How To Mitigate Third-Party Risk
Wondering how to mitigate third-party risk? You're not alone. Relationships with suppliers, vendors and contractors are integral to any company's survival, but managing the inevitable risks and protecting your brand is no easy feat.
Failing to mitigate these risks effectively can result in data breaches, damaged reputations and even legal implications from confidential leaks.
According to research by The Independent, hacker attacks occur every 39 seconds, and 83% of organisations have suffered a data breach.
Developing a third-party risk management strategy can be time-consuming, but the results are worth the initial investment.
In this guide, we'll reveal effective ways in which you can mitigate third-party risks and ensure compliance.
- Pre-contract negotiations are central to ensuring a solid third-party risk mitigation strategy.
- Involving key stakeholders with vendor management decisions ensures transparency and organisational collaboration.
- A solid company compliance plan will ensure you manage vendor risks effectively, but many companies outsource compliance to ensure professionalism.
Pre-Contract Negotiations in the Vendor Contract to Mitigate Risk
Contracts are instrumental in setting expectations and managing vendor relationships. Failing to ensure a risk-free partnership can have serious repercussions for your company.
The importance of pre-contract negotiations
Pre-contract negotiations are vital because they ensure both parties can align their expectations and responsibilities. It's not just about getting a deal done but looking at the potential risks that might arrive and committing to negate them.
Also, prioritising pre-contract negotiations can remove the potential for future issues between both parties and reduce the need for legal mitigation.
Identifying and Assessing Risks
Risk identification should be at the core of any negotiations, but research by NC State highlights that 69% of organisations don't have an effective risk management plan.
Identifying potential issues arising from vendor relationships ensures companies can organise them. For example, categorising risks such as operational or digital and assigning probabilities gives the highest priority risks the most attention.
Drafting Risk Mitigation Clauses
Risk mitigation clauses are essentially a safety net that protects all parties from the risks and conflicts that might occur. When creating these clauses, you should:
- Use clear language to ensure everyone understands.
- Define everyone's responsibilities clearly.
- Implement contingency plans that cover a range of risk scenarios.
- Be transparent about when you'll review the strategies for risk mitigation.
Legal and Compliance Considerations
It's always essential to spend a lot of time on legal and compliance considerations, as failing to follow them can result in severe repercussions for your company.
Regarding corporate compliance, performing due diligence on the vendor will identify any problems with their compliance record and legal history.
You should also stay in line with industry standards and laws and seek support if you're unsure how to remain compliant.
Including a dispute mechanism that details how to proactively and efficiently handle legal issues is also beneficial.
Case studies of pre-contract negotiations
Research from the Harvard Business Review shows that even the world's largest companies struggle to maintain third-party relationships.
However, by clearly detailing expectations and defining how the partnership would work, Dell and FedEx reduced costs by 47%.
5 Ways to Mitigate Third-Party Risk During the Vendor Relationship
Once you finally exit the pre-contract stage and the relationship begins, you'll still have to be aware of the many risks that might occur.
Our reliance on technology makes communication and collaboration with third parties easier but also increases the risks of data breaches and cyber-attacks.
A 2019 study from the Ponemon Institute revealed that 50% of all data breaches occurred from third parties, highlighting the need for consistent risk mitigation.
Here are five ways to successfully identify and mitigate potential risks before they become huge problems.
Continuous monitoring and evaluation
A successful relationship with any vendor requires continually assessing their compliance and performance.
Performing due diligence can help you identify whether the vendor has robust risk management strategies and if they're still complying with the agreement.
Regularly evaluating any security gaps can help you decide whether the vendor is sticking to their side of the agreement.
You can streamline vendor monitoring and evaluation by:
- Conducting regular contract reviews.
- Setting and tracking KPIs.
- Auditing the vendor's processes.
Ensuring compliance with the agreed-upon terms
Contracts are in place to ensure both parties stick to their side of the agreement, and that's why they're so important in ensuring compliance.
However, complacency, general carelessness and other vendor behaviours mean companies must regularly ensure third-party suppliers are sticking to the contract terms.
Documentation: Remember to keep clear documentation of invoices, performance metrics and correspondence, as these records will be crucial evidence during disputes.
Escalation Procedures: In the event of non-compliance, having clear procedures will detail the next steps, which ensures any problems can be resolved quickly.
Training and Support: Providing support and training resources can help vendors meet agreed-upon terms and understand their responsibilities to your company.
