Third-party risk management is essential for every business that works with vendors and partners because it reduces the risks of security issues, including data breaches and non-compliance.
Businesses need to implement a strategy that enables them to continuously monitor third parties and mitigate risks before they turn into serious problems. From developing a compliance framework to assigning each vendor a risk status, navigating the TPRM process can be time-consuming,
In this guide, we’ll cover all stages of TPRM so you can approach the process with confidence.
Key Takeaways
- TPRM is an intensive process that protects an organisation from threats from working with third-party vendors.
- Dedicating time to the TPRM process sets a strong foundation for your organisation’s compliance and risk mitigation efforts in the future.
- Technology can help businesses collect data and simplify the third-party risk mitigation process, but it’s also essential to have compliance in place for your own company.
Understanding TPRM
Many businesses work with third-party vendors, but today’s digital-first society means there are higher risks of data breaches. Third-party risk management is a critical process, and when executed correctly, it can offer more security and keep your company compliant.
Basics of Third-Party Risk
According to Cyber Security Dive, 98% of organisations have been connected to a third-party data breach. A TPRM strategy can help businesses identify potential risks from their third-party relationships and develop a mitigation plan.
It also ensures there’s clear documentation in place to verify all processes, assessments and steps taken to prevent security issues.
Regulatory Landscape and Compliance Requirements
Most industries have some form of regulations and compliance guidelines to ensure consumers have strong protection.
TPRM is integral to remaining compliant when working with vendors and partners. Key regulatory factors for businesses in the UK include:
- Data Privacy: The GDPR states that companies must handle personal data in line with the protection standards set by the European Union.
- Financial Regulations: Companies operating in the financial sector must adhere to the Financial Conduct Authority’s (FCA) regulations.
- Cybersecurity Regulations: Many authorities have cybersecurity regulations that serve as resources for directors and help them understand their responsibilities.
- Industry-Specific Regulations: Many industries in the UK also have sets of regulations to follow, including healthcare, education, and professional business services.
Compliance with these regulations is essential to avoid legal and financial repercussions.
The Role of TPRM in Business Operations
TPRM has a vital role in business operations, and a proper strategy in place will prioritise:
- Risk Mitigation: TPRM safeguards organisations against risks and ensures they can remain operational.
- Cost Efficiency: Legal disputes, disruptions, regulatory fines, and shutdowns can cause significant financial problems, but TRPM can save money by identifying these risks.
- Enhanced Reputation: A business’s reputation is vital for its success, and having a clear third-party risk management strategy in place demonstrates your commitment to best practices.
- Competitive Advantage: As Adobe revealed, 70% of customers will invest more in a company they trust. If you can show you take data protection seriously, it can give you a competitive advantage.
TPRM Process Phases
So, now you know more about TPRM, and why a comprehensive strategy is essential, it’s time to reveal the process.
Identifying Third Parties
The first step in your TPRM process is to gather detailed records about all third parties your organisation works with. Whether they’re long-term vendors or you use them as and when needed, this list will form the basis of your risk management plan.
Defining Objectives and Scope
Establishing a framework for your risk management plan will ensure you include all necessary considerations, including your immediate and long-term objectives. The plan’s objectives should include compliance, risk regulation and business continuity.
The scope of your strategy will depend on how large your organisation is and the amount of third-party relationships you have. It should also cover your industry’s regulations and geographical operations.
Third-Party Categorisation
Now you have the basis for your plan in place, it’s time to focus on third-party categorisation, which involves rating each vendor according to the risks they pose. Most businesses use the high, low and medium ratings, but you can also categorise by letters.
For example:
- High Risk: Requires immediate measures.
- Medium Risk: Measures should still be in place within acceptable timeframes.
- Low Risk: Stakeholders can decide whether to mitigate or accept the risk.
Data Collection and Vendor Selection
Vender selection ensures you choose the right third-party relationships and can reduce any compliance risks. By creating a needs assessment, you can look at your main priorities and judge each vendor on how they’ll deliver.
