties have in place. The scope and requirements of a TPRM program are dependent on the organization and can vary widely depending on industry,
regulatory guidance, and other factors.
Why is Third-Party Risk Management Important?
Disruptive events, have impacted almost every business and their third parties – no matter the size, location, or industry. In addition, data breaches or cyber security incidents are common.
- Internal outages and lapses in operational capabilities
- External outages affecting areas across the supply chain
- Vendor outages that open your organization to supply chain vulnerabilities
- Operational shifts that affect data gathering, storage, and security
TRPM- The Macro Picture:
Across the board, third-party risk management is growing in importance, with many companies around the world in the process of developing departments to improve it. It is increasingly being viewed as an important investment companies must make to protect themselves from financial,
regulatory, and reputational risk. This prioritization of TPRM is aligned with a push for centralization of processes and the standardization of procurement approaches, reporting, and risk management
Third-Party Risk Management Lifecycle:
The third-party risk management lifecycle is a series of steps that outlines a typical relationship with a third party. Typically, the TPRM lifecycle, is broken down into several stages. These stages include:
- Vendor identification
- Evaluation & selection
- Risk assessment
- Risk mitigation
- Contracting and procurement
- Reporting and Record-keeping
- Ongoing monitoring
- Vendor off-boarding
Exhibit 1. TPRM LIFE CYCLE
Five steps to Third-Party Risk Management:
No matter how you decide to address TPRM, there are five essential steps that will go a long way in minimizing risk.
1.Identify – The first step is determining which companies you do business with that could bring about any type of risk. An understanding of this third-party ecosystem is critical.
2.Classify – Taking a risk-based approach, you’ll need to identify how much risk each third- party places on your organization based upon data, system access, and service provided.
3.Assess – Next, the security posture of the third parties you do business with must be evaluated. Depending on the nature of your organization, you’ll have varying levels of assurance based upon third-party risk.
4.Manage Risk – Here, you’ll outline steps to put policies in place and decide how remediation should be addressed. Basically, you’re asking whether to accept or avoid risks.
5.Monitor – The last step involves the continuous monitoring of third parties to ensure they meet contractual obligations and sustain their security posture.
TRPM- Risk Pillars
TPRM as a whole is an ecosystem which includes and evaluates various types risk pillars.
Naming a few Risk Pillars which are assessed in a TRPM model
- Finance Risk
- Governance Risk
- Operations Risk
- Security Risk
- Enterprise Risk
By implementing a robust TPRM program, organizations can better understand and manage the risks associated with their third-party relationships, protecting sensitive data, maintaining compliance, and safeguarding their reputation. TPRM helps ensure that third-party vendors meet the organization’s security requirements and adhere to industry best practices. Embracing TPRM is a strategic imperative to enhance business resilience and maintain a competitive edge in today’s interconnected business environment.
To learn more about implementing a comprehensive TPRM program tailored to your organization’s needs, please visit our website or contact us today.