Open communication is integral to a transparent relationship between the company and the vendor. Whether you decide to hold regular meetings or give the vendor a way to contact you, it ensures both parties can share information freely.
Fostering a culture of open dialogue also ensures understanding, and feedback sessions can benefit both parties.
Incident Response and Contingency Planning
Unfortunately, even if you're the most diligent company, unexpected incidents can happen, and during times like these, you'll rely on your initial response and contingency plan.
A detailed plan will minimise the impact of unexpected events and ensure your company can recover from them.
You can simplify contingency planning by:
- Developing incident response plans that detail each person's role and responsibility.
- Running simulated exercises to test and refine the plan.
- Setting communication channels and protocols.
- Having set backup vendors to ensure your company remains operational.
Leveraging Technology for Risk Mitigation
In today's digital age, technology plays an integral role in risk mitigation, and leveraging the right tools can help your company remain compliant.
There are various tools to choose between, including vendor risk assessment tools. These solutions play a significant role in offering real-time insights and protecting your business from vendor-associated risks.
Staying updated with cybersecurity information can help you take a proactive stance for your company. This might improve vendor relationships as third-party suppliers will also be worried about whether the company they partner with are secure.
Tips on How to Mitigate Third-Party Risk
By following the above steps, you can set yourself up for a successful vendor relationship. However, there are specific steps to ensure your company can mitigate third-party risk.
Following these tips will set you on the right path and ensure you reduce the chances of third-party breaches.
Building A Risk Aware Culture
Building a strong foundation for your management and employees can create a risk-aware culture where everyone's working towards the same goals, establishing third-party security controls.
Employee Training: Provide your team with comprehensive training and help them learn about third-party risks to ensure they effectively identify vulnerabilities.
Active Leadership: Leaders are pivotal in shaping organisational culture, so always ensure management teams are active participants in any risk awareness initiatives.
Communication Channels: Let your employees know they're free to share their concerns about vendor risk management and establish a culture of transparent communication.
Training and Education For Stakeholders
Taking your stakeholders and providing training to turn them into legal and compliance leaders is also a good idea.
As employees look to management for guidance, delivering intensive training programmes can ensure stakeholders :
- Use proper vendor selection criteria and prioritise security.
- Perform due diligence on third-party vendors and suppliers.
- Effectively manages employees and guides compliance.
Periodic Reviews and Adjustments
Periodic reviews ensure you can continuously monitor and mitigate third-party security risks before they become serious. Various monitoring solutions can be instrumental here, as they can track your vendors and notify you of any changes.
Remember to be adaptable, as your risk management needs might change. With the right software solution and executives in place, your company can navigate any alterations with minimal disruption.
Demonstrating the Long-Term Benefits of Risk Mitigation
By demonstrating the benefits of long-term risk mitigation, you can ensure external stakeholders are on board. Here are some top ways to justify strict third-party risk management measures:
Reputation: Tell shareholders how important it is to protect the company's reputation and give examples of how effective risk mitigation prevents damage.
Competitive Advantage: Risk mitigation should always be considered a competitive advantage for companies. Show that effective compliance often attracts partners and clients.
Compliance with Regulations: Detail how risk mitigation ensures companies adhere to legal requirements and avoid repercussions.
The Bottom Line
Navigating the world of third-party risk management can be challenging, but with the proper support, you can enjoy the benefits of vendor relationships. The first step in third-party risk management is ensuring your company complies with industry regulations.
Deciding to outsource compliance gives you access to experts who will review your company and provide recommendations. At Captain Compliance, we help our clients future-proof their company and build better relationships through unparalleled consultancy services.
Once you're confident about your company's compliance, you can work towards developing a robust vendor risk-management strategy.
Can risk mitigation really provide a competitive advantage?
Yes, it can because companies with solid risk mitigation procedures can demonstrate their commitment to compliance and security.
What should our incident response plan include for third-party breaches?
Always include clear procedures and ensure everyone knows organisational and individual responsibilities. The plan should also include protocols for reporting risks to stakeholders.
How often should I conduct vendor audits?
It depends on the level of risk because high-risk vendors require more frequent audits than low-level ones.
What should I include in my vendor contract to ensure compliance?
Vendor contracts should have clear metrics and reporting obligations, along with specific terms and anything else, to ensure an in-depth understanding from your vendor.
What is the role of artificial intelligence in vendor risk management?
Artificial intelligence is already playing a significant role in third-party risk management, but it will likely become instrumental. Its capability to collect large data sets will help businesses make proactive decisions for risk mitigation.