Proposals can be helpful in the vendor evaluation stage, as they remove any ambiguity. It’s also a good idea to establish a method for data collection, which ensures you have the facts on each vendor and can compare them to see which aligns with your supply needs.
Phase 2: Risk Assessment
The risk assessment is a critical stage, preparing a company for any challenges when working with third-party vendors. No third-party risk management program will be successful without putting in the work during this stage.
However, once the assessment is complete, it should grow and scale with your company, simplifying the TPRM process in the future.
Identifying and Analysing Risks
There are numerous risks a business might face with third parties, but the ability to spot them will go a long way toward preventing them.
Common risks include:
Operational: Incidents that might disrupt a company’s operations or cause them to cease altogether.
Cybersecurity: These attacks are common, but due diligence and regular monitoring of vendors can prevent them.
Compliance: Failing to find the right compliance solutions can lead to fines, fees and even legal problems.
Financial & Strategic: Poor TRPM plans can impact the company financially and prevent it from remaining competitive.
Reputational: Even large, international companies can struggle with cybersecurity and compliance. As you can see from this report by CSO, data breaches can destroy a company’s reputation, causing long-term effects.
Risk Prioritisation
Along with categorising the various risks into high, medium and low groups, it’s also important to prioritise the risks by how they might impact your company. For example, stakeholders can address the issue if a vendor has a high-risk rating for cybersecurity.
Some might add stricter controls or liaise with the vendor regarding how they can enhance security, ensuring managers and anyone involved in TPRM can implement measures.
Compliance and Legal Risk Assessment
The first step is to review your industry’s regulations and gather documents. While some industries are heavily regulated, others might only have a couple of rules.
Once you know what they are, it’s time to evaluate whether your company adheres to them and consider the legal risks you might face.
Asking the vendor for its policies and procedures will also ensure you stay within legal guidelines and mitigate risk.
Risk Mitigation Strategies
Risk mitigation strategies are designed to reduce the chances of security breaches while working with third-party vendors. When deployed correctly, these strategies can prepare a company for potential risks and ensure all stakeholders know what to do.
Developing Mitigation Plans
When developing mitigation plans, it’s essential to follow these steps:
- Identify: Document all third-party associated risks and what they might lead to. For example, poor security could result in data leaks.
- Mitigation: Once you have clear guidelines in place, you can focus on creating a compliance framework and developing clear plans for risk mitigation. The plan should also detail timelines and various responsibilities.
- Monitoring: Regularly monitor plans and evaluate whether they’re still viable. This ensures an organisation still has protection and will know what to do when encountering a breach or compliance issue.
Contractual Adjustments
When you work with vendors for a while and notice potential risks, making contractual adjustments is beneficial. Both parties can outline new responsibilities and enhance their working agreement.
You might want to consider making contractual adjustments when:
- Risks Change: If you notice any changes in vendor operations, you can strengthen the agreement by updating it to factor in new risks. Changing terms such as service-level agreements and dispute resolution policies can also affect both parties’ relationships.
- Legal Obligations: Many organisations also ask solicitors to look at their risk-mitigation plans because a legal expert can adjust them to strengthen various policies.
Vendor Education and Training
Taking a proactive approach to third-party risk management programs allows vendors to learn about compliance and its importance. Clear communication is vital here because tailored training plans offer better results.
Once you identify gaps in the vendor’s risk management strategy, it’s easier to tailor dynamic training.
Ongoing Monitoring and Reporting
Last but not least is performing continuous monitoring. Putting all the initial work in but failing to monitor and report on your vendors consistently means you’re still not adequately protected from unexpected risks.
Continuous Assessment
Continuous assessment refers to consistently keeping up with your vendors and reviewing their performance. Holding feedback sessions is also helpful because it gives people the chance to share their opinions.
Reporting to Stakeholders
When you retort to stakeholders, you’ll want to know they can understand the information in front of them. Meeting with the stakeholders and establishing what they want to achieve from TPRM ensures everyone knows what’s happening.
Escalation Procedures
Escalation procedures enable an organisation to handle any risks quickly. The structured plans will help stakeholders be responsible and decrease the chances of limited operation or legal issues.
Challenges in the TPRM Process
The TPRM process is essential for third-party risk management, but that doesn’t mean it’s easy to implement. These challenges can make it hard for businesses without extensive experience in risk management to navigate their professional relationships.
Data Quality and Availability
With AI tools now making it easier than ever to collect large amounts of data, the world truly is at our fingertips.
However, that doesn’t necessarily mean the data you gather is reliable. Data validation is central to risk management; having analysts in place can make the task easier.
Establishing strict protocols for data collection and validation will also protect its integrity.
Resource Allocation and Budget Constraints
TPRM is an investment into your company’s future, but justifying that to external stakeholders is no easy feat. However, with the range of third-party risk management tools and AI for data collection, it is possible to distribute a budget effectively.
By highlighting the importance of TPRM and showing stakeholders the impact of not remaining compliant, it’s easier to secure funding to manage third-party relationships.
Scaling TPRM for Larger Organizations
Large organisations often juggle multiple third-party vendor relationships at once, making it much harder to scale risk management effectively. However, companies that implement workflows and leverage technology can succeed.
Having set workflows also enables you to identify when a vendor poses more risk and customise it to create an intensive strategy.
Best Practices for a Robust TPRM Process
A robust TPRM strategy will grow and scale with your organisation’s needs – but how do you create one? Following these best practices will solidify third-party vendor relationships and ensure your company remains compliant.
Cross-Functional Collaboration
Communication is key to risk management, and every department of an organisation should collaborate to achieve complete transparency. Creating cross-functional teams can be beneficial because the teams can meet regularly and share vendor information.
Fostering a collaborative environment also reduces the chances of high-risk situations going under the radar.
Continuous Improvement and Adaptation
We all know if a company stays still, it won’t move forward, and it’s the same thing with TPRM. Regularly assessing policies and procedures helps you adapt to changing practices and technologies which could threaten the organisation.
However, some technological solutions serve as viable tools to enhance TPRM processes, which could save time and money while reducing room for errors.
Vendor Relationship Management
The selection process is integral to a smooth relationship with a vendor. Evaluate vendors and ensure you cover all bases before signing a contract.
Any reputable vendor will understand that you want to perform due diligence, so if they seem evasive, that’s also a red flag.
Final Thoughts
Navigating the TPRM process successfully means you have a solid foundation to let third-party vendor relationships flourish. By investing your time and resources into each stage of the process, you can approach each partnership knowing the associated risks.
Remember, third-party vendors will also want to know that your organisation remains compliant and has strong security policies. If you’d like to review your procedures, our compliance services give you the clarity and confidence you need.
Please feel free to contact our friendly team today.
FAQs
What are the main steps in the TPRM process?
The process can seem complex, but splitting it into the following steps will make TPRM easier to manage:
Vendor Selection: Choose vendors that suit your company’s needs and long-term objectives.
Due Diligence: Conduct assessments of vendors, looking at their financial status, compliance history and backgrounds.
Risk Assessment: Evaluate the potential risks of using a particular vendor and decide whether they’re easy to mitigate.
Contract Management: Establish clear contracts that outline expectations and responsibilities.
Ongoing Monitoring: Regularly monitor performance and compliance and record your findings.
Risk Mitigation: Develop various strategies to mitigate risks and regularly assess their effectiveness.
Reporting and Documentation: Get everyone involved with risk management to keep records for audits.
Are there industry-specific TPRM best practices?
Yes, and they vary according to your industry’s regulations. Tailoring your risk management strategy to these guidelines is essential.
What technology solutions are recommended for TPRM?
Vendor Risk Management (VRM) software can facilitate your risk management strategy by providing clear data and automating various processes.
How often should organisations review and update their TPRM policies?
It depends on your industry. Most companies review policies once a year, but more frequent assessments might be needed for certain industries.
